Keystone's Key Events and Market Movers Week of 3/26/12

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Keystone presents the following underlying market currents, sometimes subtle, sometimes turbulent, that move global markets in real time.  The key dates and times below typically correspond to market pivot points.

Summary for the New Trading Week Ahead:

Last week was the week the bears needed to come to play, and they did. This week we find out if they got game, or not.  On the esoteric side, a major Bradley turn occurred 3/16/12, so the window for a major market turn has closed, and this week we see if the model identified a significant market top, or not.  Markets are typically weak moving into the new moon (3/22/12) and this accurately shows market direction once again.  Markets are typically bullish into the full moon (next full moon is 4/6/12).

For this week, the last week of the month, EOM, and last week of the quarter, EOQ1, window dressing may come into play.  Keystone says ‘may’ because he cannot remember any other time where window dressing was so widely publicized ahead of time.  Window dressing is where funds will buy the stocks that have performed during the quarter to make sure they are listed on the quarterly statements to make clients happy.  Thus, if a fund missed the boat on a stock, it will tend to buy at least some of it as the month or quarter comes to a close, the quarterly action is much more important, and this buying tends to elevate the broad indexes.  Oddly, AAPL is already owned by 90% or more of fund and money managers so if they wanted it they would already have it and other funds that have avoided it surely will not buy it now.  At the same time, when everyone expects an event (window dressing) it has a way of not happening; the markets always strive to hurt the maximum amount of traders. So if you believe that too many traders are already expecting window dressing, maybe you try to front run the others since you feel you are smarter than the average bear (reference to Yogi Bear). Perhaps that was the reason behind the Friday buoyancy?  At any rate, we will find out tomorrow if markets are bullish showing that indeed window dressing is occurring.  Window dressing may turn out to be a non-even this week and that would be very evident if Monday is weak.

Note the Fed talk appearing in the schedule this week, you would think they were paid by the speech.  Interestingly, the Fed Indexes are released as well that will provide a gauge on manufacturing.  Much hoopla has been made recently about the bump higher in manufacturing and how it signals an all clear for the economy.  Keystone sees the manufacturing gains only in select industries such as shale gas support, or automotive areas as companies built inventories. This week tells the story. Traders want to hear that the dealer (Fed) is coming to town with more crack cocaine (quantitative easing). If a couple of the Fed heads, and especially Chairman Bernanke whisper the ‘accommodation’ sweet nothings in traders’ ears, as well as slipping in an occasional ‘QE3 on the table’, the markets will be off and running higher perhaps towards the SPX 1425 gap fill.  However, if the QE talk is muffled, and by mid week all that is heard is crickets with hints that the money printing presses may be down for maintenance, the markets will sell off strongly. Markets have rallied purely off the crack cocaine easy money, QE2, Operation Twist, promising low rates thru 2014, LTRO1 and LTRO2 by the ECB, etc…; the junkies (traders) already went thru that batch of drugs but now need more.

The politicians will be mouthing off and the U.S. Healthcare mess will start to be sorted out by the courts.  Markets need this like they need a hole in their head. Markets are bearish when Congress is in session and considering all the political hot air on tap, this casts negativity on trading.

Earnings are all but over, after all we are moving into Q2 next week, but some notables remain.  LEN earnings have taken on extreme importance in light of the Friday KBH debacle. Bullish traders say housing is recovering and the KBH somber news as a one-off. If LEN disappoints, housing is in for some damage and this will ripple thru the markets since housing is such a huge part of the economic foundation.  FDO and BBY are important to keep gauging consumer spending.  Keystone continues to short retail but that has been a fool’s errand so far. More importantly, listen for earnings warnings as companies enter the confessional and lower their estimates or guidance before the numbers hit over the next couple months.  Traders should already realize that earnings are dropping, not raising, and as Larry Kudlow opines each evening on CNBC, ‘earnings are the Mother’s milk for stocks’. A year ago earnings estimates were running about $112 for the S&P, now they are about $100. A 14 multiple places the SPX at 100x14 = 1400, right where it sits.  Attaching lower multiples, like 13 or 12, yield SPX forecasts of 1300 and 1200 respectively. Considering the bullish euphoria currently, very few are considering these lower numbers.

The European debt crisis drama continues with Greece, Portugal, Hungary, Spain and Italy all remaining a concern.  Portugal will need a second bailout.  The yields, as shown by the early morning posts during the week on this site, show yields starting to blow out again to the upside. Perhaps this week the lid blows off the boiling European pot again.

Note how the markets moved in sync on Friday with the same old asset relationship in place for a long time, despite some recent minor blips; dollar weaker = euro stronger = gold, copper, oil, commodities and equities stronger.  A stronger dollar will drop copper and commodities lower, as well as equities, and reward market bears. Bulls want to see the weaker dollar remain in place to allow further market upside.

On Thursday, Keybot the Quant, Keystone’s algorithm, moved to the short side so in tomorrow’s trading we find out if a whipsaw occurs, or not.  The key overnight tonight is the dollar and copper.  If the dollar is stronger, copper will be weaker and the markets will sell off.  If the dollar is weaker, copper will be stronger, and Keybot will likely flip back to the long side. If JJC moves higher than the current price of 48.83 and the SPX moves over 1400, Keybot will likely be back on the long side.

