Friday, October 18, 2013

Keystone's Morning Wake-Up and Midday Market Action 10/18/13; Market Euphoria Grows; OpEx; GE; HON; MS

The full moon lights the night sky like day time. Typically, equities are bullish through the full moon which is official at 7:38 PM EST this evening. Everything is going the bulls way. Fed's Fisher, who always carried the hawk flag, says the economy is weak and the QE will likely continue into 2014. When a hawk turns dove, like Kocherlakota a couple years ago, traders assume the easy money crack cocaine will continue indefinitely. Since white-feathered Yellen will take the helm of the Fed in February, many doubt that her first decision would be to immediately taper. Analysts now say tapering is not likely until March through June of next year, hence the equity markets explode higher as trader's line up at the Fed punch bowl to become more drunk and avoid the hangover.

GOOG earnings are better than expected and it trades up +8% pre-market which will turn the Nasdaq happy today. China economic data is better than expected with a 7.8% growth rate, fueled by targeted stimulus programs, the China version of QE. Global markets are pumped higher on easy money. The party continues and the band plays on. Drunkards stagger up to the long stock window and say 'please, sir, another'. The current action is very reminiscent of early October 2007. The bullishness is universal and with the political can-kicking in place until early 2014, and now another Fed hawk changing into a dove, with Yellen waiting in the wings, traders are touting SPX 1770, 1780 and 1800+ upside targets like the local fireman tossing candy to children during the Halloween parade. In late September and early October 2007, traders and regular folks alike all agreed that the markets would continue higher indefinitely. The proverbial shoe-shine boy and taxi drivers were providing stock tips. Nowadays, a large part of the population is structurally unemployed or underemployed, very different from 2007 when anyone that wanted to work was working. This is why you do not hear the euphoria about the stock market in more common circles. These folks are suffering. But the families with two wage-earners and the upper middle class and wealthier in general, are all fat, dumb and happy. These folks have benefited greatly by the Fed central banker intervention so in these circles the stock market euphoria does exist.

A few important things to remember is that the Fed may not be able to continue QE indefinitely. Surely they are aware, or becoming aware, that QE is likely doing more harm to the economy than good. The money-printing simply pumps stock prices higher creating new asset bubbles such as the current dividend stock bubble. The intent is to create a wealth effect where folks feel better-off so they spend more, which fuels the economy, and in turn kicks a sustainable recovery in gear. This is Chairman Bernanke's theory. However, only the wealthy have benefited. Bernanke, the president and Congress are all friends of the rich; not the poor or disadvantaged. Traders assume that QE can truly remain in place forever. We all know this is impossible, the question is when does it end, or more importantly now, when is QE forced to end? The forced ending scenario is not on anyone's radar screen. Many companies are performing buy-backs to goose the stock price. Typically, these companies are lower in price about 3 months or so out from the buy-back announcement since the big boys distribute their stock on the rally caused by the buy-back leaving Ma and Pa to hold the bag. We are in that area months forward where the affects of the buy-backs should be waning for many companies. Another interesting aspect of today's market drama is that no one is alive that traded through the Great Depression. If you were a trader in your 30's, or 50's, back then, you would be 110 years old or older now. We are in uncharted territory and no one knows how this story ends. These markets are exhibiting a once in multi-decade behavior. This is special and epic stock market history unfolding.

Coming back down to earth and sticking to the technical's, GTX is under 4888 which helps the bears, however, the obscene collapse in the VIX to 13 overpowered any market negativity, including the weak earnings yesterday which kept the Dow low for much of the day. JJC 40.19 remains on the bull side. Ditto UTIL which jumped to 495 on the lower Treasury yields. UTIL 498 is a very important bull-bear line in the sand for next week so this afternoon watch UTIL closely to see how it finishes. If UTIL ends the day under 498, the market bears have the advantage come Monday morning. If UTIL finishes near or above 498, the bulls will be running higher early next week. The 10-year yield drops to 2.55% so lower Treasury yields will send utes higher. Bulls are cruising with the VIX under the 15.00 level identified by Keybot the Quant, and under the 200-day MA. For the SPX, starting at 1733, bulls only need a smidge of green in the futures and price will seek the mid to upper 1730's in quick order today. The S&P futures are +2. The bears are simply trying to stop the bleeding and can do that by keeping GTX under 4888, sending JJC under 40.19 and/or pushing volatility higher, any amount higher. Bears must push the SPX under 1714 today to regain downside mojo. A move through 1715-1733 is sideways action to end the week. The SPX prints a new all-time closing high at 1733.15 and new all-time intraday high at 1733.45. Key support below is 1733, 1730, 1726, 1722, 1720, 1718 and 1715.

