2/3/2012 8:54:44 AM

Equities jostled for position with a mixed close...

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Daily Trading Action

The major indexes opened higher and then moved in mixed fashion for the first half hour before committing to a move higher into late morning before rolling over to find negative territory and new lows before the end of the lunch hour. From that point, the bulls took control and were successful at pushing the S&P-500 and NASDAQ-100 into positive territory by the close but were unable to get the Dow to close in the black. Still gains and losses for equities were generally muted. The 12,900 level still looms as the next area to be attempted by the Dow. The semiconductor index (SOX 420.56 +1.82) added a fractional gain as did the Russell 2000 (IWM 81.18 +0.46). The Dow Jones Transport Index (IYT 94.75 -0.63) posted a loss for the second consecutive session. The Bank index (KBE 21.51 +0.09) posted a fraction gain as did the Regional Bank Index (KRE 26.44 +0.15). The Finance Sector ETF (XLF 14.35 +0.07) also posted a fractional gain. All equity indexes have a BULLISH BIAS. All equity indexes we follow are currently in uptrend (many are quite weak) states with the exception of the Dow Jones Transport Index which is in an uptrend state. Long term bonds (TLT 119.13 -0.05) was largely unchanged. It remains in a weak uptrend state with a NEUTRAL BIAS. It closed just under its 50-Day Moving Average (DMA). Trading volume was light on the NYSE with 780M shares traded. Trading volume decreased on the NASDAQ to a bit below average with 1.858B shares traded.

There were five economic reports released:

• Challenger Job Cuts (Jan) rose +38.9% versus December's +30.6%
• Initial Jobless Claims for last week came in at 367K versus an expected 375K
• Continuing Jobless Claims came in at 3.437M versus an expected 3.538M
• Productivity-Preliminary (Q4) rose 0.7% as expected
• Unit Labor Costs (Q4) rose +1.2% versus an expected +0.7% rise

All five reports came out an hour or more before the open.

Five of ten economic sectors in the S&P-500 moved higher with Energy +0.5%, Financials +0.5%, Consumer Staples +0.3%, Tech +0.3%, and Telecom +0.1% adding fractional gains. Industrials -0.1%, Consumer Discretionary -0.1%, Utilities -0.3%, Health Care -0.4%, and Materials -0.5% saw fractional losses.

The U.S. dollar closed nearly unchanged just higher than on Wednesday. The Euro lost nearly a tenth of one percent.

The yield for the 10-year note fell two basis points to close at 1.83. The price of the near term futures contract for a barrel of crude oil fell $1.25 to close at $96.36.

Implied volatility for the S&P-500 (VIX 17.98 -0.57) fell three percent to a closing low not seen since July. The implied volatility for the NASDAQ-100 (VXN 18.89 -0.15) fell less than one percent but it also closed at a low not seen since mid-2011.

Market internals were positive with advancers leading decliners 4:3 on the NYSE and by 3:2 on the NASDAQ. Up volume led down volume 3:2 on the NYSE and by 2:1 on the NASDAQ. The index put/call ratio rose 0.20 to close at 1.31. The equity put/call ratio was nearly unchanged rising 0.01 to close at 0.63.

Conclusion/Commentary

Thursday's trading showed another day of tentative trading with a mixed close for the major indexes but market internals were positive. Volume lightened on both the NYSE and the NASDAQ as market participants waited for the payrolls and unemployment rate reports due out before the market opens on Friday.

Note: Non-farm payrolls were announced with a significant upside surprise and with upward revisions to November and December. The unemployment rate ticked down to 8.3%. It should be noted that the labor department has revised their method of calculation to reach the payrolls numbers and the unemployment report.

We have been looking for a top by Friday or the following Monday and it looks like the catalyst to push us there is now in place. Recall that we wanted to purchase put options if the Dow reached the 12,900 level. This could occur either on Friday or Monday and we will provide specific instructions on Monday if conditions confirm the top is in.

Bond prices moved sideways on continued better than expected economic data. Attention is focused on the U.S. economy even as Greece continues to try to settle a deal with private bond holders to take a 70% haircut on the value of its bonds along with a low rate of interest for the value of the remainder moved out significantly in time. The Eurozone statistics agency reported a drop in retail sales in December anchoring what many economists have suggested and that is that Europe entered a recession in Q4. We are not certain what the catalyst will be but we believe that it will occur sooner rather than later to help work off overbought conditions in U.S. equity markets.

We continue to be patient as we await the topping process to complete so that we can enter the put trades that we identified more than a week ago.

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