Geopolitical Risk...

By: Mark McMillan | Fri, Jul 18, 2014
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7/18/2014 9:28:43 AM

Equities sell off hard...

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- 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: June 10, 2014 $1.00, 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 = $6.28 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.) We have collected dividends: June 10, 2014 $1.00.

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Even with losses of more than one percent, the major indexes still look pretty strong with only the S&P-500 closing below its 20-Day Moving Average (DMA). All the other equity indexes we regularly monitor took significant losses. The three canaries; Russell-2000 (IWM 112.48 -1.76), Bank Index (KBE 32.12 -0.63), and Regional Bank Index (KRE 38.58 -0.92) all closed below their 20-, 50-, and 200-DMAs and all shifted into downtrend states but they all reached oversold levels so an initial bounce looks likely. The Finance Sector ETF (XLF 22.65 -0.30) lost more than one percent and the Semiconductor Index (SOX 635.32 -16.43) lost more than two percent. Both closed below their 20-DMAs while the other equity indexes we regularly monitor remain above their 20-, 50-, and 200-DMAs. All the non-canary equity indexes are in trading states with a BULLISH BIAS. Longer Term Bonds (TLT 114.89 +1.43) added more than one percent and is positioned now for a potential double top. It shifted to an uptrend state. It maintains a BULLISH BIAS. It remains above its 20-, 50-, and 200-DMAs. Trading volume remained light with 705M shares traded on the NYSE. Trading volume on the NASDAQ was exactly the same as on Wednesday with a just above average 2.044B shares traded.

There were five economic reports of interest released:
• Initial Jobless Claims for last week came in at 302K versus an expected 311K
• Continuing Jobless Claims came in at 2.507M versus an expected 2.563M
• Housing Starts (Jun) came in at 893K versus an expected 1.020M
• Building Permits (Jun) came in at 963K versus an expected 1.037M
• Philadelphia Fed Index (Jul) came in at 23.9 versus an expected 12.5
All but the last report came out before the bell. The Philly Fed released its report a half hour into trading.

There were three important geopolitical events that occurred before and during the session. The first that occurred was sanctions announced by the United States of America against Russia over their continued involvement in the affairs of Ukraine. Second was the announcement of a downed Malaysian Airlines Boeing jet. It was shot down over Eastern Ukraine near the Russian border. There has been a lot of finger pointing but the technology required to shoot down a jet at 30,000+ feet is not known to exist in Eastern Ukraine. This leads one to ponder who shot down the airliner and whether it was linked to the Malaysian Boeing jet that went down in March? Finally, late in the session, Israel announced they were commencing ground based attacks in Gaza. Needless to say, equities sold off as investors worried over geopolitical risk.

Apple (AAPL 93.09 -1.67) slipped most of two percent. AAPL constitutes about 20 percent of the NASDAQ-100 and nearly five percent of the S&P-500.

Seadrill Limited (SDRL 38.17 -0.62) slipped most of two percent. The next target above remains $40.96, it's closing price on the last trading day of 2013. It is in an trading state. We sold March 2014 $35.00 put contracts for $150 at the open on Feb 18th, 2014 and bought shares at $35.43. The stock is now trading ex-dividend for $0.98 and one dollar for total dividends issued of $1.98. 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 and the Euro were little changed.

The yield for the 10-year treasuries fell six single basis points to close at 2.48. The price of a barrel of crude oil rose +$1.99 to close at $103.19.

The implied volatility for the S&P-500 (VIX 14.54 +3.54) soared thirty-two percent! The implied volatility for the NASDAQ-100 (VXN 15.85 +2.47) rocketed sixteen percent higher!

Market internals were mixed. Advancers led decliners 5:4 on the NYSE while decliners led advancers 4:3 on the NASDAQ. Up volume led down volume 2:1 on the NYSE while down volume led up modestly on the NASDAQ. The index put/call ratio fell -0.31 to close at 0.78. The equity put/call ratio rose +0.17 to close at 0.67.


It looks like the canaries will get a bounce but it may be a dead count bounce. We are concerned that, even though the major indexes continue to look relatively unphased, it is possible that this is the beginning of a downtrend, even though we are in a traditionally bullish earnings season. Stay tuned as we are day-to-day on maintaining our current long positions.


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Mark McMillan

Author: Mark McMillan

Mark McMillan
The McMillan Portfolio

Mark McMillan

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