Canary Breakout Begins...

By: Mark McMillan | Tue, May 27, 2014
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5/27/2014 9:07:36 AM

Russell-2000 leads the charge...

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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.

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Long DIA at $161.48 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: 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 = $5.28 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.

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Equities saw a modest gap up open followed by strong buying in the first forty-five minutes then each index behaved differently with the Dow meandering sideways to gradually higher and the NASDAQ-100 just kept rising helping to lead equities higher for the day. This saw the NASDAQ-100 shift to an uptrend state while the Dow and S&P-500 remain in trading states. The S&P-500, however, did close at an all-time high. All three finished above their 20-, 50-, and 200-Day Moving Averages (DMAs) with the NASDAQ-100 continuing to show relative strength over the others. The Dow Jones Transports (IYT 143.09 +1.16) added a strong fractional gain as did the Semiconductor Index (SOX 589.91 +5.61). Both closed above their respective 20-, 50-, and 200-DMAs. Of course, the Russell-2000 (IWM 111.97 +1.21) added more than one percent and was able to close above its 20- and 200-DMAs. The Bank Index (KBE 31.76 +0.13) and the Regional Bank Index (KRE 38.14 +0.18) were both able to close atop their 20-DMAs but remain just below their respective 200-DMAs. The Finance Sector ETF (XLF 22.04 +0.07) added a fractional gain and sits above its 20-, 50- and 200-DMAs. Longer Term Bonds (TLT 112.70 +0.60) added a fractional gain and rose back above its 20-DMA and sits above its 50- and 200-DMAs. It maintains a trading state. Trading volume was very light with 524M shares traded on the NYSE. Trading volume on the NASDAQ was also very light with 1.518B shares traded.

There was a single economic report of interest released:

The report was released a half hour into the session. March's New Home Sales were revised upward from 384K to 407K.

We are watching gold for a potential reversal in the Gold Miners Index (GDX 23.31 -0.08) posted another modest loss. The price of Gold (GLD 124.51 -0.18) also posted a modest loss. Both closed below their 20-, 50-, and 200-DMAs.

Apple (AAPL 614.13 +6.86) added one percent. AAPL constitutes about 20 percent of the NASDAQ-100 and nearly five percent of the S&P-500.

Seadrill Limited (SDRL 36.37 -0.33) fell most of one percent. It is in an uptrend state and looks ready to break out higher now. We sold March 2014 $35.00 put contracts for $150 at the open on Feb 18th and bought shares at $35.43. The stock is now trading ex-dividend for $0.98. 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 U.S. dollar rose two tenths of one percent while the Euro fell a like amount.

The yield for the 10-year treasuries fell two basis points to close at 2.54. The price of a barrel of crude oil rose sixty-one cents to close at $104.35.

The implied volatility for the S&P-500 (VIX 11.36 -0.67) slipped five percent at a level not seen since March 2013. The implied volatility for the NASDAQ-100 (VXN 13.45 -0.75) fell five percent and remains below its 200-DMA.

Market internals were bullish with advancers leading decliners 2:1 on the NYSE and by 3:1 on the NASDAQ. Up volume led down volume by more than 2:1 on both the NYSE and the NASDAQ. The index put/call ratio fell -0.20 to close at 0.65. The equity put/call ratio fell -0.13 to close at 0.58.


Friday was a light volume trading day preceding the Memorial Day holiday weekend. The Russell-2000 led equities higher, supported by the other leading indexes. In fact, all equity indexes we regularly report on added gains. Longer term bond prices posted a fractional gani as well. All three canaries (IWM, KBE, KRE) closed higher with the Russell-2000 closing definitively above its 200-DMA and above its 20-DMA. The bank indexes both closed a bit below their 200-DMAs but both were able to climb above their 20-DMAs. We consider this a bullish move as the bears are losing their grip. A short covering rally could occur, in particular for the canaries. With short interest now up to more than three days at average trading volume, the rally could be significant. We will maintain our long positions for now.


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Author: Mark McMillan

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