Bears Shoved Aside As Second Quarter Ends...
7/1/2011 9:15:23 AM
The last day of June sees equity bulls add to gains...
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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.
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Value Portfolio:
We are long TBT at $32.50 from June 16th. (TBT closed at $34.51 on June 30th)
We sold short one contract TLT July $98 Calls at $1.19 per share on June 16th
We sold short one contract TLT Aug $98 Calls at $1.80 per share on June 16th
We sold short one contract TLT Sep $98 Calls at $2.13 per share on June 16th
(TLT closed at $94.10 so the contracts we sold are nearly four dollars out of the money with price potentially reversing higher. Time value on all option contracts we sold continues to erode which means we can buy them back for less than we sold them for or, if price stays below $98.00, let them expire worthless and keep all the money).
Daily Trading Action
The major index ETFs opened higher and almost immediately began to move higher. That move lasted an hour before the bears attacked but the move lower was modest and lasted less than a half an hour. The bulls continued to support higher prices until the lunch hour began. The first three hours of the afternoon were spent slowly drifting modestly lower before the final hour brought more buying which helped the major indexes to close very near their highs for the day. This left all three major indexes closing above their 20-, 50-, and 200-Day Moving Averages (DMAs). The Semiconductor Index (SOX 410.35 +10.18) soared +2.5%. The Russell-2000 (IWM 82.80 +0.60) added a fractional gain. The Regional Bank Index (KRE 25.45 +0.16) added a fractional gain to close just below its 50-DMA. The Bank Index (KBE 23.99 +0.05) added a modest gain. The Finance Sector ETF (XLF 15.35 +0.06) also added a fractional gain. All equity indexes we regularly monitor are now in trading states. Long term bonds (TLT 94.10 -0.15) traded down to and reverse at its 100-DMA to leave a hammer candlestick. This warns of a potential bottom. TLT is in a downtrend state but we are mindful of a potential bounce here but believe it will be constrained below its 200-DMA. NYSE trading volume was nearly average with 994M shares traded. NASDAQ share volume was nearly average with 1.809B shares traded.
There were three economic reports of interest released:
- Initial Jobless Claims for last week came in at 428K versus an expected $420K
- Continuing Jobless Claims came in at 3.702M versus an expected 3.700M
- Chicago PMI (Jun) came out at 61.1 versus an expected 54.1
The first two report were released an hour before the open. The latter report was scheduled to be released a half hour after the open but was apparently leaked and then released fifteen minutes into the session.
The U.S. dollar fell nearly another half of one percent.
The yield for the 10-year note rose five basis points to close at 3.16. The price of the near term futures contract for a barrel of oil rose sixty-five cents to close at $95.42.
Implied volatility for the S&P-500 (VIX 16.52 -0.75) fell four ten percent and the implied volatility for the NASDAQ-100 (VXN 17.86 -0.98) fell five percent. This left the VIX and the VXN closing at their lowest levels since the end of May and on the last vestige of support before the uptrend from April 20th is broken.
All ten economic sectors in the S&P-500 moved higher led by Industrials (+1.7%), Energy (+1.5%), Tech (+1.4%), and Materials (+1.3%).
Market internals were positive with advancers leading decliners nearly 3:1 on the NYSE and by 5:2 on the NASDAQ. Up volume led down volume 7:3 on the NYSE and by 4:1 on the NASDAQ. The index put/call ratio fell -0.18 to close at 1.22. The equity put/call ratio fell -0.02 to close at 0.54.
Commentary:
Thursday was the last day of June and the "window dressing" that we thought might take place appeared to do so. Friday is July 1st. It is a holiday in Canada called Canada Day similar to the 4th of July Holiday in the U.S. called Independence Day. It is also the birthday of your humble writer. As such, I have grown used to it as a day when the market will often reverse direction. I am mindful of this but we didn't get any signal of an imminent reversal (with the noted exception of TLT's potential reversal on a hammer).
What we have seen is a continued decline in implied volatility to a level where it will almost certainly bounce. It is the nature of the bounce that will dictate what will occur next week. While we are always mindful of seasonality, we don't trade it as it doesn't always hold. We believe that the announcement that our elected members of Congress will stay through the normal holiday closure period to work on the debt ceiling bodes well for a potential solution. The Republicans and Democrats have not yet found a compromise with much posturing going on for political gains. Unfortunately, U.S. market volatility can rise due to the uncertainty surrounding their squabbles. If the debate goes on much longer, it could impact the rating on U.S. Treasuries which will impact the nation for years. Let's hope this gets settled soon.
We will remain with our current positions until we see that the market will indeed reverse itself. We are looking for a light volume trading day but not for a large price move. Remember, U.S. markets are closed on Monday in observance of Independence Day so the next session will be on Tuesday, July 5th. I hope you enjoy your holiday weekend.
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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