Housing Numbers Burst the Recovery Bubble...

By: Mark_McMillan

Trade Recommendations: Take no action.

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: DIA - Long at $101.18 ($101.37 - $0.19 dividend)

QQQQ - at $45.50 (adjusted down $0.05 for a dividend payment)

SPY - Long at $107.99 ($108.52 less the $0.53 dividend)

Daily Trading Action

The major index ETFs opened higher and continued to progress higher for the first twenty minutes of trading. From that point on the major indexes eased lower in anticipation of economic reports released at the top of the hour. They continued lower on the release of the reports but completed that move lower in a bit more than a half an hour and tried to rally until just before noon. The lunch hour saw slight easing of the major indexes with a pronounced downward move when traders returned from lunch. That selling lasted through the remainder of the session with a respite in the final two minutes that saw prices close just pennies from the lows. Both the Dow and S&P-500 closed below their 200-DMAs. The Russell-2000 (IWM 64.75 -1.36) and the Semiconductor Index (SOX 361.39 -6.65) both plummeted with IWM finishing below its 20-Day Moving Average (DMA) and the SOX finishing well above its 20-DMA. The Bank Index (KBE 24.48 -0.34) and the Regional Bank Index (KRE 24.46 -0.38) also lost more than one percent with KBE able to close above its 20-DMA and KRE finishing below that resistance. The 20+ Yr Bonds (TLT 98.57 +1.16) moved opposite falling equity markets. Volume remained light on the NYSE and was below average on the NASDAQ.

There were two economic reports of interest released:

• Existing Home Sales (May) came in at 5.66M versus an expected 6.10M
• FHFA Housing Price Index (Apr) rose 0.8% versus March's 0.1% rise

Prior to the open, analysts at Standard and Poor's raised their estimates of loan losses for Spain's banking sector but market participants seemed to shrug that off with the higher open. Additional negative Euro sentiment came with an announcement that BNP Paribas received a ratings downgrade.

On a positive note, the United Kingdom announced revised plans to accelerate debt reduction through a combination of spending cuts and tax raises. This helped the pound move 0.3% higher against the U.S. dollar. The Euro attempted to rally versus the dollar early on but ended closing 0.3% lower against the U.S. dollar, which put additional pressure on U.S. equities markets.

A federal judge in Louisiana ruled against the Obama administration's 6-month deep-water drilling moratorium in the Gulf of Mexico. The action had idled 33-deepwater rigs in the gulf. The President's spokesperson said they would immediately appeal the judgment. The ruling was particularly direct that the Federal government had acted in an arbitrary and capricious nature. The Federal government's action was also considered illegal as they hadn't consulted state officials, which is a requirement in such matters. The suit, which was supported by the Governor of Louisiana, was brought by Hornbeck Offshore Services (HOS), a stock recently added to the value portfolio. There was an immediate spike and then fall for gulf oil related stocks.

All the ten economic sectors in the S&P-500 moved lower on the day led by Energy (-2.7%) and Utilities (-2.5%).

Implied Volatility accelerated higher with the S&P-500 (VIX 27.05 +2.17) implied volatility rising nearly nine percent and the implied volatility for the NASDAQ-100 (VXN 26.83 +1.26) rising five percent.

Commentary:

Tuesday's trading action started out like it might be constructive but market participants headed for the exits when the housing numbers were released. A statement released by the chief economist of the National Association of Realtors (NAR) allowed that housing prices may fall yet again (a double dip) due to the amount of inventory of homes due to defaulted loans.

We expect Wednesday to either see a rally or at least a braking of the downside action. We will have to evaluate the trading action to determine whether we will abandon our long position after the close on Wednesday.

At this time, all the indexes we regularly monitor are in trading states which means the indexes will bounce between support and resistance rather than just keep moving in a single direction. Fear hasn't crept up sufficiently to say the downward move is complete, but optimism is certainly not high at this time. Stay tuned.

It should be noted that the Russell-3000 will be rebalanced the following Friday, June 25th. More than 460 companies will be swapped into and out of the Russell-3000 universe. This will affect trading for the coming two weeks and will result in one of the heaviest trading volume days of the year on Friday, June 25th.

We hope you have enjoyed this edition of the McMillan portfolio. You may send comments to mark@stockbarometer.com.

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By Mark McMillan

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