Keystone's Nightcap 5-5-11

The euro down=dollar up=commodities down=equities down relationship shows up today just as the charts said it would.

Trichet did not want to talk about ‘strong vigilance’ today, instead, he showed up at the ECB conference with a dust pan and broom to clean up from the pony he delivered last month.  Trichet’s less hawkish stance makes traders assume that now the next hike will not be June, or July, or maybe not even August, thus, the euro tanked, and the dollar skied just as the chart divergences wanted them to.  Looks like ole jinx Trichet called another commodities bubble top, just like when he made his rate hike mistake in July 2008.

For currency trading, interest rates matter, so traders were content with long euro short dollar since Bernanke has the free money spigot flowing and at the same time Trichet is taking rates up.  What changed today was that Trichet pulled the plug on his hawkish leadership which means the spread on that interest rate relationship is now narrower than it was yesterday, hence, the euro sells off and dollar rises, then commodities sell off and the broad markets fall from the stronger dollar effects.

Another interesting thing in the markets now is that with Bernanke’s free easy money flowing, many traders parked the dough in commodities.  Now some of that money has to go somewhere, and this is why you see the 10-year yield dropping, some traders are actually placing dough in the safety of treasuries.

Also, of interest, is that the RTH retail chart wants to receive a negative divergence spank down but some of the easy money is also floating into staples such as PG and this is actually providing some buoyancy in retail.  Also, retail sales numbers were okay last month. But, considering the position of Easter that benefited the retailers, their luck should run out here and despite some potential lower gasoline prices, Keystone does not think retail performance will shine, instead, folks will be more content to sit at home on a lawn chair in the back yard instead of spending money at the mall. So RTH’s spank down is coming.

Some of Bernanke’s easy money is also running into big pharma, big drugs and utilities for safety as well.  In a stronger selloff, none of this will be safe including retail but you should see treasury price further rise with yields backing off.

Copper has been a steadfast leader for the last month and has pulled the commodities and metals to the bear side.  Once the 4 level is lost, we will see the potential effects of copper hoarding, if it exists, it will show up as many folks run to cash in inventory as prices fall, and then the sudden supply increases can send price into free fall.

AAPL continues to not have the oomph to get above that 352-355 area when Steve Jobs released iPad2; not a good sign for Apple or the broad markets.

Financials, XLF, laid an egg again today, they rolled over yesterday and now the 2-10 spread is down to 258 basis points; 3.15% 10-year and 0.57% 2-year.  Keystone uses a 255 number to denote the line between happy and sad bankers, thus, if only 3 more basis points of spread is lost, the sub 255 spread will verify that the trending lower weakness in financials for the last two months is real and plans on continuing. If the ten year pulls a U turn in the morning and yields move up, the financials would have their life saved.

Utilities, UTIL, have not rolled over so like the February sell off in the indexes, a move back up would be expected even if additional selling occurs unless the utes change their posture and drop precipitously.

SPX:VIX closed at 73.36, still five points above the critical 68 level.  As soon as 68 is lost, perhaps it will occur tomorrow?, the indexes will drop large that day, the Dow will drop 200 or 300 points. Markets will hang in there if the 68 level is not lost, but at some point forward, the 68 level will be lost. SPXA150R dropped under 85 so this is consistent with additional selling as long as it continues lower and especially if it drops under 80.  If it moves back above 85, then the bulls will wrestle back control of the markets.

Volatility, VIX, spiked today and semiconductors, SOX, weakened which caused the afternoon swoon.  Semi’s recovered just before the closing bell and require close watching at the open tomorrow.

Selling days on the NYA are running at 120% of an average day’s volume while buying days are all on lower volume.  This is market bearish. Today’s volume remains strong thus further selling would be anticipated.  CPC put/call finally came up a bit to 1.06, the highest it’s been for a while showing that some traders are worrying  a little, however, selling can be expected in the broad markets until you see at least a spike of the put/call above 1.2.

In the last four days of selling,  SPX has left a gap down each day so we will have to come back up at some point to fill those gaps, just as we did with 1340 two months after it occurred in February. The buy-the-dip crowd is probably already pointing to this aspect.  This does not mean that we cannot venture south quite a ways before we do come back up because we can.  Review Keystone’s key support and resistance levels he often posts.

For tomorrow, market bears have to push the SPX under 1329 to get any substantial selling to occur.  The job report will set the tone.  Market bulls need to get over 1348 to accelerate buying. The euro down=dollar up=commodities down=equities down relationship shows itself today, just as the charts forecasted.