Keystone's Morning Wake Up 2/1/12

January starts the year on the bull side, the SPX up over 4% and Nasdaq up over 8% on the month.  Markets moved up on the commodities sector, copper, gold and silver moving up strongly due to front running the anticipated China triple R ease.  But, China has not announced the ease yet and in fact they are hesitant now and want to move slower.  China is concerned over the creation of asset bubbles due to their easing.  They see the commodities bubble that Chairman Bernanke created with QE2, and the subsequent pop, where copper collapsed in 2011.  Look no further than December-January to see this story playing again, commodites, copper, gold, silver-it's best start in 30 years, alll up large, not even on the actual China ease but on the hope of an ease.

Markets pulled back since last Thursay due to this China hesitation on the easing. At the same time, Europe has been somewhat quiet so it has added neither negative effects, or positive effects, on market action in January.  The other factor that caused the large January run-up is due to one stock, AAPL.  The blow-out Apple earnigns propelled the Nasdaq higher and if tech leads the broad markets, the markets in general have no where to go but up.  Financials remain buoyant as well since they are a large consumer of technology. As February begins, the China easing measures are now more of a mystery and the AAPL earnings are ancient history.  Europe will return to the front burner.

AMZN earnings laid an egg last evening and this is hurting the Nasdaq futures this morning.  Hurting only in the context that the Nasdaq futures are up less than the S&P futures. Thus, an opening pop is projected for markets at this juncture but since tech is now not leading the upside today, the upside should be limited.  ADP Employment report hits at 8:15 AM EST so note the futures in about 45 minutes.

China PMI was key last night and came in a smidge above consensus at 50.5, but below the whisper, and above last months 50.3. Above 50 shows an economy in expansion, below 50 in contraction.  The HSBC China PMI, considered more reliable since it includes smaller Chinese companies, and also is more independent then the manufactured numbers from the government, remains in contraction at 48.8 only a hair improvement from last month's 48.7.  Thus, a little for everyone.  Markets perceive it as good news, however, since equities futures are higher and oil, gold and copper are all higher.

To keep it simple today, watch SPX:VIX ratio 68, UTIL 453, CRB 309.50 and SPX 1307 and 1321. The bears have the advantage since the SPX:VIX ratio is below 68, and a large down day would be expected.  However, with the futures up strongly, the ratio may jump back above 68 once again negating the projected market bearishness, as it has for the last two trading days. So watch SPX:VIX as the bell rings. Bears have a long day ahead if the ratio pops back above 68.

Broad market direction will also be determined by utilities and commodities today.  If UTIL jumps above 453 this signals that the bulls have resumed full control of the markets and continued upside is ahead. If the CRB drops under 309.50 this signals that the bears have gained control of the broad markets and extended downside is ahead.  Since the China PMI's are perceived positively, with oil, gold and copper running higher, the CRB is sure to follow along higher dampening the bearish outcome.

For the SPX, starting at 1312, a pop of about 8 points is projected at this juncture. Interestingly enough, this is exactly in the area that bulls need to push the markets higher.  If the bears can push the SPX up and over 1321, the large block buyers will enter the markets and the upside will accelerate. The bears need to push the SPX down under the 1307 level and the downside will accelerate. A move thru 1308-1320 is sideways action.

In addition to these technical's described, the ADP number is important. A market pivot point may occur at 10 AM with Construction Spending and ISM data.  Construction Spending is an excellent gauge on employment. ISM is always released the first of the month and energy traders are fixated on this number. Watch the energy markets, such as XLE, and individual tickers in the oil and gas area, XOM, COP, etc.... Oil Inventories at 10:30 AM are also important. Anecdotal data shows that China is bringing less oil into the country. How then does China PMI project wine and roses moving forward? Many cross currents are occurring in markets now. The low volume, low volatility markets are adding to the chaos.

Earnings continue to play an important role. Many companies are barely coming in line with lowered estimates and guidance is ratcheting down. WHR missed this morning which places the housing recovery, that even the cab drivers now say is guaranteed, in jeopardy. Appliances and furniture should fly off the shelves if the housing sector is as good as many pundits say. In fairness,WHR provides strong guidance. Since the cross currents of economic data, Europe news, China mixed signals and earnings are making for a smorgasbord of confusion, as always, it is best to use the technical's to guide the path forward.