Stock Market Bulls Fight Back...

By: Mark_McMillan

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Daily Trend Indications:

- Positions indicated as Green are Long positions and those indicated as Red are short positions.

- The State of the 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 a position. If the BIAS is Bullish but the 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 trade on "weaker" signals than you might otherwise trade on as the 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.

Current ETF positions are:

DIA: Short at $105.19

QQQQ: Short at $45.91

SPY: Short at $110.65

Daily Trading Action

The major index ETFs saw a gap up open and traded lower for the first fifteen minutes. After that, the Dow, S&P-500, and Bank Indexes followed one path while the other equity indexes we regularly monitor followed another. The latter group immediately took off higher afte the first fifteen minutes and didn't take a break until the noon hour. At the end of the noon hour, a final push by the bulls drove equity indexes to their zenith by around 1:15 to 1:30pm when the bears took over. It turns out, this was the level of the 200-Day Moving Average for the NASDAQ-100. From that point, the bears controlled thing as the equity indexes sold off into the close and the NASDAQ-100 closed on its 50-DMA. The Dow and S&P-500 followed the leading indexes higher, reaching their 20-DMA before reversing and managed to both close above their 50-DMAs. The Russell-2000(IWM 62.62 +1.06) and the Semiconductor Index (SOX 328.60 +4.36) joined the NASDAQ-100 in leadership with gains of more than one percent. The Bank Index (KBE 22.85 +0.02) closed nearly unchanged while the Regional Bank Index (KRE 22.40 +0.31) added more than one percent. The 20+ Yr Bonds (TLT 104.25 -0.60) had a fractional loss. NYSE volume increased but was still very light with just 973M shares traded. NASDAQ share volume rose modestly to very light with just 1.724B shares traded.

There were six economic reports of interest released:

• Housing Starts (Jul) came in at 546K versus an expected 555K
• Building Permits (Jul) came in at 565K versus an expected 573K
• PPI (Jul) rose +0.2% as expected
• Core PPI (Jul) rose +0.3% versus an expected +0.1% rise
• Industrial Production (Jul) rose +1.0% versus an expected +0.6% rise
• Capacity Utilization (Jul) came in at 74.8% versus an expected 74.5%

The first four reports were released an hour before the open. The other two were released fifteen minutes before the open.

U.S. futures markets took their queue from Europe's bourses which were trading higher due to better than expected results from a economic sentiment survey for August. Germany's ZEW economic survey was below expectations but Europe overall was better.

All ten economic sectors in the S&P-500 moved higher led by Materials (+2.3%) for the second day in a row.

Implied volatility for the S&P-500 (VIX 24.33 -1.77) fell significantly but remains above its 200-DMA as does the implied volatility for the NASDAQ-100 (VXN 25.92 -1.16).

The yield for the 10-year note rose seven basis points to close at 2.65. The price of the near term futures contract for a barrel of crude oil rose fifty-three cents to close at $75.77.

Market internals were positive with advancers leading decliners by more than 3:1 on both the NYSE and the NASDAQ. Up volume led down volume 3:1 on the NYSE and by 4:1 on the NASDAQ. The index put/call ratio rose 0.40 to close at 1.54. The equity put/call ratio fell 0.09 to close at 0.63.

Commentary:

Tuesday's trading action presented about what we would have expected with the Fed beginning to buy long-term government treasuries and bond investors beginning to divest themselves of their holdings. This provided a liquidity fueled rally for equities. The bears waited to step in until resistance levels were reached. For QQQQ, that was the all important 200-DMA. For the Bank Index (KBE), it was the level of the gap up open. Market Participants were selling the banks from the open even though bank bulls pressed prices to retest those levels in both late morning and early afternoon. The bears were always willing to sell at the level of the gap up open prices were little changed at the close. While the Regional Bank Index fared a bit better, it is troubling that the big banks aren't participating in the day's upside.

On a bullish note, the S&P-500 was able to climb back above its 50-DMA and the NASDAQ-100 closed even with its 50-DMA.

With the leading indexes leading U.S. equities higher, the advance could continue. Many of the equity indexes look set to move into a trading state but remain in a downtrend state. We are concerned that this may be a bounce in a downtrend fueled by the liquidity afforded by profit taking in long-bonds. If bonds decide to break above Monday's closing price and continue to move higher, the liquidity in equity markets will quickly be withdrawn and we could have a rapid move lower. We will wait another day for some clarity on liquidity.

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

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By Mark McMillan

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