Keystone considers the current broad market action to be a rolling top and has commented often about the instability existing in the markets.   What better proof of this last week with the TVIX volatility derivative failure, then the Iranian export news that launched oil, now holding a 10 to 20 dollar premium due to Middle East turmoil, the AAPL trading halt, and the BATS Exchange mini-flash crash.  These are not your grandfather’s markets folks.  This is the Wild West with the casino wheel spinning and it is every man, er HFT robot, for himself.

Continue watching AAPL since as AAPL goes, so goes the markets.  As Keystone pointed out last week, the Apple daily chart wants a smack down.  The weekly AAPL chart maintains momo, however, so price will want to come back up after the sell off (down up down move). The projection is that for every 10 dollar down move in Apple, the broad indexes will probably lose 1%, thus, a 70 drop in AAPL price will probably correlate to a market pull back of 7%. From the uber bullish euphoria that remains in the markets, very few expect any pull back that would exceed a couple percent. Remember, however, the markets strive to hurt the maximum amount of traders and it would be as easy as driving AAPL lower, especially during a week where joyous window dressing is expected.

Watch the Nasdaq versus S&P 500 percentage moves in real-time. If the Nasdaq 100 and Nasdaq Composite start to lag the broad market, the SPX, that will show tech running out of gas and thus affect the broad markets negatively. Friday’s action showed AAPL slightly propping up tech which helped prop up the markets once again.  Tech leads overall market direction so AAPL is the markets.  Traders enjoying the technology rally will likely take profits moving forward. A pull back in AAPL will negatively impact the tech sector, Nasdaq, and the broad markets, as well as the 90% of fund and money managers that own the stock.  Bullish traders enjoyed the parabolic ride up in Apple but will not enjoy the topping and rolling over action ahead.

Market bulls have made serious gains in the broad markets in 2012, overtaking the moving average lines as well as other key levels indicating a return to secular bull markets.  AAPL blow-out earnings in mid-January launched the indexes as well as the quantitative easing from the Fed, the ECB and others. The bulls are in good shape as long as they stay above SPX 1300 and NYA 7700.

Copper will dictate Monday’s start; if the dollar is higher, copper lower, the down move in the markets will continue.  If the dollar is lower, copper is higher, the market bulls will push the SPX up and over 1400 and back up to test 1403 and 1406.

Key Dates and Times for the Week Ahead:

·         Monday, 3/26/12: Watch for window dressing (market buoyancy) this week. The European debt crisis drama continues; Greece, Portugal, Hungary, Spain and Italy all remain at risk. Ongoing political rhetoric, Congress in session, and now the start of hearings on the constitutionality of President Obama’s Healthcare Program are market negatives since they lessen trader confidence moving forward. Listen for any China news since this impacts copper and commodities markets which will cause the equities markets to move in the same direction. China PMI is targeted after the week ends.  Fed’s Plosser speaks 7:30 AM.  Chairman Bernanke speaks 8 AM. Chicago Fed Index 8:30 AM. Pending Home Sales 10 AM. Dallas Fed Survey 10:30 AM. Earnings: APP, APOL, CALM.

·         Tuesday, 3/27/12: Fed’s Rosengren speaks.  S&P Case-Shiller House Price Index 9 AM.  Consumer Confidence 10 AM. Richmond Fed Index 10 AM.  Chairman Bernanke speaks 12:45 PM. 2-Year Note Auction 1 PM.  Earnings: LEN, WAG, ZZ.

·         Wednesday, 3/28/12: Mortgage Purchase Applications 7 AM. Durable Goods Orders 8:30 AM. Oil Inventories 10:30 AM. 5-Year Note Auction 1 PM. Fed’s Bullard speaks 9 PM. Earnings: FDO, FUL, PAYX, RHT.

·         Thursday, 3/29/12: GDP and Jobless Claims 8:30 AM.  Natty Inventories 10:30 AM. Kansas City Fed Index 11 AM. Fed’s Plosser speaks 1 PM.  7-Year Note Auction 1 PM. Farm Prices 3 PM. Fed Balance Sheet and Money Supply 4:30 PM. Fed’s Lacker speaks 6:45 PM.  Earnings: BBY, FINL, JOSB, SHAW, SORL, TXI, TIBX.

·         Friday, 3/30/12: Informal meeting of EU finance ministers in Copenhagen. EOM. EOQ1.  Personal Income and Outlays 8:30 AM. Chicago PMI 9:45 AM. Consumer Sentiment 9:55 AM.  Earnings: CLRO, TOPS.

·         Saturday, 3/31/12: China PMI.

·         Monday, 4/2/12: ISM Manufacturing Index 10 AM.

·         Tuesday, 4/3/12: FOMC Minutes 2 PM.

·         Friday, 4/6/12:  U.S. Markets are Closed in Observance of Good Friday. Jobs Report 8:30 AM.