2/6/2012 8:58:04 AM

Market buys into hype...

Recommendation:
Take no action.

Click here to access our stock market chat rooms today! For a limited time, try our chat room for free. No subscription necessary to give it a try.

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

Click here to learn more about my services and for our ETF Trend Trading.

Value Portfolio:
We publish new reports to our free newsletter every month. If you're not a member, sign up by clicking here: Free Stock Market Newsletter

Daily Trading Action

The major indexes opened one percent higher and then moved lower for the first fifteen minutes before shifting back into moving higher through the rest of the morning and the lunch hour. The afternoon was spent drifting lower before a rally in the final fifteen minutes saw the major averages close near the day's highs. The Dow actually hit its intraday high in the first forty-five minutes which was still shy of the important resistance level we have been watching, namely the intraday high seen on May 2nd last year. The 12,900 level still looms as the next area to be attempted by the Dow. The semiconductor index (SOX 427.99 +7.43) added 1.8%. The Russell 2000 (IWM 82.95 +1.77) added +2.2%! The Dow Jones Transport Index (IYT 95.82 +1.07) added 1.1% with its first gain in the last three sessions. The Bank index (KBE 22.17 +0.66) added three percent and the Regional Bank Index (KRE 27.20 +0.76) nearly matched that. The Finance Sector ETF (XLF 14.74 +0.39) added +2.7%. All equity indexes have a BULLISH BIAS. All equity indexes we follow are currently in uptrend states with the exception of the Dow Jones Transport Index which is in an trading state. Long term bonds (TLT 116.57 -2.56) slid -2.1% closing below its 20- and 50-Day Moving Averages (DMAs). It shifted to a trading state with a BEARISH BIAS. Trading volume was below average on the NYSE with 905M shares traded. Trading volume increased on the NASDAQ to average with 2.140B shares traded.

There were seven economic reports released:

• Nonfarm Payrolls (Jan) rose 243K versus an expected +155K
• Nonfarm Private Payrolls (Jan) rose 257K versus an expected 168K
• Unemployment Rate (Jan) came in at 8.3% versus an expected 8.5%
• Hourly Earnings (Jan) rose +0.2% as expected
• Average Workweek (Jan) came in at 34.5 hours versus an expected 34.4 hours
• Factory Orders (Dec) rose +1.1% versus an expected +1.5%
• ISM Services (Jan) came in at 56.8 versus an expected 53.1

The first five reports came out an hour before the open. The last two were released a half hour into the session.

Both The U.S. and the Euro closes all but unchanged.

The yield for the 10-year note rose twelve basis points to close at 1.95. The price of the near term futures contract for a barrel of crude oil rose $1.48 to close at $97.84.

Implied volatility for the S&P-500 (VIX 17.10 -0.88) fell five percent and the implied volatility for the NASDAQ-100 (VXN 18.21 -0.68) fell nearly four percent. Both closed at lows not seen since July.

Market internals were positive with advancers leading decliners 4:1 on both the NYSE and the NASDAQ. Up volume led down volume 5:1 on both the NYSE and the NASDAQ. The index put/call ratio fell -0.29 to close at 1.02. The equity put/call ratio fell 0.11 to close at 0.52.

Conclusion/Commentary

Friday's trading was a euphoric day that brought the Dow near the resistance level we have pegged as the likely market top. It didn't quite reach that level and it is the market behavior from this point that will determine whether the market will top here ore merely take a rest before breaking out even higher.

What was the cause for the bullish euphoria? The economic reports that showed unemployment down to 8.3% and nearly a quarter of one million jobs added in January. Unfortunately, these numbers are not comparable to the past as the labor department decided to change their methodology. Leaving the inputs the same would not have seen the decrease in the employment rate nor showed the better than expected number of jobs added. In point of fact, the labor department said that 1.2M workers have simply vanished from the U.S. labor pool since the 2010 census. Another way to say this is that all workers aged 55 and older have simply died since 2010. This means that the labor force shrunk to a 30-year low of 63.7%. of the quarter million jobs added, 113K were low wage jobs and part-time jobs rose by 699K! So, in effect, we had huge losses in full time employment! Even the ISM Service Index is suspect as it rose on an increase in sector employment but may not have counted large bank layoffs with another 15,000 people to be laid of by Wells Fargo (announced on Friday).

Enough of our questioning the numbers. We watched Neil Cavuto interviewing a guest about the ginned up numbers. When the guest stated that the methodology had changed he said, "well, the numbers are the numbers." or something akin to that. At this time, if our financial media don't question the merit of numbers based on a changed underlying methodology, is it any wonder that the market will move higher. All of us are being duped by the government into believing that everything is OK. This will continue until November and the elections are held to decide who is in control over the next four years.

Bond prices dropped like a rock on the release of the economic reports as the risk trade is back on. We wonder how long this will last as we have to believe that the financial world will look deeper into those numbers and will smell a rat and eventually cough up some discomfort at the current set of lies being fed to the public by the U.S. (and other) government(s).

We are sticking with our short positions and looking for the opportunity to buy puts.

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