Stock Market Short Covering Rally...

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: In Cash.

Daily Trading Action

The major index ETFs opened significantly lower and immediately began There were really only two half-hearted attempts to halt the rally, which occurred a half hour into the session and just before the lunch hour. The first attempt lasted only about fifteen minutes and the second continued through much of the lunch hour before traders came back from lunch early and began, once again, to bid up share prices. From there, the bulls continued to run the major indexes higher into the close. The bias that has been bearish for months is at risk to change. At the end of last week, we had suggested this change could occur this week and we were overly optimistic about that. That bearish BIAS is at risk, however, across all the equity indexes we monitor except the Russell-2000 and the Regional Bank Index. The Russell-2000 (IWM 62.36 +1.03) roared ahead shaking off its downtrend state. The Semiconductor Index (SOX 358.13 +0.19) closed almost flat after opening lower and testing down to its 200-Day Moving Average (DMA) before climbing back to parity. The only two equity indexes still in downtrend states are the Bank Index (KBE 23.28 -0.06) and the Regional Bank Index (KRE 23.32 +0.22) which finished mixed. The 20+ Yr Bonds (TLT 100.33 +0.15) were little changed actually closing higher as market participants are still clinging to their relative safety. Volume increased to below average with 1.125B shares traded on the NYSE. Similarly, NASDAQ share volume increased to average with 1.935B shares traded.

There were two economic reports of interest released:

• Building Permits (Jun) came in at 586K versus an expected 572K
• Housing Starts (Jun) came in at 549K versus an expected 575K

Both reports came out an hour before the open and didn't appear to have an effect on futures markets which were down significantly before the bell. The reports are seasonally adjusted and were mixed with the forward looking Building Permits higher than expected while actual housing starts were lower than expected.

The day was all about investor psychology. With the major indexes opening up more than one percent lower, market participants jumped at the opportunity to buy stocks at a discount. That buying pressure on stocks eventually took hold as the major indexes were forced higher and a short covering rally began. Even Goldman Sachs (GS 148.91 +3.23) was able to recover from a markedly lower open after missing on revenue and reporting an 82% decline in earnings. Goldman claimed one-time charges from the $550M settlement of fraud charges with the SEC and $600M in EU charge settlements weighed on earnings and investors snapped up shares at a discount.

Nine out of ten economic sectors in the S&P-500 moved higher led by Materials (+2.9%). Healthcare (-0.2%) was the only sector to fall.

Commentary:

Tuesday's trading action occurred when it had to in order to prevent a further move lower. The institutional money and large mutual funds don't appear to be running scared. The significant discounts available at the lower open were too tempting and the bears covered their short positions as the markets moved steadily higher through the session.

We note that there are still significant concerns around the ramifications of FINREG on the largest banks. While the Regional Banks were able to move higher, the largest banks are still being sold off to limit risk.

A good trade, since we went to cash last Friday, has been to bet against whatever directional bias exists at the market open. Wide swings have resulted in traders working the opposite stance from the open. Wednesday looks set to open fractionally higher so we will see how market participants react before choosing to enter positions.

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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