Keystone's Morning Wake Up 9-30-11

The continuing smell of whipsaw markets in the morning. The erratic markets continue into Friday with futures negative. The "Sell Rosh Hashana" crowd must be up early. Today is EOM and EOQ3. Personal Income and Outlays data released minutes ago shows income down spending up and little reaction in the futures, they remain poised for a 10 point drop in the SPX and about 100 on the Dow. Chicago PMI is 15 minutes after the open and Uiversity of Michigan Consumer Sentiment at 9:55 AM. This sets up some wild action for the first half hour of trading. Typically, Friday's are buoyant in the afternoon since shorts pare back positions before the weekend, and this adds to or sometimes fuels a short-covering rally.

Talking sectors, the utilities and retail are the only major sectors perceived to be bullish by Keystone's algo, and as seen from yesterday's move in the last couple minutes, retail is a hair away from turning bearish again. Thus, for today, retail, RTH is the most important. If RTH drops under 103.90, now only pennies above, the markets will weaken again. By the look of the futures currently this appears a done deal, but, we will wait and see how the open goes. Once retail is back in the bear camp, the utes will be the lone wolf trying to hold up the broad markets.  For today, watch UTIL 426.79, that is the signal line that will usher in strong selling.  As long as UTIL stays above here today, and it is comfortably above currently, then the downside will be limited.

The advance-decliners NYAD shows four extreme moves in the last six days, each extreme move indicates a reversal. Six days ago the NYAD was at -2500 indicating markets need to bounce, they did, then NYAD shot up to +2500 requiring a market reversal to the downside, it did, then NYAD prints a -2000 number, another strong low reading, thus, markets should bounce, they did, then yesterday up to near +2500 indicating a need for markets to sell off again, they did. This is interesting since these moves typically occur over a much longer time frame, the markets are compressing and the high volatility are launching the large point moves each day each way.

The Dow Industrials yesterday went from 11000 up to 11275, down to 10965, and then back up to 11154. This is a 175+310+189=674 point move in the Dow, an over 6% total move in the Dow yesterday! This is one of the reasons that when markets become erratic like this you want to trade small as we have discussed since the spring time. For the last two months the smart play was simply to reduce positions, and do a lot of sitting and waiting. The Europe situation will resolve itself one way or another during October-November and the clarity can provide the path forward, which is expected to be bearish.  Others are now finally calling for a double dip recession but Keystone's work showed that was here from mid May on.

The request deadlines for redemptions from hedgies is today and Monday, so investors are pulling dough out of accounts.  The major savior for many hedgies has been their gold holdings which provided balance to their portfolios this year. That bird has flown the coop. The redemptions are interesting since it will more than likely lead to further gold position liquidation in October. This means more supply so gold prices should continue to weaken moving forward. Indications in both China and India now, as their holiday and marriage seasons are in full swing, show that the enthusiasm for gold may be strong but the global slowdown is dampening the actual purchases.

Keystone's SPX:VIX Ratio Indicator continues to languish under 35 favoring bears. The ratio is at 29.88 so it has work to do before it moves up to cross 35 which will indicate bullish markets again. This is a lead weight hanging on the market. Keep an eye on the Nasdaq percentage move versus the SPX percentage move each day.  Yesterday, despite the midday bounce, showed the Nasdaq percentage move lower than the SPX move, thus, if tech is weak and not leading, any bounce in the markets is questionable.  Current print on the e-mini's is Nasdaq down a 0.8% and S&P down 1.0%. Thus, the Nasdaq is stronger than the S&P at this juncture which says the sell side should be limited. If Nasdaq was a higher percentage than the S&P, that makes market bears salivate, since it leads to a stonger down move for the broad markets.

If the CRB breaks the 300 level we are well on our way to deflation. Current print is 304, nope, let's call it a 303 handle now. Preannnouncements are not occurring, and companies are obligated to report worse news once they become aware, but, as we all saw in Q2 and Q3 of 2008, the companies were talking blue sky, all the way to where they were looking up and stepped off the cliff. Thus, the earnings season will be anticipated to be negative despite the lack of preannouncements, since the earnings numbers will likely be reported on the weak side. It is hard to believe that all companies are going to beat by several pennies and report gains in the top line revenue as well.

The Euro fun will continue thru next week. The ECB rate decision on 10/6/11 will be important but no lowering rates is anticipated, even though they all know they want to cut immediately. This is Trichet's farewell and they will not make him look like a doofus on his last day, raising rates since April, just like his mistake in July 2008.

The Fed talk was uneventful this week, same old stuff, but today, Bullard (St. Louis Fed) speaks at 11 AM so watch out for any sound bites around this time. In a nutshell today, the first half hour, even into Bullard's talk should be highly volatile markets. Watch RTH 103.90 to note market direction and it looks like it will fail at the open favoring market bears. If RTH fails, watch UTIL 426.79. If UTIL stays above, any selling will moderate. If UTIL fails the 426.79 then the markets will start falling substantially. SPX 1140 is key. If that holds, any selling damage should be minimal. If you see a 1139 handle appear, the markets will likely sell off large, especially dropping several additional handles quickly if the 1139 appears.