Keystone's Evening Nightcap 10-24-11

The Fed's Dudley 'Do-Right' could do no wrong today, touting QE3 and pumping the broad indexes higher. The Fed quantitative easing talk started on Thursday with Yellen yellin', Tarullo bellowing as well, now Dudley.  This quantitative easing talk has bounced the markets starting Thursday, exactly at the time when the indexes were starting to drop.

Once the SPX punched thru 1239 today, it never looked back.  This led to 1240, then 1242, then 1247, 1252 and finally stopped by 1258 resistance--the starting level from the first day of this year. Resistance levels were dropping faster than names at a hedge fund party. The Dow Industrials turned positive on the year during Friday's session.  The drop in volatility provided the rocket fuel for today's session. Continue to watch VIX 29.85. The close tonight is below so market bulls are favored. If there are any chinks in the bull armour it will first show by the VIX moving back above 29.85.

Semiconductors and retail started ths recovery rally about a month ago. The utes and financials then jumped aboard the bull train, and now, today, volatility joined the bullish fun as well. Thus, for any market pull back to occur, look for these sectors to weaken in the reverse order.

Retail is phenomenal, it is the most surprising sector of the year. The strength of the American consumer can never be understated. Oddly, however, the numbers do not add up. Gasoline price remains elevated but uncharacteristically it is not hampering retail sales, at least not yet. Similarly, consumer sentiment is in the dumps which should also equate to slower sales, but the consumer keeps spending dough. Back-to-school sales turned out okay but still forecast soft holiday sales.

But the retail fun is in high gear.  BBBY hit new all-time highs today.  This is surprising, Keystone says jokingly, since the drapery department will probably see a big fall in sales now that Colonel Kaddafi died. But seriously folks, the dollar stores, DLTR, NDN, DG, etc..., are all topping now. Retail is setting up to be a nice sector to short so Keystone will provide further color in the days ahead.

The weaker dollar has aided the rally since Thursday and now everyone is quick to eulogize the buck once again but to paraphase Mark Twain, "rumors of the dollar's demise are greatly exaggerated." Texan, TXN, reported tonight, providing a Gloomy Gus forecast, which may dampen tech spirits in the morning. This just in. Fitch stating that "Greece default is inevitable." No worries, a Fed head will yell "quantitative easing" into a crowded trading floor tomorow and all you will hear is 'buy' cries.

The indexes do need to pull back for a rest. NYAD prints +2300 Friday and +2000 tonight so this needs to pull back down, which corresponds to market selling.  NYMO now over 91, a high equal to the early July and late August sell offs for the equities markets. TRIN closes at 0.70, very bullish which reflects todays action. All three of these, however, are pointing to a pull back in the indexes in the short term, as in tomorrow.

The momo is strong in the markets now so any pull back would more than likely result in a move back up to matching or higher highs afterwards. Current SPX S/R is 1233, 1235, 1240, 1242, 1247, 1249, 1252, 1257, 1258, 1259, 1262, 1268, 1270, 1273 and 1280.  The 150 day MA continues to slope downwards which is a secular bear market signal. The 150 day MA will offer resistance at 1265. The 50 week MA is 1268. Thus, that 1268 resistance may come into play over the coming days.

For the SPX tomorrow, the market bulls can keep it going if futures are only up a couple points overnight. The SPX starts at 1254 and if the 1257 handle is touched, it is off to the races higher again, with multiple handles ticking off quickly for the indexes as buyers step in strongly. The market bears need to drop under 1239 to return the negativity. If a 1238 handle is printed, the sellers will enter in force and the indexes will drop several more handles quickly.  A move thru 1240-1255 is sideways action with markets waiting for the Merkozy EU Summit results on Wednesday.

Thus, to keep it simple, bulls want SPX 1257 and bears want 1238. If VIX moves above 29.85, the market bears are making a run; if VIX stays under 29.85 the market bulls are favored.