Keystone's Trading Week in Review and Path Ahead 2/18/12

On 2/10/12, Friday, the Greece deal falls apart and global markets weaken. Cable news channels show rioting in Greece.  A Greece two-day strike begins. Keystone’s SPX:VIX Ratio Indicator drops under 68 signaling a large down day on tap and bearish markets ahead—as long as the ratio stays under 68. Greece cabinet members resign or are forced out. Eurozone finance ministers demand that Greece’s government ratify unpopular new austerity measures and voting is targeted for the weekend. The markets are weak all day long.  In the afternoon, S&P downgrades 34 of 37 major Italian banks. The Dividend Stock Bubble continues to grow with dividend payouts starting to rival 2008 payouts which verifies the large influx of investors into the blue chip divvy stocks in recent months. The amount of ‘missing’ money in the M.F. Global mess grows higher to 1.6 billion.  This news is released under the cover of darkness on a Friday night, what does that tell you?  The stink around this story lingers and sadly illustrates the continual crumbling of free market principles. The SPX loses 9 points today, or 0.7%, recovering from much lower numbers. The Dow Industrials end the day down 89 points, or 0.7%.

-----------------------------------------------------------------------------

On 2/12/12, Sunday, the Greece vote occurs, which is a ‘referendum on Greece’s future inside the euro zone and E.U.’ as stated by Greek Finance Minister Evangelos Venizelos.  Greek Parliament passes the austerity bill. Barron’s publication, a well-read financial publication, places Dow 15000 on the cover.  Using socioeconomics as a guide, magazine covers are typically a key contrarian indicator, and typically, the markets will move in the opposite direction of the magazine cover hype.  This goes for dire bear predictions as well, it just so happens that at this point in the cycle traders are fully loaded on the euphoric bull side of the boat, thus, extreme caution is required with any long positions.

On 2/13/12, Monday, Keystone’s SPX:VIX ratio pops back above 68 indicating that the market bulls are back in control. AAPL touches the $500 level. Tech continues to lead markets.  The broad indexes are buoyant all day long on the positive Greece news. Moody’s downgrades debt of Italy, Portugal and other Euro nations. The euro weakens on the news. The BOJ eases its policy to try and weaken the yen, which moves the dollar/yen higher.

On 2/14/12, Tuesday, weak retail sales data places the markets in a bad mood. The E.U. meeting scheduled for tomorrow that was to approve releasing funds for Greece is cancelled. Greece remains unresolved and no one believes any of the news anymore. Markets sell off. Keystone’s SPX:VIX ratio indicator drops back under 68 signaling significant selling ahead.

On 2/15/12, Wednesday, Moody’s rating agency is reviewing 17 banks for downgrades including BAC, GS, JPM and MS and European banks such as SocGen. The news turns futures markets red. Markets languish after the open but AAPL and technology provide buoyancy. Apple prints all time highs in the 520’s and then rolls over after lunch time taking the broad indexes lower. Apple finishes the day with a key reversal since it traded above Tuesday’s high and then closed under Tuesday’s low, a bearish indication.

On 2/16/12, Thursday, markets are weak overnight but the Housing Starts and other economic data bounce markets. The utilities sector explodes higher taking the broad indexes higher. AAPL and tech continue to lead the broad markets higher. Keystone’s SPX:VIX ratio indicator moves back above 68 at lunch time verifying that the market bulls are in full control again.

On 2/17/12, Friday, the markets remain buoyant and traders focus on Dow 13K and the 2011 highs for the SPX.  The Dow closes above the intraday HOD from 2011 at 12928, this is now the highest level for the Dow since 5/19/08, four years ago, and a big feather in the bulls cap. The SPX, reflecting the broad market better, however, remains stubborn, falling short of closing above the 2011 closing high at 1263.61. Watch SPX 1263.61 like a hawk as this drama picks up again next week.

-----------------------------------------------------------------------------

On 2/19/12, Sunday, Eurozone leaders begin meetings, thru teleconferencing, to resolve the Greece crisis by Monday.

On 2/20/12, Monday, U.S. bond and equity markets are closed for Washington’s Birthday and President’s Day holiday.  The Greece drama plays out with the Euro leaders deciding to………………futures markets react by moving…………..

On 2/21/12, Tuesday, ……………….

-------------------------------------------------------------------------------

For the week ahead,

Continue watching the European 10-year bond market yields for any sign of trouble. Portugal and Hungary yields were increasing as the week ended. The Greece solution is promised for Monday so traders are waiting for the goods to be delivered and markets will react.  The LTRO program is in play over the coming days since round two is needed, the junkie markets need more crack. As long as the new LTRO provides more crack, markets will be happy but if the program is not as robust as traders want, the markets are vulnerable.

China real estate bubble is popping but many traders continue to believe in the soft landing concept. The jury remains out as to who is correct. China inflation is hotter than expected and officials are backing off earlier projections of easing. The markets have already priced in a triple R easing, as evidenced by the big rally in copper and other commodities thru January, but China has not even stepped up to announce the triple R ease and may want to hold off. RBA minutes are important since China and Australia are joined at the hip due to the commodities markets.

Another earnings week is on tap with the retail sector in focus.

On 2/20/12, Monday, U.S. Bond and Equity Markets are Closed in observation of Washington’s Birthday and President’s Day. RBA (Australia) releases meeting minutes this week. Greece promises a final resolution to their saga today. Futures markets will react to the resolution, or lack of a resolution, and Greece will set the tone to start the U.S. trading for the week.

On 2/21/12, Tuesday, U.S. Bond and Equity Markets are Open. New Moon. Chicago Fed Activity Index. 2-Year Note Auction.

On 2/22/12, Wednesday, China HSBC PMI. Existing Home Sales, 5-Year Note Auction.

On 2/23/12, Thursday, Jobless Claims. FHFA Housing Index. Natty Gas Inventories. Oil Inventories (delayed one day due to holiday). Kansas City Fed Mfg Index. 7-Year Note Auction.

On 2/24/12, Friday, Consumer Sentiment. New Home Sales.

On 2/29/12, Wednesday, Leap Day, EOM.

Note Added 2/18/12 at 12:23 PM:  China cuts the bank reserve ratio requirements (triple R's) today. This move is tame as compared to an actual interest rate cut but important nonetheless since much of the copper rise over the last couple months occurred as traders anticipate China easing. The easing also now shows that China is concerned over their housing bubble and a little more credence can be placed in the hard landing scenario. Watch the reaction in copper to the news in the coming days. The first cut for the RR was 11/30/11 and clearly resulted with the stock markets launching and commodities jumping. Much of this second cut should be priced into the markets and 50 basis points would have been expected which was just announced. China voiced recent concern over further easing as they see the effects that easing has creating asset bubbles in sectors such as commodities. That thinking appears to be thrown out the window now and the housing worries must be a far more serious concern. Keystone projected five triple R cuts this year so that would leave four more, so listen for the next cut in the April-May timeframe. China needs to keep the growth rate above 8%, otherside, civil unrest and turmoil will likely result.