The Day After...
11/5/2010 9:13:57 AM
The Fed caused quite a stir in the bull camp and they went hunting bear with a short squeeze that pushed priced up two percent...
Recommendation:
Buy shares of DIA to close the short position at a limit of $112.30.
Buy shares of QQQQ to close the short position at a limit of $53.02.
Buy shares of SPY to close the short position at a limit of $119.95.
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:
Short DIA at $108.57
Short QQQQ at $49.66
Short SPY at $114.82
Daily Trading Action
The major index ETFs opened significantly higher and then ran higher until around 11:00am. From their, the major indexes took different paths as the NASDAQ-100 lost a modest amount of their gains through the day while the S&P-500, at first pulled back for about an hour and then moved higher through the rest of the day accelerating in the final hour of trading. The Dow pulled back for an hour, moved higher for an hour moved back for another hour then committed to a continuous run higher into the close. The Dow and S&P-500 joined the NASDAQ-100 in uptrend states. The Semiconductor Index (SOX 389.75 +11.94) gained three percent on the day as it continues to lead the way higher. The Russell-2000 (IWM 73.36 +1.81) 1.55 +0.28) gained two and a half percent and moved into an uptrend state but still lags the major indexes in its trek toward reaching 2010 highs. The bank indexes closed higher with the Bank Index (KBE 23.62 +0.77) gained more than three percent and the Regional Bank Index (KRE 23.60 +0.79) posted similar gains. Both remain in downtrend states but have leapt up and over their respective 20-Day and 50-Day Moving Averages (DMAs). The 20+ Yr Bonds (TLT 99.69 +0.77) posted a fractional gain after Wednesday's drubbing. It remains in a downtrend and remains under pressure as the Fed's quantitative easing is focused on 5-6 year average duraction and has essentially orphaned the 20+ year bonds. In fact, the Fed used language stating they would be buying long-term bonds averaging 5-6 years. These are conventionally not considered long-term bonds which has caused some loss of credibility for the Fed. NYSE volume was above average with 1.378B shares traded. NASDAQ volume was above average with 2.534B shares traded.
There were four economic reports of interest released:
- Initial Jobless Claims for last week came in at 457K versus an expected 445K
- Continuing Claims came in at 4.340M versus an expected 4.386M
- Productivity-Preliminary (Q3) came in at 1.9% versus an expected +0.9%
- Unit Labor Costs (Q3) fell -0.1% versus an expected +1.0%
All four reports were released an hour before the open. Three of the four reports had prior months revised higher with only Productivity left unchanged, which is negative.
The dollar dropped to a new 2010 low before closing down 0.5%. This drop in the U.S. dollar is, of course, a reaction to the Fed's quantitative easing announced on Wednesday and was reflected in foreign markets when they opened following the Fed's announcement.
All ten sectors in the S&P-500 moved higher led by Financials (+3.4%), Materials(+3.3%), and Energy (+3.0%).
Implied volatility for the S&P-500 (VIX 18.52 -1.04) fell five percent and the implied volatility for the NASDAQ-100 (VXN 19.54 -0.87) fell four percent. This is the lowest level for implied volatility since the market reached its highs in April of this year.
The yield for the 10-year note fell nine basis points to close at 2.48. The price of the near term futures contract for a barrel of crude oil rose $1.80 to close at $86.49.
Market internals were positive with advancers leading decliners 5:1 on the NYSE and by 3:1 on the NASDAQ. Up volume led down volume 9:1 on the NYSE and by 3:1 on the NASDAQ. The index put/call ratio fell 0.38 to close at 1.14. The equity put/call ratio fell 0.08 to close at 0.47.
Commentary:
Thursday was all about the day after. The day after the Fed dropped the bomb of QE2 which will cause a move lower for the U.S. dollar and a move higher in dollar denominated commodities, thereby achieving inflation. This put equity buyers into a state of rampant bullishness and the short squeeze was on through the day.
We are looking for a move lower on Friday, and while it may not quite close the gap from Thursday's higher open, we are leaving our limit orders in place and will look to make an adjustment on Monday if our positions aren't closed on Friday.
We hope you have enjoyed this edition of the McMillan portfolio. You may send comments to mark@stockbarometer.com.
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Author: Mark McMillan
Mark McMillan
The McMillan Portfolio
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