1/31/2012 8:52:00 AM

Gap down open losses reduced...

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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):
Short DIA at $125.39 on Jan 30, 2012
Short QQQ at $59.88 on Jan 30, 2012
Short SPY at $130.51 on Jan 30, 2012

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Daily Trading Action

The major indexes opened one percent or most of that lower and then moved higher for the first fifteen minutes before rolling over for the next half hour of trading. That set a bottom and the major indexes fought their way higher through the session, pausing during the lunch hour and seeing a slide with a half hour to go. The major indexes recovered from much of that slide in the final minutes but still closed lower than their intraday highs with the NASDAQ-100 recording a modest gain, the Dow a modest loss, and the S&P-500 a fraction loss of less than one half of one percent. The semiconductor index (SOX 408.413.34 +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 21.11 -0.16) and the Regional Bank Index (KRE 25.79 -0.15) both posted fractional losses. Both closed back below their respective 20- Day Moving Averages (DMAs) and KBE closed below its 200-DMA. The Finance Sector ETF (XLF 14.00 -0.13) fell most of one percent. All other equity indexes we regularly report on are above their respective 200-DMAs. All equity indexes have a BULLISH BIAS. All equity indexes we follow are currently in trading states with the exception of the Russell-2000 and the Dow Jones Transport Index which are in weak uptrend states. Long term bonds (TLT 119.47 +1.39) added more than one percent shifting to an uptrend state and a NEUTRAL BIAS. Trading volume decreased to quite light on the NYSE with 744M shares traded. Trading volume was about the same (light) on the NASDAQ with 1.608B shares traded.

There were three economic reports released:

• Personal Income (Dec) rose +0.5% versus an expected +0.4%
• Personal Spending (Dec) was flat (+0.0%) versus an expected +0.1%
• PCE Prices-Core (Dec) rose +0.2% as expected

All three reports came out an hour before the open.

The U.S. dollar rose four tenths of one percent and the Euro fell seven tenths of one percent. The dollar had gapped up and declined through the session while the Euro did the opposite.

The yield for the 10-year note fell six basis points to close at 1.84. The price of the near term futures contract for a barrel of crude oil fell seventy-eight cents to close at $98.78.

Implied volatility for the S&P-500 (VIX 19.40 +0.87) rose most of five percent and the implied volatility for the NASDAQ-100 (VXN 19.75 +0.44) rose more than two percent.

Market internals were negative with decliners leading advancers 7:4 on the NYSE and by 2:1 on the NASDAQ. Down volume led up volume 2:1 on the NYSE and by 5:4 on the NASDAQ. The index put/call ratio was essentially unchanged falling -0.01 to close at 1.31. The equity put/call ratio rose +0.08 to close at 0.68.

Conclusion/Commentary

Monday's trading was all about confusing as many market participants as possible. The bulls were outmatched by the bears on Monday but progress from the lower open left the bears with a hollow victory. The only equity index we regularly follow that finished in positive territory was the NASDAQ-100. However, with that said, the leading indexes didn't show a complete collapse with only the semiconductor index off more than one percent. Financials were also off one percent so it bears watching where these important indexes are leading. Finally, the Longer-term bonds moved back above all moving indexes we regularly report on shifting back to a NEUTRAL BIAS and to an uptrend state. It is unusual for bonds and equities to move in the same direction for any length of time.

We believe that this week will be pivotal for equities with a top likely. We are still looking to add puts if/when DIA reaches the $129 level. We will keep you posted when the major indexes signal the top is in. We should point out that our decision to move to short positions was based on the probability of a top being put in this week as well as the desire to step aside from the potential of a wholesale sell-off getting underway. We must now be patient to see how the market reacts this week.

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