Keystone's Morning Wake Up 9-23-11

These are fast-moving markets currently with a 24/7 news flow adding fresh fuel every few minutes.  Time to take a breath and figure out what has happened and chart a course forward. The market sell off began on Wednesday afternoon as Chairman Bernanke released Operation Twist but at the same time added the "significant" wording to his description of a weak economy. The oddest thing about it all is that you would expect the Fed to not step in with QE3 until deflation was of concern, just like in July-August 2010, but the very actions the Fed just put into place have caused the yields to plummet pushing the economy towards disinflation and deflation faster. Perhaps the answer to this head-scratcher is that Bernanke is trying to institute some inflation but the opposite effect is occurring and their actions may now have to cause them to go forward with QE3 in a shorter time frame than they would have liked.

The other aspect is that Bernanke's words were simply a short term catalyst that pushed the markets over the edge, and the real stumble is due to a global economy that is faltering, the China growth story fading, Europe in turmoil, and a host of other negative ongoing events.  Copper is collapsing, perhaps the hoarders are now running to turn the inventory into cash, which will only feed a further collapse. As Keystone has talked about the last few weeks, watch the CRB, and what a tumble, now printing a 307 handle. This is forecasting deflation ahead as well.

Gold continues its selloff, now dropping under 1710, a couple hundred off the top so far. Folks now wondering how the yellow metal is a safe haven as it fluctuates by tens of dollars on a daily basis. Overnight, the G-20 Fiance Ministers say they will "take all necessary actions" to preserve financial stability and the central banks stand ready to provide liquidity. Stephen Roach of MS is looking for a "synchronized global recession" while Nouriel Roubini, well-known economist, says Europe is now in a recession.  If you look for contrarian indicators, perhaps the Drudge Report running a "Global Meltdown" headline, or the cable business news station CNBC runnning a special nightime program to address the sell off, point to a capitulative move on hand for the indexes.

Autumn is here, the sun rises above the mountains as the trees begin to change color. The news wires continue with Moody's downgrading eight Greek banks overnight. The Kospi Index loses 5.7% experiencing panic selling.  A South Korea banker commits suicide after a police raid occurs searching for evidence of shady bank dealings.  Jean-Pierre Jouyet, the French Securities Regulator, says 15 to 20 Euro banks require recapitalization. Futures are deteriorating in front of today's open.

Volatility remains highly elevated so larget market swings are expected to be the norm moving forward.  Put/call CPC is at 1.27 consistent with a rally move about to begin. NYAD printed -2400 yesterday, a large negative number, so that would be expecting a recovery rally move as well. NYHL prints an uber low of -863, at the August crash lows, again showing that this selling event is now becoming overextended and a snap back would be prudent. Perhaps a wash out move will occur at the open today. In other words, if not short already, this environment does not appear to be attractive to initialize a short, since the markets will want to bounce, even if it is a dead cat bounce. Best to either wait for the rally to short into, or wait for the turn up and try the long side for a quickie trade.

But, the indicators steer the ship.  Keystone's SPX:VIX ratio is at 27.32, well below the 35 level showing that the bears are in full control.  The ratio dropping under the critical 35 level on Wednesday forecasted this current mess the last couple days.  The markets remain bearish as long as the ratio is under 35, if the ratio moves above 35, that will be consitent with a large up day, but that probably will not occur until next week or later. The utiltities are the most important thing to watch today. UTIL tested the 423.83 level five times yesterday, failing, but recovering. This level requires watching all day today again.  If UTIL loses the 423.83 today, this will signal the next down leg in the broad markets.  If it holds, then the markets will stabilize and recover today.

For the SPX today, starting at 1130, if the market bears can push lower to the 1114 handle, that will accelerate the move south. Market bulls are simply trying to stop the bleeding but if they can push higher to 1165 today, they can regain control.  Best the bulls can hope for is perhaps the shorts covering in front of the weekend creating some market buoyancy.  There is no economic data today and earnings releases are few. All eyes will focus on Europe, gaming what may happen this weekend. The Eurozone is no doubt planning how a Greek default will occur, they have to weigh the problem of time moving along with no resolution versus planning an orderly default as possible with Greece. If theEurozone waits too long, they may lose control. If they rush the default thru immediately, what contagion may they ignite?

With the futures continuing to weaken signaling a sell off at the open, it is starting to smell more like a countertrend recovery rally is at hand rather than a waterfall sell off from here. Perhaps a capitulative drop will occur this morning.  Watch UTIL 423.83; it will lead/confirm the broad market direction today.