Keystone's Morning Wake Up 5-26-11

The battle of the weaklings continues today.  Bears too weak to go lower, bulls too weak to go higher, but, one side will win out.  Seasonality-wise, ahead of a three day holiday weekend, the Thursday and Friday sessions tend to be bullish, so that is a consideration, a natural buoyacy should exist in the markets, and, along with continual POMO pumps, the bulls have a slight wind at their back.

Retail cracked yesterday, then recovered, but the writing is on the wall.  The high gasoline prices must have finally dented the retail sector.  To start today's session, retail, measured by RTH, is a hair on the bullish side, any weakness lower will verify the coming swoon with the consumer.

Commodities and copper bounced the last couple days but remain in the bear camp as measured by a proprietary algorithm.  So the beat goes on.  The broad market Kabuki Dance continues, with bulls and bears each trying to take control, but neither side breaking out, yet.  If retail weakens at the open, then the bears will have an upper edge today.  If commodities, copper and semiconductors are buoyant then the market bulls will continue to frustrate the bears.

For the SPX, if the 1326 handle is touched, the bulls are going to run strong today and tomorrow into the barbeque weekend.  If, however, the bears push the SPX lower and get below 1312, to heck with seasonality, the market bears will be in control and the indexes will drop several more handles as we near the weekend.

SPX:VIX ratio is at 77 well above the critical 68 level, but this indicator can move quickly.  Keep watching since as soon as 68 is lost, the broad markets will be selling off large.

SPXA150R well below 80 now, at 73, thus, fully agreeable to see market selling as it ventures lower.

BPSPX at 72.65, has already confirmed the equity selling since it moved in excess of six percentage points, from 83 to 72 now, but the failure of the 70 level is critical.  If BPSPX loses 70, this corresponds to wide spread index selling occurring.

Markets will have trouble moving up without financial cooperation.  Keystone uses the 2-10 spread to gauge happy bankers versus sad bankers.  The spread is around 260, once the spread loses 255, the bankers will become more negative, so keep an eye on the spread.  Perhaps the bulls pull it out and move the spread higher, back to the 260's and 270's, this would turn the whole situation around.  Keystone forecasts the former scenario not the latter one.

CPC put/call closed at 0.73 yesterday, traders have no respect for bears at all.  Traders are complacent, no fear at all, VIX is below the critical 17.64 level, at 17.07, traders continue to view the markets with wine and roses in hand. A contrarian takes key interest in these numbers.

Let's keep it simple today. Watch VIX 17.64 level. Watch RTH 109.69 level. If the VIX stays below 17.64 and RTH stays above 109.69, bulls are going to start the weekend party early.  If the VIX moves above 17.64 instead, while the RTH moves below 109.69 instead, then the market bears plan on slapping the bulls on the grill ahead of the weekend.  As this is sorted out after the opening bell, whichever direction runs, bulls need to hit 1326 to accelerate buying, and bears would need to fall below 1312 to accelerate selling. Otherwise, markets are sideways thru this range. Continue to watch the SPX:VIX ratio 68 level as well, it will sneak up on you.  Lastly, check to see if you have the barbeque in working order, it is always important to pay attention to the priorities in life.