Keystone's Morning Wake Up 8-30-11

Interesting to see Bill Gross commenting on how the move out of treasuries in February 2011 was a mistake, finally. Obviously it was, February marked the top in yields.  Keystone says Bill was simply one of the many money managers sucked into the rampant inflation thinking. After all, with the quantitative easing and money printing, it's a no-brainer to know that yields will go up--right? Wrong. Keystone forecasted a lower ten year yield for this year.

Many traders are only now understanding how disinflation and deflation remain a worry, a la the Japan, and Great Depression outcomes, that Chairman Bernanke fear the most. When 95% of the traders are going one way (inflation), even though fundamentally it is defendable, that sure is a loaded boat to one side, and as always happens, when everyone is on one side, it is the wrong side.  In fact, Keystone's Inflation-Deflation Indicator actually slipped into Disinflation a couple weeks back, check the archive's for the exact day, but only held that move for a day or two, now in Neutral territory again drifting between disinflation and inflation. Make no mistake, the inflation will roar in the coming years, but not right away. High unemployment, the shrinking consumer, a sick housing sector, and, as taxes increase, an ever increasing cash society in the U.S. that avoids Uncle Sam's cut all together, is in place now. There is a need to explore disinflation and deflation again before we rip with inflation in the coming years.

Watch the commodities, CRB is useful; when you see that falling towards 300 it will tell you the deflation move is coming on stronger. This move will also serve as a tool to know when Bernanke will step in with QE3.

Large up move for markets yesterday. The upside was verified at the opening bell when Keystone's SPX:VIX Indicator went above 35. Watch the ratio closely today, especially since the futures are red. If the ratio stays above 35, the bulls are fine, if the ratio falls under 35 today, then the bears are wrestling back control of the markets.

The huge upside move yesterday occurred at low volume, not exactly a ringing endorsement for the bulls. At the close, actually the last three minutes before the close, some shenanigans may have entered the retail sector. RTH closed above 104.04, the number that Keystone's algorithm was monitoring, but then the settlement, a couple minutes after the bell, dropped the RTH back down below. Something smells fishy so watch this closely at the opening bell today.  If the RTH moves above 104.04, now at 104.00, then the recovery rally is real and the broad market bulls are going to continue taking the indexes higher. If, however, the RTH remains under 104.04 and languishes lower, this signals that the market bulls have run out of steam.

Today is an actual Bradley turn date, 8/30/11, so this serves as an ideal place for a market trend change, or at the very least market turmoil today into Thursday.  Keystone will post September's Seasonality guidelines over the next couple days but any experienced trader can tell you how September is typically a terrible trading month.  That said, Thursday and Friday should be buoyant this week ahead of the Labor Day weekend.

For the SPX today, all the market bulls need is green futures (remaining above 1210) and the indexes will run several handles higher but alas, the futures are strongly red, spoo's down about eight, so this scenario is not currently on tap. The market bears do not have a walk in the park. They need to lose the 1178 handle. If 1177 is touched you will see the sellers enter in force, with the indexes falling several more handles quickly and the bearishness will be rampant.  At this juncture, the futures are not nearly negative enough to produce this outcome either. Thus, take it as it comes today, a move thru 1179-1209 is considered sideways action without resolution.

RTH 104.04 and SPX:VIX 35 will steer broad market direction today.