The SPX daily chart shows price violating the upper standard deviation band so a pull back will be needed to at least the mid 1690's. The SPX weekly chart is overextended to the upside but may take one or two more weeks to top out. The upper trend line for the SPX charts allows a price move to 1745. Watch GTX 4888, JJC 40.19, UTIL 498 and 484 and VIX 15.00 to determine market direction. The bull case will be reinforced with GTX moving above 4888, UTIL at or above 498 and volatility dropping to the low and sub 13 area. The bear case is bolstered if GTX stays under 4888, JJC drops under 40.19 and volatility increases. Notable earnings today include GE, HON, MS and many others. Today is OpEx so the volumes may be elevated at the open and close. Fed's Tarullo, Evans and Stein speak today. Leading Indicators are scheduled at 10 AM but delayed because of the shutdown. Keystone exited the WLT long position taking a slight loss. WLT weekly chart shows more upside ahead and it remains a takeover possibility. Met coal, steel, iron ore and copper may receive a further push higher with the happy China data, and higher numbers would be expected for the next couple weeks, however, reducing long side exposure continues to appear prudent moving forward.

Note Added 6:30 AM:  GE earnings beat by a penny on EPS but the top line is light. The weak top line revenue numbers for companies, which began last quarter, continue to surface across nearly all sectors. GE pops about +0.5% pre-market.

Note Added 7:18 AM:  MS beats by 4 pennies on EPS and also beats on top line revenue. Since traders are tripping over themselves to buy European stocks and bonds these days, using the Fed's and other central banker's easy money, it makes sense that MS, the most exposed to Europe, would benefit (just as MS was crushed during the European trouble). MS pops over +4%, now up +2%, very jumpy. GS had happy results yesterday but sold off on its joyousness. S&P futures +2.3.

Note Added 9:44 AM:  GTX is over 4888. JJC remains above 40.19. Volatility, the VIX, collapses under 13. UTIL jumps above 496 setting sights on 498. Bulls are running again to new all-time highs on the SPX. Watch the SPX 2-hour chart; negative divergence in the RSI should roll price over to the downside, perhaps in about 2 to 4 hours (reference this morning's chart). TRIN 1.27 actually favoring the bears today thus far.

Note Added 10:00 AM: Leading Indicators data is cancelled due to the shutdown. If you bring up an SPX daily or hourly chart and connect the market tops since May, price is exactly at this upper trend line right now at 1740-ish. The 80/20 rule says 8's lead to 2's so 1738 should lead to 1742. Thus, see if this upper trend line holds at 1740-1743. The upper standard deviation band on the SPX weekly is 1744.68. The SPX has pierced completely up through the upper band on the daily chart at 1736.70. The bears are not giving up. They ate some Wheaties and have pushed the GTX back under 4888. Bears are getting killed by the collapse in volatility. VIX now down to 12.54 and is creating pure bull fuel. GOOG is printing 1000.00. PCLN had previously attained 1K price. RUT is at new all-time highs. UTIL above 497 now showing that the market bulls want the edge come Monday morning.


  1. if 1752 in cash is taken to the upside .... damn! 1900+ values are on table until the end of the year.
    I'm not trippin' , I know what I'm saying!
    On a serious and good break of 1752 we will enter in the Christmas rally!


