Keystone's Wake Up 4-18-11

China raising the reserve requirements again could be seen a mile away after their higher than expected inflation data hit last week.  PBOC probably regrets not raising interest rates by 50 bips instead of the 25 they hiked on 4/5/11.  China continues to try to slow down Chairman Bernanke's hot easy money flowing into the country.  Typically, higher rates and higher growth is a magnet for incoming investors, but China is experiencing higher rates while now slowing growth.

The SPX had closed under the 50 day MA for three days in a row but Friday broke that trend.  Nonetheless, markets are entering a new phase as the SPX has closed down two weeks in a row.  Defensive sectors such as consumer staples and healthcare felt love in the back half of last week; we always need toothpase, toilet paper, soap and a doctor available.

Earnings hit hard this week with technology, financials and Dow 30 stocks prominent.  This in contrast to a holiday shortened week where typcially lower volume would be expected. Congress goes on spring break, everyone should be so lucky.  The QE2 POMO pumps continue in the morning sessions although no POMO on Thursday morning this week.  POMO pumps will pick back up next Monday as traders nurse belly aches from Easter candy and overeating.

Aside from the earnings drivers, the key economic data is Tuesday with housing starts, always a big market mover.  The bearish side for stocks is looking more and more attractive.  Watch the utilities to see if they weaken and lead the markets south.  If so, the selling will extend, if not, the buy the dip crowd will be happy once again.

Bullish utilities, commodities ex copper, retail and volatility are balancing bearish financials, semi's and copper.  The VIX touched a 14 handle last Friday, which is levels from summer 2007, and we all know what that preceded.  A break below the 15 level, however, will usher in continued fearlessness and complacency and continue the bullish buoyancy.  But a bounce from 15, which is the projected move, will usher in broad market selling.

We are now entering a very dicey period for stocks over the next 14 trading days into mid May.  European woes are heating up again so it is anticipated that the euro will pull back, dollar index will recover, and equities should swoon.  The debt ceiling deadline is fast approaching in the May time frame and the eclipse indicator, that Keystone will write about in an upcoming blog, stay tuned, points to a major sell off area in May.

Back to the short term, today, if the SPX hits a 1323 handle the buying will accelerate; there remains a tiny gap at 1340 that remains unresolved on the upside.  By the look of the futures currently, however, markets want to explore the downside to start the week.  1315 was key last week and looks to be key today.  If the 1314 handle is lost, selling should accelerate to the downside.