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Dow up 275 Points, Largest of The Year...

10/9/2014 9:41:15 AM

Fed releases minutes, equities soar...

Recommendation: Take no action.

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Stock Market Trends:

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):

Long DIA at $161.48 as of December 19, 2013
Long SPY at $181.19 as of December 19, 2013

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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: June 10, 2014 $1.00, 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 = $6.28 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.) We have collected dividends: June 10, 2014 $1.00.

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Equities saw a mixed open followed by immediate selling. By the top of the hour, that selling reversed into buying that was modest through the morning and the lunch hour then crept up unti 2:00pm when price exploded higher. The three canaries: the Russell-2000 (IWM 108.97 +2.05), the Bank Index (KBE 31.78 +0.55), and the Regional Bank Index (KRE 37.75 +0.70) all saw a gap down open turn into a large gain which left behind a bullish engulfing pattern. Given that the canaries have been singing a bearish tune, this is quite a reversal that is likely to provide difficulties for the bears in the near term. Other equity indexes also sported gains of more than one percent including the Dow which gained nearly 275 points, its best one day point gain of the year. Longer Term Bonds (TLT 119.39 +0.03) closed flat. This could indicate a top for TLT which hasn't closed this high since May of last year. It closed above its 20-, 50-, and 200-DMAs, is in an uptrend state and has a BULLISH BIAS. Trading volume was average with 920M shares traded on the NYSE. Trading volume on the NASDAQ was heavy with 2.435B shares traded. In fact, the volume was even heavier than we have seen on the large downward days.

In addition to the weekly report on crude oil inventories, there was a single economic report of interest released:
• MBA Mortgage Index for last week rose +3.8% versus the prior week's -0.2% fall

The report was released hours before the open. The Fed also released the minutes from its last meeting with the body of the minutes reflecting the fed's perception that growth and inflation are going to come in below previous expectations due to the strength of the U.S. dollar and its effect on U.S. exports. The minutes were perceived as dovish, powering the rally seen on Wednesday.

Apple (AAPL 100.80 +2.05) roared back adding two percent. AAPL constitutes about 20 percent of the NASDAQ-100 and nearly five percent of the S&P-500.

Seadrill Limited (SDRL 25.29 +0.39) added more than one percent. SDRL may be bottoming here but much of that will be shaped by the near term direction of equity markets and the price of oil. SDRL is in a downtrend state and closed below its 20-, 50-, and 200-DMAs. We sold March 2014 $35.00 put contracts for $150 at the open on Feb 18th, 2014 and bought shares at $35.43. The stock is now trading ex-dividend for $2.98 of total dividends. 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 yield for the 10-year treasuries fell two basis points to close at 2.33. The price of a barrel of crude oil fell -$1.54 to close at $87.31. The U.S. government reported an increase of 5.015M barrels of oil in U.S. inventories.

The implied volatility for the S&P-500 (VIX 15.11 -2.09) plummeted twelve percent closing well above its 200-DMA. The implied volatility for the NASDAQ-100 (VXN 17.26 -1.91) plummeted ten percent closing well above its 200-DMA.

Market internals were bullish with advancers leading decliners 4:1 on the NYSE and by 5:2 on the NASDAQ. Up volume led down volume nearly 4:1 on the NYSE and by 3:1 on the NASDAQ. The index put/call ratio rose +0.06 to close at 1.15. The equity put/call ratio rose +0.03 to close at 0.66.


Wednesday saw higher volume trading and a significant rally with the canaries showing bullish engulfing patterns. This is quite bullish. With that said, we need to see if there is a significant change in the breadth of market moves. Breadth has been narrowing with the moves higher seen for the major indexes not being supported by smaller stocks on the exchanges. A health market sees moves supported by a large majority of stocks, not by narrow leadership. The key for the day was the dovish Fed minutes. The minutes indicated that the Fed was unlikely to embark on raising interest rates until economic growth and inflation expanded, as the recent moves was both falling. We will maintain our long positions as we monitor trading on Thursday to see if there is follow through to Wednesday's large move higher.


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


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