Keystone's Morning Wake Up 12/16/11

Looks like the U.S. politicians will resolve the latest dispute concerning funding the government so that is sending a positive vibe thru the markets.  European bond yields are behaving themselves today. Italy 10-year yield is 6.37%. Spain 10-year yield is 5.14%. France 10-year is 2.99%, now under 3%, far from the 3.3% and higher level signaling danger. So the brighter picture is helping global equities.

India has stopped raising rates, the last major country to do so. The Sensex sold off a couple percent since the traders wanted to see a move towards easing. Now begins the extended period of easing among Asian nations, each cutting each others throats moving forward. Euro is buoyant the last couple days, regaining the 130 level. The 131.4-132.0 area offers resistance.

Ahead of the last trading weekend in front of Christmas, now only nine days away, many traders fear S&P or other rating agency downgrades occurring this evening, under the cover of darkness, as traders are already enjoying the eggnog weekend. This possibility has to be considered during the afternoon today. With European bond yields drifting lower, this helps lessen this risk for now.  OpEx today should see strong volume at the start, and at the finish, although markets are in the holiday mood now and should bump along sideways for the most part. Europe is always hanging out there as an unknown, however, and any rating agency downgrade of France should cause strong market selling. A France downgrade kills the EFSF fund. Perhaps Europe would move directly to the ESM at that point. For now, things have calmed albeit slightly.

The CPC put/call is at 1.26, above Keystone's magic 1.2 line, so this favors a market rally. BPSPX continues to favor bulls. Keystone's SPX:VIX Ratio Indicator is at 48 well above the 35 level and favoring market bulls. Significant levels have failed in recent days such as the Shanghai SSEC 2300, platinum 1500, and the SPX 1235. None have received back tests as yet.

Retail and financial sectors will determine broad market direction today. Watch RTH 109.40 and XLF 12.82. If the RTH loses the 109.40 level, the markets will sell off. If XLF moves above 12.82, the broad markets will rally strongly.  If neither occurs, and things remain status quo, the SPX should bump along sideways. The 1210-1225 sideways channel is in play now as well as the tighter 1216-1220 channel so the price moves out of these levels are important.

For the SPX today, just like yesterday, if the SPX touches 1226, the upside will explode into a buying orgy. If the SPX moves under 1212, however, the selling will accelerate.  A move thru 1214-1224 is sideways action. Futures are buoyant currently so perhaps a test of 1225 will occur this morning. It will be important to note to what effect RIMM's negative announcement last night has on the tech sector, since the broad market upside will be limited unless the Nasdaq leads the SPX to the upside. RIMM's charts are set up nicely for a bounce, but the news last night is dropping the stock another buck today. Price will need a few days for the smoke to clear but as the old trading joke goes, Keystone liked RIMM at 15, so he must love it at 14. The beating is relentless for RIMM, even grandmothers and children now kicking its corpse, dogs and cats now do their business on it as well; from a contrarian perspective its quite interesting.

Keystone's Inflation-Deflation Indiator is at 2.92, firmly in Disinflation and on the verge of falling into Deflation. Today's market bounce will improve this outlook but the Disinflation should stick. Continue watching the CRB; under 300 is bad for equities, under 290 and broad markets will be dropping significantly, under 270 and Chairman Bernanke will step in with QE3. For today, RTH 109.40, XLF 12.82 and SPX 1226 are key.

Note Added 12/16/11 at 9:02 AM:  Note that the Nasdaq futures are up 0.80% now as compared to up 0.65% for the S&P. Thus, the up move projected for the open has some street cred.