Keystone's Evening Nightcap 6-13-11

Utilities remain the only major sector that is bullish as measured by Keystone's proprietary algorithm.  The semiconductors, SOX, fell thru 400 today, and sits under the 200 day MA, and is negative for the year.  Chips go into all our high-tech products nowadays, what does that tell you?

Retail, RTH is negative on the year now and sits on top of its 200 day MA. Financials, XLF, remains under 15, under the 200 day MA and negative on the year.  Copper is under the 200 day MA, negative for the year and coming down to test the 4 level again.  Semi's, copper and finanicals all topped in February, these three leaders have, and continue to lead the markets south.

Volatility, VIX, jumped 4% today and ventured above 20.  Look for more of this ahead. Fear is finally coming into the markets, the QE2 punch bowl is empty, and a realization is setting in that SPX earnings are probably overestimated. Keystone's SPX:VIX Ratio Indicator fell thru the 68 level last Friday, and today shows confirmation, closing at 65.  As long as the ratio stays under 68, all rallies should be shorted since market weakness will continue for weeks and months ahead, or, at least until QE3. When the ratio hits 35-ish, we can talk rally again.

The NYA closed at 8017, under the critical 40 week MA at 8025.  Keystone's NYA 40 Week MA Cross Indicator now shows that the broad markets have fallen back into a secular bear market, just like last summer when all the trouble was occurring.  This is serious.  Watch for continued confirmation under this level.  This signals that the weeks and months ahead will see lower indexes.

Next, we look for further confirmation of the secular bear growling by referencing Keystone's other secular market calls.  The SPX 150 Day MA Slope Indicator will confirm, or not, the NYA secular bear market call, perhaps in the next couple days.  This indicator uses the slope of the SPX 150 day MA to determine if we are in a secular bull or secular bear market.  At the close each day, write the 150 day MA number down and compare it to the day before.  Last December the slope went slightly negative but it quickly recovered as Santa came to town, and never looked back, sloping up the last six months.  Well, we have a situation now.  The Thursday, Friday and today's 150 day MA numbers, respectively, are 1289.82, 1290.15 and 1290.46.  Are we topping with the 150 MA and about to go negative now confirming a secular bear market has started just as the NYA 40 week MA has?  Tonight's number is 36 cents higher than Friday's.  Friday's number is 33 cents higher than Thursday's.  Watch this closely and see if the slope rolls over confirming that we are falling into a secular bear. If tonight would have printed 1290.14, that would have confirmed the rolling over of the 150 MA slope, but, for now, it is still moving up indicating that we remain in a secular bull, for now.

Watch the SPX 1268 level. This was the Friday low where the index recovered but none of the pundits told you why, and the Wall Street old-timers sure will not let the secrets out.  But the reason the SPX bounced was because 1268 is the SPX 10-month MA.  With falling markets, the month-end prints become extremely important now and June's print will occur in 13 trading days.  Keystone uses the 10-month MA as an early warning signal, and the 12-month MA is a secular market signal like the NYA 40 week MA and SPX 150 day MA slope described above. The 1268 level broke again today which signals that further work to the downside awaits ahead.

Flat day today so let's talk tomorrow's set-up now that you have a few things to keep an eye on.  For tomorrow, for the SPX, if the market bears come to play, and can push the SPX six points lower to take out 1265.64, the selling will accelerate, first testing 1262, which would fail, and then moving on to test the starting number for the year at 1257-1258. If this fails, it is a game changer, and the trouble will double. 1252 would be targeted next, then 1247. Downside may also turn the SPX 150 day MA slope negative increasing the doom and gloom.

For the market bulls, struggling mightily lately, they have to push the SPX up six points to get any momo going.  If the bulls can touch an 1277 handle, the buyers will flood into the markets and the indexes will jump up several handles higher.  The SPX will tag 1279, 1282 and even run at 1286. If the bulls and bears duke it out all day within the 1266-1277 range, we will have another sideways slop day with no clear winner, pushing off the decision another day.

The China data may trigger the rate hike tomorrow, if so, the precious metals and commodities, and equities, will be beaten. Today you saw the gold and silver weakness which hints that traders are ditching these positions to cover equity losses.  This is the same behavior occurring in previous large sell-offs.  If China is a non-event, then the NFIB Small Biz Sentiment will set the market tone at 7:30 AM EST.  PPI and Retail Sales follow at 8:30 AM.

The high drama continues. What happened to the lazy hazy days of summer? Tomorrow's importance cannot be understated, there is a lot on the line. Good ole Keystone best get some rest.