Keystone's Nightcap 3-30-11

The markets never cease to amaze.  In two sessions, the indexes went from the edge of the abyss with all systems go for the downside at Tuesday’s open, to bull euphoria at Wednesday’s close.  This reversal was accomplished by goosing the utilities, semi’s and retail on Tuesday morning, then the financials today.  Copper remains sick.  The doctor may be ill but the bullish patients are continuing with one heck of a party.

The two day buoyancy in the indexes should not be taken as an all clear signal for the upside.  Volatility is low again and the CPC put/call readings show no fear at all.  Traders trip over each other afraid of missing any dip-buying opportunity.

SPX:VIX comfortably above the 68 level posting a 75.00 at the close, so the bulls are in control.  Bears will not growl until this drops under 68.  SPXA150R strongly bearish now since price almost hit 90, which says traders are throwing money at stocks with little care on what they buy.  These indicators all confirm the bullish fun, but, at the same time, they are contrary in nature, and forecast trouble ahead.

Credit the POMO pumps for saving the broad markets yesterday.  What will the markets be without it?

Some of the buying is end-of-month window dressing.  Some buying also in the energy sector which boosts the overall market.  The energy sector buying in part due to the standard end of month ISM data play where the professionals buy energy the last few days of the month and sell energy on the ISM new in a couple days.

Markets idling ahead of the Trichet decision, now on a seven day countdown.  Trichet promised a pony (rate hike), so he better deliver a pony.  Oddly enough, the message actually got more hawkish since news today referenced a ‘series of hikes’.  Holy smokes, in for a penny, in for a pound.  Look for media leaks that hint at Trichet backing away from the rate hike, if so, euro will fall=dollar up=equities down=commodities down.

If, however, Trichet goes thru with the hike, reminiscent of his mistake in July 2008 when he unintentionally called a top in the commodities market, the euro should maintain its current buoyancy which in turn will provide support for US equities, at least for a little while.  This ECB soap opera is one reason for the anemic volume.  Some traders simply prefer to wait for the rate decision.  Today’s move up in the indexes occurred on vapor volume.

Copper remains weak telling you in the weeks ahead that everything else will become sick.  But the wine flows like water now, no one wants the party to end.  Reversals in financials, retail or semi’s would dampen the markets but barring that, the indexes should float along with upward buoyancy to finish the week.

Stay on guard for a China rate hike, that will be an immediate game changer, or resolution one way or the other with Trichet's pony.