Keystone's Evening Nightcap 6-29-11

What a remarkable week for the bulls so far.  Only one more day remaining for QE2 and the last POMO pump tomorrow.  The Fed is exiting quantitiative easing in a blaze of glory as they forced the retail sector higher yesterday as well as the NYA back up and over the 40 week MA, nullifying the move into a secular bear market, for now. Today retail stayed bullish while copper was targeted and took off like a rocket, the bulls never looked back, shortly thereafter the volatility dropped to favor bulls as well. By mid monring, the bulls were running and not looking back.

Trichet's communique yesterday stating a return to 'strong vigilance' is his promise to raise rates on 7/7/11 at the next ECB meeting.  If Trichet balks, the euro will tank. But that move by Trichet boosted markets more than the Greece distraction via the asset realtionship; euro up=dollar down=commodities up=equities up=treasury price down (yields up). As the yields move higher, the ten year moving from 2.8% handle to 3.1 % in only two days!

This move in the ten year, while the two year moved up less so, expanded the 2-10 spread to negate any bad affects on banks and the broad markets due to the spread falling below 255, Keystone's 2-10 Spread Indicator value.  At this writing, the ten year is 3.1%, the two year is 0.46%, thus 310-46=264.  The spread was at 256 early this morning; that is a move of 8 basis points in a few hours!  More importantly, some serious distance was placed from the 255 number, thus, the yield curve is starting to steepen and favor the banks, allowing them to go back in to make easy money.  The financials responded strongly, catapulting higher, moving from garbage two days ago to glory today.

The bulls are further buoyed by the SPX:VIX ratio moving back above 68. As if all this bull euphoria is not enough, markets are typically buoyant the two days in front of a three day holiday weekend.  That means markets should move sideways or sideways up into the weekend.  A rest is needed considering the strong move in the indexes thus far this week.

If you went long Monday or Tuesday you were rewarded.  The energy and steel plays this week ran nicely as well but it is best to book those profits.

For tomorrow for the SPX, things keep going the bulls way.  Bulls only need two points higher to move above 1309.21 after tomorrow's open, and if this occurs, the bulls will be running several handles higher in the indexes again, the SPX will be on its way to test 1314.  The market bears, stunned and shell-shocked from the action this week, must push the SPX 10 points lower to get under the 1297 handle to restart any significant bearishness.  SPX 1298 thru 1307 tomorrow represents sideways slop and will give the indexes a chance to catch their breath.

Some of this bull move is no doubt due to the end of the quarter, Q2, and first half of 2011, H1, which closes out the books tomorrow. The Greek drama continues with the 5-year inplementation plan approval on the table, and then the Euro Finance Ministers will meet to approve the funding for Greece on Sunday, 7/3/11.

Jobless Claims are 8:30 AM and a sliver of good news will result in more bullish action for the broad markets.  Bullard speaks tomorrow at 9 AM and he has favored the hawkish side.  Chicago PMI is 9:45 AM and a possible market inflection point.

The bulls did a heck of a job this week thus far and if no surprises occur, this action should ride at least sideways into the July 4th weekend.