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The Sky is Falling...

10/10/2014 10:18:14 AM

This is the fourth Dow loss of 300 points or more in a single day...

Recommendation: Take no action.

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Stock Market Trends:

Stock Market Trends Table

- 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 opened around flat but sold off through the day leaving the major indexes with two percent losses and the other equity indexes off varying amounts. The three canaries: the Russell-2000 (IWM 106.03 -2.94), the Bank Index (KBE 30.97 -0.81), and the Regional Bank Index (KRE 36.83 -0.92) lost between two to three percent on the day. This contradicts the bullish engulfing seen on Wednesday which is highly unusual. Longer Term Bonds (TLT 118.87 -0.52) posted a fractional loss. The expected top for TLT is not going to happen cleanly. It closed above its 20-, 50-, and 200-DMAs, is in an uptrend state and has a BULLISH BIAS. Trading volume fell to a below average 896M shares traded on the NYSE. Trading volume on the NASDAQ fell to a somewhat heavy 2.297B shares traded.

There were three single economic reports of interest released:
• Initial Jobless Claims for last week came in at 287K versus an expected 295K
• Continuing Jobless Claims for last week came in at 2.381M versus an expected 2.425M
• Wholesale Inventories (Aug) rose +0.7% versus an expected +0.3% rise
The first two reports were released an hour before the open. The other report came out a half hour into trading.

Apple (AAPL 101.02 +0.22) posted a modest gain. AAPL constitutes about 20 percent of the NASDAQ-100 and nearly five percent of the S&P-500.

Seadrill Limited (SDRL 24.11 -1.18) fell nearly five percent. SDRL remains in free fall as the price of oil continues to fall in the face of a rising U.S. dollar. 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 was unchanged closing at 2.33. The price of a barrel of crude oil fell -$1.54 to close at $85.77.

The implied volatility for the S&P-500 (VIX 18.76 +3.65) soared 24%! The implied volatility for the NASDAQ-100 (VXN 19.77 +2.51) soared fifteen percent!

Market internals were bearish with decliners leading advancers 7:1 on the NYSE and by 6:1 on the NASDAQ. Down volume led up volume 12:1 on the NYSE and by 5:1 on the NASDAQ. The index put/call ratio fell -0.29 to close at 0.86. The equity put/call ratio rose +0.09 to close at 0.75.


Thursday was an unusual trading day. There is certainly a lot of bearishness out there. In fact, things are getting so bearish that a contrarian argument would be that the markets will begin to climb a wall of worry. For years, market participants have been waiting for a ten percent correction and have been denied. That belief is so ingrained that a lot of cash has been built up acting as a cushion against downside and ready to be put to work at the next market bottom. We maintained our long positions looking for follow-through to Wednesday's rally and we did not get it. None of the major equity indexes have yet moved from trading states to downtrend states although most equities are, themselves in downtrend states. All equity indexes we regularly monitor now have a BEARISH BIAS which means that they are more likely to move lower in the intermediate term. Although it feels as if "the sky is falling," it turns out the S&P-500 is only four percent off its all-time highs. Chicken Little, as it turns out, was wrong. We believe that we are closer to a short term bottom than a top, principally because the market tends to bounce after a 12:1 down volume versus up volume ratio. The sun will come out tomorrow.


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


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