    1. It may tease that V. The weekly chart this morning indicates a market nearing its last throes but goosing news may always occur at any time. Thus, if another week or two occurs to roll price over, your 1752 may be teased. SPX has a 1740 handle now. Strength begets strength and the 2-hour and 1-hour RSI's continue higher, although now overbot. Bulls have a good chance today to keep equities elevated into the weekend.

    2. Thanks for the informative posts KS. Question on layering strategy and diversification: Your portfolio is roughly 70% long / 27% short. At various stages in this particular rally, would you be layering in more positions in the shorts, or just maintaining the positions as a hedge? I guess the answer to that question may be influenced by main sectors you track like UTIL, RTH, JJC, etc. Have been reading your posts and other writings, love them. thanks again

    3. Keystone has been leaning on the bearish side for the short term trades all year long, incorrectly so. The Keybot algo trades purely on 1's and 0's so it is a steady eddy, low-risk, way to play the stock market. For now, positions may stay relatively unchanged but since Keybot is 65% or the portfolio, the second that Keybot flips short would change the market weighting from 70 long, 27 short 3 cash to 5 long 93 short 3 cash. So that can happen in a heartbeat and is likely for next week. The only reason that certain sectors are highlighted on any given day is because Keybot identifies these sectors as most impacting market direction. Watch UTIL 498, GTX 4888 and JJC 40.19 closely next week, thus the dollar and Treasury moves will be important since they impact these sectors.

    4. thanks for the reply KS. I have a three-part post:

      1. Regarding the scaling in question, do you scale in or add to the shorts during an up cycle or hold them as a hedge only?
      2. Correct me if I am wrong, but the weekly SPX stoch has not seen a clear topping negative divergence in an uptrend since the June-July 2007 time frame, until now. I feel we may see a slightly higher high sometime this coming week to produce a 3-count up bar on the weekly, then a correction of a few weeks followed by a surge into late January, where we may see a higher high, or not. But again, this is a feeling, not a fact.
      3. I am exhibiting bad habits by not staying objective and positioning what I think is going to happen rather than what IS happening. Costly habit & would like to ask for some help if you feel inclined. I had the misfortune of investing in markets (through FA) for the first time in July 2007 after I sold my business. Not asking for trading advice, asking for help pertaining to discipline and fear of going long. My e-mail is (Mark)

      thanks again

  2. What's going on with AMZN? I don't get it. Up close to 3% on... UBS? Isn't it about topped out?

    1. Perhaps the GOOG euphoria carried Amazon higher. Also, Fleabay is talking down the holiday season so instead of AMZN dropping in sympathy, perhaps traders feel that EBAY's loss is AMZN's gain.

  3. If you've just been staying long you saved yourself the chart reading ;) If you want to get cute, you could try a short-term short middle of next week, and keep it as a hedge.

    The oscillations are coming with faster frequency now, in tighter cycles, as we push into the ascending wedge. The entire focus of the govt and fed is to push the equities market up, so if the top of this rising wedge gets blown out to the upside (not without some kind of headfake first), we are in uncharted territory, and we will all play the fun parlor game called Pick Your Own Wave Count.

    Good luck everyone.

    Thanks for the reporting Key!

    1. I love it, Zig. Pick Your Own Wave Count. LOL.

    2. Although at 1744 and change and way outside the Bolingers, the trader in me is screaming to at least take a vix call or something lol..

    3. Yep, this weekend would be excellent timing for a major negative news event with the way the charts are set up. Markets fell a lot like the October 207 euphoria and also the dot-com bubble in late 1999 early 2000. Back then, traders chased Pets dot com and Web Van, it got ridiculous and everyone started using easy metrics to reinforce the bull side, like now, pumping NFLX, TSLA, and so forth. Don't worry about that pesky Tesla car fire. Internet companies are now justifying valuations with number of clicks and other rainbow and pot of gold talk. It is fascinating to watch. No one thinks the markets are at an inflection. Complacency is rampant with CPC plunging to 0.69 and CPCE is 0.46. This is a significant market top and the drop may be quite dramatic, a la a crash. Perhaps 1745 one day, and 1580 the next. This is market history in the making, these are very special times but no one is looking at it this way.

    4. Second line should say 'Markets feel'.


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