Thursday, November 28, 2013

Keystone's Thanksgiving Day Reconnaisance

Happy Thanksgiving. The turkeys don't have a chance today. HappyHanukkah. The SPX staggers sideways through 1802-1808 all week long. Despite the charts wanting to see a roll over to the downside, the bulls keep equities elevated with the weaker yen. Banzai!! The dollar/yen leaps above 102 due to the BOJ weakening the yen and this creates new highs for the Nikkei not seen since 2007 and new all-time highs in U.S. equities. The broad indexes are driven higher by the central banker's liquidity. Nine months of weakness in copper and commodities verifies that trading is detached from fundamentals and simply follows the soothing and seducing siren song of future Fed Chair Yellen. Watch the dollar/yen to determine market direction. Utilities crumbled yesterday but did recover in the afternoon. UTIL is under the important 490.64 level creating market weakness but above the 481.68 number creating bullishness. For next week, the UTIL 490.64 and 482.94 numbers are key, thus, watch to see how UTIL closes the week, above or below 483. If above 483, the bulls will be in good shape. If below 483, equities are in trouble.

Bulls need utilities, copper and commodities to move higher to provide upside bull juice, therefore, in this near-term, the best fuel the bulls can hope for is with the utes crossing up through UTIL 490.64 to signal the all-clear. Keybot the Quant remains short, however, if UTIL moves above 490.64, and SPX moves above 1808.50, and both remain above, Keybot will likely flip long. The bears need to keep utes weak and send UTIL under 482-483 which will create a strong down leg in equities. The bears also need to push VIX above 13.90 which would provide bear fuel. Generally, bulls are fine if they keep VIX below 13.90. For the SPX starting at 1807, bulls only need 1-1/2 point higher, to push up through 1808.50, and an upside acceleration will occur pushing price towards 1820. The bears need to push under 1803 to accelerate the downside to 1796. A move through 1804-1807 is sideways action. The 8 MA is below the 34 MA on the SPX 30-minute chart, albeit by 2 pennies, signaling bearish markets for the hours ahead. Key support below is 1803, 1802, 1799, 1798, 1797, 17961791, 1788, 1782 and 1772.

Friday is EOM and it appears the indexes will print another up month. The rally is now 4 years and 9 months long which places it in the top 4 or 5 longest rallies in stock market history. The 18-year cycle, the most reliable stock cycle, continues along with the secular bear from 2000 to 2018. Markets are typically bullish from the last day of the month through the first 4 days of the new month as new money is put to work. Monday evening is a new moon and markets are typically bearish moving through the new moon. In addition, there is a higher chance of military events and/or terrorism around the dark new moon each month. The day after Thanksgiving, Black Friday is one of the busiest shopping days of the entire year so analysts and traders will be watching the mall parking lots.

The 5 years of central banker intervention has destroyed price discovery in the markets. This is noted by many skewed pricing relationships and technical and fundamental signals that are providing false indications. In addition, the Internet and technology in general, has created a whole new breed of savvy traders. Thus, tried and true market indicators will have to be tweaked moving forward. This places markets in a strange place, very elevated price levels, small caps with PE's well over 20, and everyone believing in the upside forever mantra. Nearly everyone also believes that they will have plenty of time to exit the markets if a serious downdraft occurs. There is a reason for lock limits in markets. You may wake up one morning and find the major indexes down substantially and all you can do is hold on for your life if long. Also, perhaps eerily, there is a quiet calm; computer glitches and exchange outages were happening with frequency, but now, quiet. Like any parent knows, you worry when you don't hear any noise coming from the kids' bedrooms rather than when they are making noise. Simply be aware that a large market drop can occur in a heartbeat and you need to have a plan in place to handle any such outcome. Everyone will be thinking of capital preservation as market selling occurs, each one wanting to get out before the other guy thereby ratcheting price lower, while those deciding to ride it out become more and more concerned being stranded at the market top.

The rates to stock relationship is interesting these days. Traders are completely convinced of a March tapering of QE so moving forward, the majority of traders expect yields to jump higher, the 10-year yield over 3%, and for stocks to sell off. This behavior has manifested itself over the last couple months here and there and the proponents say yep, Fed will lose control, yields will catapult higher and the markets will correct. On the other hand, sometimes better economic data, like yesterday, results in the 10-year yield moving higher, and stocks moving higher. This causes traders to say that the tapering move is priced in and yields and stocks will move higher together moving forward reflective of a healthy economy. After all, this is a time tested relationship where money flows out of notes and bonds (lower prices) moving yields higher and that money finds its way into stocks. The corresponding opposites are then yields moving lower with stocks moving higher and also both yields and stocks moving lower together. The lower yield higher stock scenario is the least likely of all outcomes since it is reflective of a Fed increasing QE moving forward; pure insanity.

Keystone looks for the deflationary and disinflationary outcome, the lower yield and lower stock outcome a la 2008. The counter balance to this is the higher yield higher stock moves which occur the other way. Traders want to believe that the economy is running on all cylinders and 2014 will be a breakout year for the globe with yields moving higher and stocks moving higher, everyone hopes for that, however, that does not mean it will happen. This behavior will likely only be reflected in the bear market rallies providing further short  opportunities. The Fed wants to avoid deflation, hence the 5 years of obscene money printing. The grand experiment will likely fail. The worst outcome is the one no one even wants to talk about; when realization sets in that the planet is falling into deflation and the QE programs were for naught, only creating an even worse mess moving forward, and on top of this tragedy, the Fed no longer has any ammo. The Japan-style deflationary scenario, the U.S. is trying so hard to avoid, likely has to extract its pound of flesh. Europe is already on the verge of the deflationary spiral. Things can change but currently, the coming deflation is likely to shock and astound everyone trading global markets.

For Friday's shortened session ending at 1 PM EST watch UTIL 490.64, 482-483, VIX 13.90, the dollar/yen 102.15 as a pivot, the 8/34 cross described above and in this morning's chart, and SPX 1808.50 and 1802, to determine market direction. Dollar/yen is now at 102.25 (weaker yen than 102.15) so the futures show positivity. Time for the Thanksgiving Day festivities. Gobble gobble.

Note Added 11/30/13 at 7:36 AM:  Banzai!! Banzai!! Dollar/yen moves to 102.45 (weaker yen) so the upside market move continues. The central bankers, in this case the BOJ, are the market. The SPX prints inside the apex of the rising wedge on the daily chart (scroll back to study this chart) so next week a major decision is likely. The broad indexes gave up much of the gains into the closing bell with the Nasdaq finishing positive but the SPX and Dow negative. The day after Thanksgiving is typically up so it is odd to see the negative prints despite all the uber bullishness lately.  VIX jumped strongly higher in the final minutes now at 13.70 only pennies from the 13.89 that will cause market turmoil. UTIL finished at 487 directly in the middle of the 491 the bulls need, and 483 the bears need. Scroll forward for the utility chart posted this morning for further study. UTIL should test 483-485 probably on Monday where a bounce or die decision will likely be made, and the broad market will follow the utilities. VIX 13.89, UTIL 490.63 and UTIL 482.94 are key market metrics for next week that will dictate market direction.

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