Keystone's Evening Nightcap 9-27-11

European news continues to flick the markets to and fro.  The morning started out in a happy mood on news that the EFSF fund will be expanded and well-funded and a solution to the Euro problems are close at hand. Further, Germany's Merkel is taking a much more conciliatory stance with Greece stating that they will offer all aid possible. As today's session played out, however, the mixed messages out of Europe continue, any sound bite one minute is contradicted an hour later. In the afternoon word hit that the Eurozone members were debating the extent of the coming Greece haircut. Indications show that a 50% haircut is in order but Greece would rather have a trim instead of a razor cut and prefers just a little off the top at 20%. Markets started to sell off on the news realizing the solution may not be as near as first thought. Greece actually needs a full Brazilian, slapped on the behind, and told to put the bon bons down and get back to work.

Talking technicals, continue to watch Keystone's SPX:VIX ratio, now at 31.17, about four points below the 35 bull signal. The market bulls will not receive confirmation on an extended rally unless the ratio moves above 35. The retail sector initialized the current rally and the semiconductors added more go juice this morning. Thus, focus on these two sectors and any sign of weakness in semi's, or retail, is a sign of trouble for the broad markets. If both weaken, then the recovery rally will be no more.

Use these levels to gauge broad market direction in Wednesday's session. The SOX, now at 366.01, needs to stay above 365.40 for the market bulls to remain happy. Bears want this level to fail. For retail, RTH, now at 105.24, watch the 104.11 level. The market bulls need to stay above here to keep the party going. Bears got game if you see 104.11 fail.

For the SPX, the bulls gave up the ghost into the close. The SPX begins at 1175. Bulls need to touch 1196 to start the big block buying and regain upside momo. Bears need to touch 1163 for the sellers to enter in force and drive the markets lower in quick order. A move thru 1164-1194 is sideways slop.

The end of quarter window dressing was playing a large part in the rally, just like the end of June, and expect that to continue this week.  The Fed's Rosengren speaks overnight tonight so his comments will be available when you rise and shine to check the futures.  Durable Goods Orders are 8:30 AM, then Oil Inventories at 10:30 AM, then the 5-Year Auction at 1 PM. Of more interest will be DRI earnings to see if folks continue to dine out, or if they are staying home eating franks and beans, and, FDO numbers where we find out if the dollar stores continue to eat WMT's lunch. The markets continue to be under the effects of a Bradley turn date from Monday, so expect the unexpected. Obviously, the European Keystone Cops, no relation to good ole Keystone, are keeping market volatilty high with their antics.

Today, NYAD spiked intraday to +2500, a signal that a reversal to favor bears is preferred, and the markets did leak into the close.  Similarly, the TRIN spiked to 13 three days ago indicating that the selling was overdone, thus, a reversal occurred which created the bull rally, but today the TRIN spiked downward to print a 0.25 which indicates that the bullishness was getting way overdone. A TRIN of 1.0 is considered neutral with the bulls and bears in a standoff. Steady eddy strength in markets is signaled by a TRIN of 0.7 to 1.0 while steady eddy weakness in markets is signaled by a TRIN of 1.0-1.5. Extreme readings indicate reversals are at hand.

Keystone's Inflatin Deflation Indicator has moved back into Neutral territory but only a smidge out of the Disinflation zone. A move back into Disinflation would be expected in the days ahead.  There are no major pre-announcements by companies yet which is somewhat surprising. Either companies are all dead set on making their numbers come heck or high water, or they simply plan to take the medicine when the releases occur. Thus, the bullish nature of retail and semi's, window dressing for Q3, lack of pre-announcements and happy Eurozone talk are encouraging for the market bulls. Conversely, the SPX:VIX ratio remaining under 35, the NYAD spike to +2500, TRIN spike downward to 0.25 and sad Eurozone talk are encouraging for bears. If you had to watch one single item after the open tomorrow, that would be the socks, SOX, as described above, which will dictate broad market direction.