Sovereign Debt Concerns Plague The Continent and U.S. Markets Trade in Sympathy...
7/19/2011 8:59:01 AM
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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.
Best ETFs to buy now (current positions):
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Value Portfolio:
We are long TBT at $32.50 from June 16th. (TBT closed at $33.33 on July 18th)
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 $95.24 on July 18th so the contracts we sold are nearly three dollars out of the money. 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 lower and then immediately tried to move higher but the bulls gave up within the first fifteen minutes and the major indexes began a dive that would last the morning. At the worst point, many equity indexes were down two percent before they reversed course and began to move higher. The major indexes only dropped to an intraday loss of about 1.5% before reversing course. The move into the close was solid setting up a follow-up move higher on Tuesday. The Dow and NASDAQ-100 managed to stay above all three of the moving averages we regularly monitor but the S&P-500 closed below its 20- and 50-Day Moving Averages (DMAs). The Semiconductor Index (SOX 384.63 -5.44) lost more than one percent which is much better than the more than two percent loss it was sporting intraday. The Russell-2000 (IWM 81.48 -1.33) logged a -1.6% loss. The Regional Bank Index (KRE 24.67 -0.36) lost -1.4% and the Bank Index (KBE 22.70 -0.33) lost -1.5%. The Finance Sector ETF (XLF 14.65 -0.20) posted a -1.4%t loss. All three recovered from being down two percent at their intraday lows. Long term bonds (TLT 95.24 -0.93) fell one percent. TLT is above all moving averages we regularly report on but the BIAS of longer term bonds in BEARISH and is in a trading state. NYSE trading volume was light with 874M shares traded. NASDAQ share volume was somewhat light with 1.640B shares traded.
There were two economic reports of interest released:
- Net Long-Term TIC Flows (May) rose by $23.6B CPI (Jun) fell -0.2% versus an expected -0.1% fall
- NAHB Housing Market Index (Jul) rose to 15 versus an expected 14
The first report was released a half hour before the open and the other report came out thirty minutes into the session. The first shows that capital is still flowing into the United States and the latter shows the the National Association of Home Builders grew slightly more optimistic since June.
Monday was all about fear over the debt ceiling not being resolved as well as sovereign debt fears. Potential contagion in Europe from relatively small economies such as Greece, Portugal, and Ireland to large economies, such as Italy and SPAIN have made market participants uneasy. Since the PIIGS (Portugal, Ireland, Italy, Greece, Spain) became a popular acronym for the countries that are of most concern, r.e. their sovereign debt, it really shouldn't be a surprise, but markets don't like uncertainty and sell-offs are common until relative certainty is restored.
The U.S. dollar rose about two tenths of one percent on the day.
The yield for the 10-year note was unchanged closing at 2.91. The price of the near term futures contract for a barrel of oil fell -$1.31 to close at $95.93.
Implied volatility for the S&P-500 (VIX 20.95 +1.42) rose more than seven percent as did the implied volatility for the NASDAQ-100 (VXN 22.48 +1.53). We continue to believe that a reduction in implied volatility is likely to occur in the short term and there is a reasonable probability that we just saw the local closing high for implied volatility on Monday.
Tech (-0.3%) and Energy (-0.4%) were the relative strongest performers while Financials (-1.4%) led the sell-off as all ten economic sectors in the S&P-500 finished with losses.
Market internals were negative with decliners leading advancers 5:1 on the NYSE and by nearly 4:1 on the NASDAQ. Down volume led up volume 7:1 on the NYSE and by 6:1 on the NASDAQ. The index put/call ratio fell -0.30 to close at 1.23. The equity put/call ratio rose +0.06 to close at 0.70.
Commentary:
Monday saw the sell-off continue but it also saw equity indexes recover from their lows and longer term bonds sold off. In fact, the action was BULLISH through the afternoon setting up a move higher for Tuesday. We will continue to discuss the focus for this week as split three ways:
- U.S. Debt Ceiling negotiations to avoid a reduction to the U.S. AAA credit rating
- European sovereign debt stability and bailouts
- Q2 Earnings season where some 300 companies are set to report in the coming week
While we don't have a lot of clarity over the European sovereign debt issues, a back-up plan has been proposed to let President Obama raise the debt ceiling up to three times going into the 2012 Presidential election. It is a contingency plan in case Congress can't agree on how to reduce the deficit and get the debt ceiling raised in sufficient time to meet the the August 2nd deadline for a potential default. This can take away some uncertainty and could get the market rallying.
With Google (GOOG 594.94 -2.68) and IBM (IBM 175.28 -0.26) having reported better than expected earnings, Apple (AAPL 373.80 +8.88) stepped up to the earnings confessional after the market closed and reported better than expected earnings which means that the industry Bellwethers are doing well for Tech.
On Tuesday, prior to the open, Bank of America (BAC 9.72 -0.28) will report earnings with an expected ninety cent per share loss, due to a settlement reached to buy back its toxic mortgages from its acquisition of Countrywide Financial. Goldman Sachs (GS 129.33 -0.83) is also schedule to report before the bell. These will affect the Financial sector.
We continue to be concerned that the top for equities may already be in. With that said, we do expect an oversold bounce that could propel the major indexes up toward recent highs. This week is seasonally weak (no pun intended) but it follows a week that saw the major indexes closed a couple percent lower already. With all of the major indexes in trading states and having a BULLISH BIAS, we are looking for a catalyst to get a move higher started. There is a lot of energy built up for a large move one way or the other and we still believe that can be a move higher for equities.
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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