1/30/2012 8:56:23 AM

Pessimism gives way to value shopping...

Recommendation:
Sell shares of DIA, QQQ, and SPY to close the long positions.
Sell shares of DIA, QQQ, and SPY short to open short positions.

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Stock Market Trends:

- ETF Positions indicated as Green are Long ETF positions and those indicated as Red are short positions.

- The State of the stock market is used to determine how you should trade. A trending market can ignore support and resistance levels and maintain its direction longer than most traders think it will.

- The BIAS is used to determine how aggressive or defensive you should be with an ETF position. If the BIAS is Bullish but the stock market is in a Trading state, you might enter a short trade to take advantage of a reversal off of resistance. The BIAS tells you to exit that ETF trade on "weaker" signals than you might otherwise trade on as the stock market is predisposed to move in the direction of BIAS.

- At Risk is generally neutral represented by "-". When it is "Bullish" or "Bearish" it warns of a potential change in the BIAS.

- The Moving Averages are noted as they are important signposts used by the Chartists community in determining the relative health of the markets.

Best ETFs to buy now (current positions):
Long DIA at $122.48
Long QQQ at $56.01
Long SPY at $126.17

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Value Portfolio:
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Daily Trading Action

The major indexes opened lower and then moved higher for the first half hour of trading before settling into a gradual move lower that last through the morning and most of the lunch hour. From that point, the major indexes began to climb in a move that would last most of the rest of the session. Only the final fifteen minutes saw the bears seize control and force the major indexes aggressively lower causing the Dow and S&P-500 to close with fractional losses and whittling the NASDAQ-100 down to just a 0.30% gain. The semiconductor index (SOX 413.34 +1.40) added a fractional gain as did the Russell 2000 (IWM 79.72 +0.54). The Dow Jones Transport Index (IYT 95.38 +0.79) also posted a fractional gain. The Bank index (KBE 21.27 +0.08) and the Regional Bank Index (KRE 25.94 +0.15) both posted fractional gains on strong buying interest after the prior session's drubbing. The Finance Sector ETF (XLF 14.13 +0.05) also posted a fractional gain. All equity indexes we regularly report on are above their respective 200-Day Moving Averages (DMAs). The Regional Bank Index closed back above its 20-DMA. All equity indexes have a BULLISH BIAS. Although most equity indexes are currently in uptrend states, they are weakening. Long term bonds (TLT 118.08 +0.37) posted a modest gain. It is in a trading state and has a BEARISH BIAS but could shift back to a NEUTRAL BIAS within a day. Trading volume was light on the NYSE with 851M shares traded. Trading volume decreased to light on the NASDAQ with 1.672B shares traded.

There were three economic reports released:

• GDP-Advance (Q4) came in at +2.8% versus an expected +3.2%
• Chain Deflator-Advance (Q4) rose +0.4% versus an expected +1.5%
• UnivofMichigan Consumer Sentiment-Final (Jan) came in at 75.0 versus an expected 74.2

The first two reports came out an hour before the open. The last report was released twenty-five minuts into the session.

The U.S. dollar fell seven tenths of one percent and the Euro rose nine tenths of one percent. The dollar had gapped down and rose through the session while the Euro did the opposite. We had suggested that the trend for the dollar to move lower and the Euro to move higher should continue but we have had signs of a slowdown so a countertrend move is likely soon.

The yield for the 10-year note fell three basis points to close at 1.90. The price of the near term futures contract for a barrel of crude oil fell fourteen cents to close at $99.56.

Implied volatility for the S&P-500 (VIX 18.53 -0.04) was essentially unchanged and the implied volatility for the NASDAQ-100 (VXN 19.31 -0.25) fell about one percent.

Market internals were positive with advancers leading decliners nearly 2:1 on both the NYSE and the NASDAQ. Up volume was about that same as down volume on the NYSE while up volume led down volume 5:4 on the NASDAQ. The index put/call ratio fell -0.16 to close at 1.32. The equity put/call ratio fell -0.05 to close at 0.60.

Conclusion/Commentary

Friday's trading saw a disconnect after U.S. Equities opened lower on concerns over a worse than expected GDP number and the Euro rose nicely but failed to inspire U.S. Equities to follow suit. That failure of U.S. equities to recover may be the "tell" that confidence in the overbought U.S. equity rally is waning.

We saw all four leading indexes close in positive territory, but the two most important (NASDAQ-100 and Semiconductor Index) posted the most modest gains. Fickle financials also posted fractional gains but this rally is looking long in the tooth.

We have been looking for a move up by the Dow such that DIA could reach the $129 level. It didn't make it much past the $128 level before shifting toward a more bearish stance. We are going to pick up our toys and go home shifting to short positions rather than waiting for the expected advance. The advance could still come in the next week but we have decided not to wait having given the liquidity fueled advance every opportunity to run its course.

As for the puts we have been looking to buy, we will wait to see if we get an additional bounce by late in the week and would look to add them on such a bounce.

We hope you have enjoyed this edition of the McMillan portfolio. You may send comments to mark@stockbarometer.com.