Keystone's Evening Nightcap 10-10-11

The bulls came to play today. By the close, the utes, UTIL, attained the 439 level, and Keystone's SPX:VIX ratio moved above 35, verifying the bull rally. The utes, semiconductors and retail sectors are now bullish, as perceived by Keystone's algorithm. For a further move up, the market bulls must next bring along either the financials or volatility while keeping UTIL above 439.

XLF, now at 12.44, needs to move only eleven cents higher to get up and over 12.55, and the indexes will take the next move upwards, more than likely up and over SPX 1200.  If the financials cannot supply the next cup of bull juice, then volatility, the VIX, might. The market bulls need to push the VIX, now at 33, lower, to get under 29, and this will open up the upside for the indexes as well.

If financials or volatility cannot achieve these levels, and UTIL drops back under 439, then the markets will be weakening.  Note the NYAD today, printing +2528, with a high over +2600!! This screams for a market reversal tomorrow and a give back day of at least some of todays gains. Put/call ratio CPC is over 1.2 as well favorable to a market reversal in favor of the bears. The move in the indexes has gone from a short-covering rally initially, last week, to a stronger up move today that is on the verge of winning over the finanicals and/or volatility, thus, any pull back should simply result in a quick rest and the momo of the upside should resume for a higher high for the indexes as the days move forward.

The volume was light today for the Columbus Day holiday session so the jello was much easier to move around the plate. The bond market was closed as well but tomorrow we start to get all the big players involved again, as well as the China market that has been enjoying holiday time, so the market direction can be relied upon better in the coming days.

Despite the bullishness, caution is the key word since the entire rally today is predicated on Merkel and Sarkozy simply agreeing that they will agree to a plan in the future. Keystone's Eclipse Indicator opens a window now for the next month, until mid-November, for a major market sell off area, so keep this in mind for the next five weeks. Merkel and Sarkozy better deliver a pony since they promised one today.

Also of interest is that Merkel and Sarkozy targeted the plan before 11/3/11. All this timing gels with the next Fed meeting and the ECB rate meeting. Perhaps the first global quantitative easing program in world history may take place as the Eurozone fine tunes their plans.  QE3 will not be announced in the States until we see steady deflation like the summer of 2010 and we are not there yet. Use the CRB level of 270 as one gauge that will tell you we are close. Thus, one scenario may be where the broad markets tumble this month, ushering in deflation, and the timing is just right for the Eurozone plan, and for QE3 from the States, all to be announced at the same time, for one big global economic orgy. Fireworks may be in order since it will launch global markets for a final spurt, but at the same time probably seal all our fates in the long term.

Note how gold is moving as a commodity again. The following asset relationship is in play which was also occurring during the Fall 2008 crash into 2009 period; euro down=dollar up=commodities down=gold down=equities down=treasury price up yield down.  The visa versa is in play as well and that is what we saw today; euro up=dollar down=commodities up=gold up=equities up=treasury price down yield up.

For the SPX on Tuesday, since the close was at the highs, market bulls only need to see green futures, even if only by pennies, since this will launch the SPX at the open and surely 1200 will print in the session. The market bears are simply trying to stop the upside momo and will do this by keeping the financial and volaitility levels away from the numbers outlined above, and by pushing UTIL back under 439.

Boiling it all down to something simple for Tuesday's session, watch UTIL 439 (now market bullish at 440), XLF 12.55 (now market bearish at 12.44) and VIX 29 (now market bearish at 32) to determine broad market direction. If the utes stay elevated and the financials run higher, and volatility drops, the market bulls are going to run up and over 1200. If the financials and volatility stay where they are at now, and UTIL loses the 439 level, then markets will pull back down for a rest which will satisfy the needs of the overzealous NYAD today. Lastly, keep an eye on the SPX:VIX ratio; if it stays over 35 the market bulls are in full control, if it drops back under 35, the market bears are going to try to ruin the rally party.