Keystone's Morning Wake Up 7-28-11

The large sell off played out as Keystone projected yesterday.  The SPX:VIX ratio losing the 68 level was the tell, and once the SPX lost 1329.60, the indexes started moving south.  When the retail sector gave way about 2:30 PM, that accelerated the selling much more. Retail had continued to hold up but yesterday it gave up the ghost.  Watch RTH, now at 109 even. Keystone's algorithm is scanning the 109.24 level as the bull-bear decision line so the bulls are winning by 24 pennies. The secular NYA signal shows that the markets have slipped back into a secular bear so this requires continual close watching.

All this bearish talk aside, the huge standout yesterday was the utilities. UTIL stayed flat and did not join the bearish move.  Just as Keystone told you that the February sell off would not be more sustainable due to the utes not participating to the downside, and, that the May-June sell off would not be more sustainable due to the utes not participating to the downside, and, that the July second week sell off would not be more sustainable due to the utes not participating to the downside, do you notice a theme here?, this large move down yesterday did not see ute participation.  UTIL was flat all day long, trailing off a bit in the final hour to close only a measly 50 cents lower, only -0.1% compared to the indexes losing 2.0%.

Thus, this selling event will not be sustainable either.  Typically, after a large Wednesday selloff, weakness usually follows into Thursday morning but by late morning markets typically start to recover.  Maybe the traders anticipate the lunchtime sandwich and develop a better mood.  Considering that the utes did not lead down, and that a debt ceiling agreement can occur at any time, the markets have the potential to shoot up like a rocket on that political news, thus, if short, consider covering this morning, but most of all, continue to stay close to your mouse.

The Bradley turn window is now so expect continued wild market behavior thru next Wednesday. The Bradley turn sure did hit in force yesterday.

There is a gap fill needed at 1297-ish.  Claims hit in a few minutes so we will see if that provides any weakness in futures.  Home sales numbers hit 10 AM and manufacturing data at 11 AM.  Lacker will speak at 12:45 PM minutes ahead of the 7-year note auction at 1 PM, so lots going on today at regular intervals.  Huge day of earnings on tap with key players including ADP, DD, EMN, EVR, XOM, K. LLL, LAZ, S, SBUX. XOM out minutes ago did not impress and is down 1.60, or 2% pre-market. Since XOM is one of the Dirty Thirty, a 1.60 move will equate to 13 points of weakness for the Dow Industrials (take the move down and multiply by 8 to get an idea on what the Dow would do).

SPX:VIX at 57 hints at continued market weakness, as long as it stays under 68. CPC typically signals a bottom at the 1.2+ level, it closed at 1.12, so close but no cigar.  NYAD big-time low print at -2539 signals a reversal now for the bulls to recover. NYHL at -20 is consistent with a bottoming area in this -20 to -80 area. Interestingly the TRIN, at 1.59, did not post a wildly higher number such as 2, 3, 5, or higher, as would have been expected. Perhaps some early session selling today may spike the TRIN up into the 2 or 3 area. Mixing all these indicators together, they are consistent with a bottoming event close at hand, there is a little more wiggle room for indexes to line out lower, which would give the CPC a chance to get above 1.2 and the NYHL to get lower than -20, but the NYAD low print is glaring and begging to see a recovery bounce in the indexes.

For the SPX today, 1303.50 is key for the market bears.  If the bears can push under this number the selling will once again accelerate and the 1297 gap fill will be touched more than likely. The market bulls are simply trying to stop the bleeding today and would be content with sideways markets. Again, the debt crisis resolution will catapult markets skyward.  Keystone continues to not see a downside to all this drama, the politicians are theatrical actors simply putting on a good show so they can defend themselves come next election season. An agreement should be coming any day now.

Thus, with the utes not leading down, and the debt ceiling agreement with potential large upside, caution is warranted if short. Thursday morning is typically weak after a big drop on a Wednesday so the pro's will likely cover as the morning session plays out. Stay cautious on the short side since a sudden reversal upwards will rip your face off.  If you enjoyed yesterday's drop by holding shorts ahead of the move, no use in getting greedy.

Markets remain at the mercy of the news wires, and things can change in a heartbeat, but, at this writing, the down move does not appear to be sustainable, it is simply a matter of where the indexes want to line out here, say SPX 1292 thru 1307, in preparation of jumping once the politicians throw the confetti with a debt ceiling agreement.