Keystone's Morning Wake Up 8-29-11

Not to trivialize the poor souls that lost their lives or the few dozen injured, but Hurricane Irene turned out to be a pig in a poke. When the hurricane was lowered from a CAT 2 to CAT 1 on Saturday morning, the media should have dialed back the rhetoric. Then the CAT 1 was downgraded to a tropical storm Sunday morning.  Insurers are bouncing strongly this morning since the early estimates proved far too high. It's always best to plan for the worst and hope for the best but the nervous Nellie's sure sent each other, and the public, into an unwarranted tizzy. Thus, markets should experience some early bouyancy due to relief over the hurricane non-event.

COP and HES shut down refineries ahead of the hurricane but oil supply is fine overall. Gasoline inventories were building ahead of the storm. Since everyone was told to panic and hunker down, that can not help demand to any great extent as well. Thus, some pressure on oil would be expected.

Last week the bulls staged a come back rally with the major indexes and sectors up 4% or more. What will they do for an encore? This week is an interesting set up since tomorrow is a Bradley turn date and later in the week seasonality should kick in. For the Bradley, the turn date opens a turn window between now and Thursday and the expectation would be for a reversal of trend early in the week. Since the last few days, and today's open is up, then a down move would be expected.  In rare instances, the markets can take a straight vertical melt-up move in this window, but the expectation would be for some market softening during the first half of the week.  Seasonality-wise, markets are typically bullish the two days in front of a three day weekend. With Labor Day near, this hints that Thursday and Friday should be expected to be market buoyant days.

As always the specific technicals are the instrument gauges that over rule all.  With the utilities, UTIL, the market bears almost opened the 50 week MA trap door last week but failed, and then the broad markets took off to the upside like a rocket. Thus, if UTIL remains above 414.5, then the market bulls are in biz.  If the 414.5 level is lost, UTIL is now comfortably nine points above at 423.68, so this outcome has become less likely, a trap door opens and the broad markets will go into free fall in short order.

Keystone's proprietary algo, Keybot the Quant, is focusing on the retail sector the last few days, the RTH. If the RTH, now at 102.24 gains the 104 level, the broad market bulls are happy since this will boost the indexes higher. Another key technical is Keystone's SPX:VIX Ratio Indicator that remains sub 35. For a true recovery rally to hit full swing and the bulls to throw confetti, the SPX:VIX must move above 35. The ratio begins the week at 33.07 so watch this very closely in real time. If the ratio moves above 35 the indexes are going to rock substantially higher. If the 35 is not attained, each day that goes by, give the market bears more and more strength, and will enable the market bears to eventually gain back control of the markets. SPX:VIX 35 is key.

For the SPX today, starting at 1176.80, the market bulls need to get up and over 1181, if so, the indexes will rock higher in quick order. The market bears have a formidable task ahead, needing to push back towards Friday's lows, 40 points lower, if they expect to regain any momo. Today, the bears would probably be content with simply prohibiting 1181 from occurring. A move thru 1137-1180 is sideways action with neither bull or bear gaining advantage.

In a few minutes, the Personal Income and Outlays data hits, a Fed fave, so note the reaction in the futures. Pending Home Sales at 10 AM and Dallas Fed Manufacturing Survey at 10:30 AM. Remember how Philly Fed Manufacturing data sent the markets into a tizzy two weeks ago, so the Dallas Fed data is important this morning. LDK provides earnings to gauge the solar sector while WINN is a great cross sectional look at retail.  The markets remain at the mercy of Europe news which trumps all.

In conclusion, for broad market direction today, keep it simple and watch UTIL 414.5, RTH 104, SPX:VIX 35 and SPX 1181.