Keystone's Sunday Commentary for the Week of 6-13-11

...if it's Sunday, it's time for Keystone's commentary for the week ahead......,

The ole Wall Street adage “Sell in May and Go Away” sure proved correct this year.  The tech-heavy Nasdaq Composite and small cap Russell 2000 are now negative for 2011. Considering that the Dow Industrials is the furthest above the start of 2011 number for the indexes, this illustrates that traders prefer a shift towards perceived safety in blue chips and divvy producers, although if the markets got real ugly, most everything will drop.  Staples, healthcare and other safety plays are becoming more in vogue.

Markets show last week how even if you were bearish and had the direction correct, some bears got shaken out on Thursday’s bounce, only to see markets tumble on Friday.  Typically, markets gain buoyancy on Friday afternoons due to short sellers paring back positions in front of the weekend.  Last Friday started to show buoyancy, popping at 2 PM on bank positive news and the final POMO schedule to close out QE2, but rolled over into the close.  A non-buoyant Friday afternoon is of concern to bulls.  Monday’s tend to be buoyant as traders return for the week and talk of mergers may occur, and funds usually experience inflows early week.  Thus, watch the Monday session behavior, since non-typical Friday action, if leading to non-typical Monday action, confirms structural damage to the equities markets.

Jamie Dimon’s dig at Chairman Bernanke is all the rage, making the point that all this new regulation is hampering bank lending and actually causing problems such as high unemployment.  Mr. Dimon has a point, since the unknown aspects of coming regulation creates an atmosphere of confusion and uncertainty, and businesses cannot properly plan budgets with so many unknowns, this leads to a status quo for companies and no desire to take on loans or hire new workers.  Keystone does not agree with the approach of Mr. Dimon, however, an article explaining his view would have been move effective, rather than a public display of snippiness, which continues to undermine overall confidence for anyone involved in the equities markets.

Continue to watch Keystone’s 2-10 spread Indicator; 255 spread identifies an advantageous yield curve for bankers versus a disadvantageous yield curve shown by minus 255.  Currently, the 10 is 2.97%, the two is 0.40%, thus, 297-40=257 so the banksters are trying to hang on by their fingernails.

Keystone’s SPX:VIX Ratio Indicator failed on Friday.  The critical 68 level gave way at 11:06 AM EST, indicating a blood bath day ahead, but then recovered at 11:48 AM, but only to fail again.  The rest of the Friday session was a bull-bear fight for the critical 68 level with the ratio flipping back and forth nine times before closing under the 68 level signaling bear victory.  As long as this ratio stays under 68 now, the markets will experience continuing weakness moving forward, any market pops will be of no consequence.  If the bulls can drive the SPX:VIX ratio back above 68 early this week, it tells you that the bulls have no plans on relinquishing control of these markets just yet.

Keystone’s NYA 40 Week MA Cross Secular Signal failed for a few brief minutes on Friday afternoon.  This should have bulls concerned since if the NYA falls under the 40 week MA, that signifies that the markets have fallen into a secular bear pattern and that week and months of weakness in the equities markets will follow.

Decliners were 80% with advancers 20% so a big washout did not occur as typically happens with a number in excess of 90%.  The TRIN verified the selling spending some of the day over the 2.0 level, but settled at 1.3, not an overly exuberant selling event.  Volume was close to average and volume on selling days continues to outpace volume on up days.  In a nutshell, this all hints that the downside is not finished no matter how much the markets may bounce in the coming days or weeks.

The SPX bounced off the 10-month MA at 1268 on Friday, a first test of this critical level, watched by Wall Street old-timers.  The SPX 12 month MA is 1236, which like the NYA above, represents a secular market change form bull to bear.

Traders will focus on OPEX Quadruple Witching this week, the Russell revaluation and the EOM in 14 trading days.  The end of month data will lock in H1 for 2011. A 6/24/11 date acts a deadline for Europe to get its house in order.  China rate hike may hit any day as well.  No shortage of drama.  The China hike should take commodities and equities lower.  Euro weakness leads to a higher dollar and lower commodities and equities; the euro is supported by Trichet’s hawkish comments which help the equities bulls, but, Trichet may have unwittingly called the top in commodities again like he did in July 2008 with his previous rate hike mistake.

Semiconductors, SOX, lost the 200 day MA.  Financials, copper and semi’s have led the markets lower after they topped in February, as pointed out here over the last weeks and months.  Watch the behavior of prices for all indexes and sectors in relation to the 200 day MA’s as the days roll along.  This will help gauge overall market weakness.

The CPC is at 1.18, typically, once a print over 1.2 occurs, the markets will be ready to bounce, so we are in that area where a bounce should occur.  Watch for a potential sharp quick V bottom like March.  The BPSPX under 70% and faling indicates further weakness in equities markets for the weeks and months ahead.  NYAD prints -1847 consistent from where a bounce should occur, but not yet at the -2000 or -2300 washout level that will signal a reversal at hand. 

Although the current picture is gloomy, careful attention must be paid to the utilities, UTIL, since they have not led the move down in the broad markets, as would be expected for longer term weakness and a fall back into secular bear markets.  Thus, a move back up in equities is expected to line up the utilities, perhaps only one more move up is all it will take to lock in the markets for extended multi-month weakness.

We remain in a Bradley turn window which says a market trend change may occur.  The current trend is obviously down so the trend change would be up.  A full moon mid-week is typically bullish for markets.  The Tuesday into Wednesday move during OPEX week is usually bullish.  Also, the week after June expiration, next week, 6/20/11, is down 18 of the last 20 times, so keep this in mind for late this week.

China rate hike is a real wild card now, and the Chinese tend to announce these hikes at odd times, such as Christmas Day, so expect the unexpected.

Reference Keystone’s Key Events blog for the detailed breakdown of data and events this coming week.

Reference Keystone’s SPX S/R for critical support and resistance numbers.  SPX 1258 was the starting number for this year.

For tomorrow for the SPX, starting at 1271, if the market bears can push only three points lower, to get under 1268.28, the selling will accelerate.  The bulls need to push 18 points higher to get up and over 1288.60 to get their momo back and accelerate the move higher. Support below is 1270, 1268, 1262, 1258.  Losing 1258 would be momentous for this year.  Resistance above is 1273, 1277, 1279, 1282, 1286, 1289 and 1293.

Again, watch SPX:VIX 68, NYA 40 week MA cross, 2-10 spread and CPC 1.2 level, as described above, to gauge broad market direction. Volatility, measured by the VIX, now at 18.86, will continue to favor bearishness above the 17.73 level.  If the VIX drops under 17.73, that tells you that the market bulls are regaining control of the markets and the dip buyers are starting to come back into the markets in force.