Keystone's Wake Up 4-29-11

SPX is now testing resistance levels from the summer of 2008, three years ago, as the commodities bubble popped.  1363 resistance above and 1354 support below.

EOM today so the monthly charts will be worth a look this weekend.

Bloomberg said that earnings so far show about 60% beating while close to 40% missed.  Lots of mixed news; multi-nationals benefiting from lower dollar.

Many sectors displaying negative divergences on weekly and daily charts which forecasts trouble ahead for the broad markets.  Staples, healthcare and some real estate look to be the best of a bad lot.  Real estate was the surprise since SRS, the inverse real estate had and still has nice positive divergence, is indicating a weakening in real estate.  The RSI relative strength did take an extra tick lower for SRS which will at least mute the effect of the bounce coming for SRS in the days ahead.

The idea is that staples, healthcare and to some extent, real estate plays, are probably the best three places to hide money from the oncoming downside. Negative divergence showing on several sectors such as technology, telecom, discretionary and trannies.  Energy and basic materials are rolling over with H&S’s.  Financials are already trending along lower, until yesterday when they bounced, so the coming days will sort the banks out.

Financials were POMO pumped yesterday and rejoined the bull side. Some euro investigations are opening up against JPM, GS, and others, but unknown how this will affect financials today.  As long as XLF remains above 16.44 then the broad market bulls are in continued up mode.  If the XLF drops back under 16.44 and lower, then the market bears take the financials back and the broad markets will drift lower.

The 2-10 spread has been falling, flattening.  10-year at 3.30%, why 4% only seems like yesterday; the 2-year at 0.61%, thus 330-61=269.  We are only talking small ticks here, but the 270’s were the norm over recent weeks, but 269 spread is plenty steep for banksters to be happy, and this is in line with XLF buoyancy which occurred yesterday.  Keystone uses a 255 level as a marker, below is sad bankers, above is happy ones.  So the spread remains comfortably above.  If the spread drops under 255, well, then the banks have problems, and so will the markets. A 3.1% ten year and 0.6% two year would produce sad bankers so it is not as far away as traders think.

Utilities have exploded to the upside on POMO fuel, UTIL now at 428 well above the 411 danger zone area. Broad markets will not experience extended selling unless the utes are leading or coincidental with the downside. This is a big feather in the bulls cap. Also, SPX:VIX now at 93 well above the 68 bear selling zone so no worries by bulls.  SPXA150R is above 90, this is a lofty perch consistent with topping markets.  Traders remain complacent, still feeling the euphoric affects of Easter beverages, not worried about a drop in the markets at all.  This is evidenced by the VIX now closing with a 14 handle and the put/call numbers showing lack of fear.  Chairman Bernanke’s message, whether he intended it to be or not, is to keep the good times rolling, and traders are embracing the party atmosphere.

Many traders play the energy/ISM trade where you buy energy at the end of the month and hold it until, and sometimes thru, the ISM news on the first of the month. Trade has worked like a charm month after month.  Thus, watch XLE over next couple days.  If XLE is weak that would show that this trade is ending its streak and it would provide a hint to overall market direction as well. If XLE moves strongly up over next couple days, early next week, then the market bulls will respond broadly.

The long side has been the trade as the indexes continue floating upwards.  Caution is warranted, the markets are not stable.  Stay on guard and close to the mouse.  Many sector charts with negative outlooks moving forward.  The weak dollar=strong commodities=strong equities trade is still kicking but it has a long gray beard now.

Charts want to flip towards strong dollar=weak commodities=weak equities=weak euro. These changes have a way of happening suddenly.