Keystone's Evening Nightcap 11-9-11

If you were up with the chickens today, the tension was in the air at 4 AM EST as the Italy bond yields crept higher. The rise in the Italy 10-year was a sight to see, first a break above 7%, then a slight drop back under. That only provided a few minutes time to wipe the sand from sleepy eyes. The 10-year then crossed 7% again and did not look back, ticking off basis points every time you blinked.  The Italy 2's, 5's and 10's inverted as well so the trading day was off to a routy start.

Volatility was the key going in to today and when the VIX jumped above 30.50 at the bell, a level continuously calculated by Keystones' algo, the bears were growling strongly. SPX price fell thru the starting year number at 1258. Then took out Tuesday's low at 1255, then the bottom fell out due to the elevated volatility with the SPX dropping to the strong 1242 support level.

At 2 PM, two important things happened technically. The financials gave up the ghost with the XLF dropping under 13.00 (another level that was provided by the algorithm).  Keystone's SPX:VIX Ratio Indicator fell under 35 as well verifying the downward action and sealing the day's fate. Markets will remain weak as long as the SPX:VIX stays under 35. If the ratio moves back above 35 that will actually signal a rally. Coincidentally, the sharp drop in the markets occurred at the same time as the test of the Emergency Alert System (EAS).

If there was ever a day that China had to step up to the plate, and even offer up hollow lip service, anything would have helped, it was today.  Instead of the Chinese riding into Europe on a white horse, all that traders heard were crickets as a tumbleweed rolled by. China was on a milk carton, missing in action, not a peep out of them, but the message was loud and clear, 'Europe you are on your own'. Of equal interest is that perhaps China has a world of problems of their own to address; you can almost hear the new planet refrain, "every man for himself!"

The 10-year U.S. Treasury note dropped under 2% as the Italy 10-year moved above 7% this morning. SPXA150R is at 39.80 and would aid the market bears if it drops lower. CPC put/call ratio is 1.34 consistent with a market that would like to bounce now. NYAD is -2500 consistent with a market that wants to bounce. TRIN prints a lofty 7.14, which represents over-the-top selling and consistent with a market that needs to bounce back to the upside.

Financials and semi's are key tomorrow. Watch XLF 13.00 and SOX 374.65. XLF is now below so it is driving markets lower.  SOX is above so it is helping the bull case. If SOX loses 374.65 tomorrow, another stage of strong market selling will occur. If XLF regains 13.00 the market selling will subside and the markets will recover.  For the SPX, starting at 1229.10, if the 1227 handle is lost and you see 1226 printing, the market selling will accelerate.

Markets tend to never bottom on a Wednesday so continued weakness would be expected tomorrow morning. Mix it all together and what do you have? Best guess is market weakness will show lower numbers for the indexes tomorrow morning, but, the indicators such as CPC, NYAD and TRIN should work towards bouncing the indexes. SPX:VIX 35 level requires watching, bears are in biz under 35, if the ratio jumps above 35 it tells you the bulls are regaining control. Watch SPX 1227, XLF 13.00 and SOX 374.65 as discussed in previous paragraph, and most importantly, hang on tight.