2/2/2012 8:43:44 AM

The big gap open gains were whittled away...

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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 significantly higher and then moved up for the first ten minutes then erased these gains in the next five minutes. After another twenty minutes of a sideways trade the major indexes moved higher cresting shortly after 1:30pm. The major indexes would be dragged lower through the remainder of the session with a a mixed close seeing the Dow closing lower than its gap up open while the NASDAQ-100 and S&P-500 closed above their higher open. The impressive intraday move higher faded into memory as market participants seemed unsure how long the advance could continue. The move up by the Dow was to a resistance level provided by the high reached on May 10, 2011. The 12,900 level still looms as the next area to be attempted by the Dow. The semiconductor index (SOX 418.74 +9.80) soared more than two percent as did the Russell 2000 (IWM 80.72 +1.70). The Dow Jones Transport Index (IYT 95.38 +0.54) limped to a fractional gain. The Bank index (KBE 21.42 +0.31) posted a gain of 1.5% and the Regional Bank Index (KRE 26.29 +0.48) posted a gain approaching two percent. The Finance Sector ETF (XLF 14.28 +0.22) posted a gain of 1.6%. All equity indexes have a BULLISH BIAS. All equity indexes we follow are currently in trading states with the exception of the Russell-2000 which is in anuptrend state. Long term bonds (TLT 119.18 -1.67) fell one and a third of one percent. It remains in an uptrend state with a NEUTRAL BIAS. Trading volume was static on the NYSE with 893M shares traded. Trading volume increased on the NASDAQ to a bit abvoe average with 2.036B shares traded.

In addition to the crude oil inventory report, there were four economic reports released:

• MBA Mortgage Index for last week showed a decline of -2.9%
• ADP Employment Change (Jan) came in at +170K versus an expected +200K
• ISM Index (Jan) came in at 54.1 versus an expected 54.5
• Construction Spending (Dec) rose +1.5% versus an expected +0.4% rise

All first two reports came out before the open. The latter two trailed the open by thirty minutes.

As expected, Facebook announced its IPO. When the IPO actually takes place we believe there may be a "sell the news" kind of day. In addition, Amazon.com (AMZN 179.46 -14.98) reported lighter than expected revenue although it did hit its target for earnings.

All ten economic sectors in the S&P-500 moved higher with Financials +1.7% leading the way. Industrials +1.1%, Materials +1.1%, and Health Care +1.0% were the other sectors to add one percent or more. Tech +0.9% posted strong gains but didn't lead the markets higher.

The U.S. dollar fell four tenths of one percent and the Euro rose one half of one percent.

The yield for the 10-year note fell five basis points to close at 1.85. The price of the near term futures contract for a barrel of crude oil fell eighty-seven cents to close at $97.61. The U.S. government reported that crude oil inventories rose by 4.175M barrels last week.

Implied volatility for the S&P-500 (VIX 19.44 +0.04) was essentially flat and the implied volatility for the NASDAQ-100 (VXN 19.89 +0.14) rose less than one percent.

Market internals were positive with advancers leading decliners 5:1 on the NYSE and by 3:1 on the NASDAQ. Up volume led down volume 4:1 on the NYSE and by 5:1 on the NASDAQ. The index put/call ratio fell 0.20 to close at 1.11. The equity put/call ratio was nearly unchanged rising 0.01 to close at 0.62.

Conclusion/Commentary

Wednesday's trading started out strong for the bulls and market internals support that. Volume was still light on the NYSE but NASDAQ volume actually crept up to slightly above average for one of the strongest trading volumes recorded this year. The first two days of the month are seasonably bullish, so we will wait until the end of the week to see if this is a sustainable rally. The markets have, once again, reached overbought conditions.

Bond prices declined as equities prices surged. The dollar moved lower while the Euro moved higher. These are the expected underpinnings of a bullish move for the market. However, we continue to believe that Bonds are in process of making further gains which should temper further advances by equities.

We believe that this week will be pivotal for equities with a top likely. We still see the potential for equities to edge higher as the topping process completes. 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.