5/16/2014 9:13:15 AM

The canaries sing of a reversal...

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Value Portfolio:

Long SDRL at $33.90 on June 15, 2012 (Shares were put to us when options expired. We were paid $1.10 per share when we sold those options and bought shares for $35.00 each). We have collected dividends: March 5, 2014 $0.98, December 3, 2013 $0.95, September 5, 2013 $0.91, June 5, 2013 $0.88, $1.70 Dec 4, 2012, $0.84 Sep 4, 2012. Total = $5.28 in dividend payments.
Short FXE at $124.19 on August 24, 2012
Long UUP at $22.43 on August 24, 2012
Short FXE at $134.48 on October 4, 2013
Long SDRL at $35.43 on Feb 18, 2014
Long SDRL at $33.50 on March 21, 2014 (Shares were put to us when options expired. We were paid $1.50 per share when we sold those options and bought the shares for $35.00 each.

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Equities saw a gap down open with selling dominating the first forty-five minutes before a failed rally attempt occurred lasting a half hour. The following plunge lasted the rest of the morning with a modest rally attempt during the lunch hour followed by a modest amount of selling which lasted for about forty-five minutes. The rest of the session was spent moving higher but the Dow and S&P-500 still finished below their 20-Day Moving Averages (DMAs) but above their 50- and 200-DMAs. The NASDAQ-100 finished below its 50-DMA but above its 20-DMA. All three recorded fractional losses. All three remain well above their 200-DMAs. All three remain in trading states with the NASDAQ-100 having a NEUTRAL BIAS and the others maintaining BULLISH BIASes. The Semiconductor Index (SOX 569.99 -6.81) lost more than one percent closing below its 20- and 50-DMAs in a trading state. The Dow Jones Transports (IYT 139.43 -0.78) closed fractionally lower but remains above its 20-, 50-, and 200-DMAs and signaled a likely reversal higher on Friday. The Russell-2000 (IWM 108.88 -0.74) closed fractionally lower below its 20-, 50- and 200-DMAs and signaled a likely reversal on Friday. It maintains a BEARISH BIAS and is in a downtrend state. The Bank Index (KBE 31.13 -0.27) and the Regional Bank Index (KRE 37.38 -0.20) closed fractionally lower, below their respective 20-, 50-, and 200-DMAs in downtrend states and maintaining a BEARISH BIAS. They both signaled likely reversals higher. 86) lost more than two percent. Both bank indexes closed below their respective 20-, 50-, and 200-DMAs. The Finance Sector ETF (XLF 21.72 -0.25) closed down one percent closing below its 20- and 50-DMAs. Longer Term Bonds (TLT 113.86 +0.90) closed fractionally higher and put in what appears to be an abandoned baby. That would signal a likely top for long term bonds and sets up a potentially high reward to risk trade. TLT is in an uptrend state and closed above its 20-, 50-, and 200-DMAs. Trading volume increased but remained light with 750M shares traded on the NYSE. Trading volume on the NASDAQ increased to average with 2.062B shares traded.

There were ten economic reports of interest released:

• Initial Jobless Claims for last week fell to 297K versus an expected 325K
• Continuing Jobless Claims came in at 2.667M versus an expected 2.700M
• CPI (Apr) rose +0.3% as expected
• Core CPI (Apr) rose +0.2% as expected
• Empire Manufacturing (May) came in at 19.0 versus an expected 4.8
• Net Long-term TIC Flows (Mar) came in at +$4.0B versus February's +$90.3B
• Industrial Production (Apr) fell -0.6% versus an expected flat (-0.0%) reading
• Capacity Utilization (Apr) came in at 78.6% versus an expected 79.2%
• Philadelphia Fed Index (May) came in at 15.4 versus an expected 9.1
• NAHB Housing Market Index (May) came in at 45 versus an expected 48

Eight of the reports were released before the open and the other two came out a half hour into the session. In summary, jobless claims are lower than expected, inflation is as expected, regional economic reports are stronger than expected, money is flowing into the U.S. at a trickle, industrial production and capacity utilization are below expectations and home builders are slightly pessimistic. Overall, mostly good reports with raised eyebrows for the last three reports mentioned.

We are watching gold for a potential reversal in the Gold Miners Index (GDX 23.62 -0.39) fell most of two percent and the price of Gold (GLD 124.77 -1.04) slid most of one percent. Both closed below their 50- and 200-DMAs with gold closing even with its 20-DMA and GDX closing below its 20-DMA.

Apple (AAPL 588.82 -5.05) slid most of one percent. AAPL constitutes about 20 percent of the NASDAQ-100 and nearly five percent of the S&P-500.

Seadrill Limited (SDRL 35.37 -0.15) posted a fractional loss. It remains above the support of its 20- and 50-DMAs. We sold March 2014 $35.00 put contracts for $150 at the open on Feb 18th and bought shares at $35.43. The stock is now trading ex-dividend for $0.98. The shares were put to us at $35.00 less the $1.50 per share we were paid for the puts, so we have an effective price of $33.50.

The U.S. dollar slipped a tenth of one percent while the Euro was unchanged.

The yield for the 10-year treasuries fell four basis points to close at 2.50. The price of a barrel of crude oil fell eighty-seven cents to close at $101.50.

The implied volatility for the S&P-500 (VIX 13.17 +1.00) soared eight percent higher remaining well below its 200-DMA. The implied volatility for the NASDAQ-100 (VXN 16.06 +0.90) rose six percent and closed on its 200-DMA.

Market internals were bearish with decliners leading advancers 2:1 on both the NYSE and the NASDAQ. Down volume led up volume 4:1 on the NYSE and by 5:2 on the NASDAQ. The index put/call ratio fell -0.22 to close at 1.03. The equity put/call ratio fell -0.03 to close at 0.69.

Conclusion/Commentary

Thursday saw selling, but not particularly dramatic by the close. Intraday saw many indexes down more than two percent. The tremendous come back in the afternoon left most prices down only fractionally and with reversals signaled on the DJ Transports, the Russell-2000, the Bank Index, and the Regional Bank Index. We will maintain our long positions to see if the reversal signaled by the canaries in the coal mine takes place on Friday.

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