Keystone's Evening Nightcap 8/2/12; Bernanke and Draghi Crazy Like Foxes?

Lots of drama in the market today.  The ongoing KGC trading debacle fallout continues.  More importantly, Draghi attempts to fool traders with smoke and mirrors, hoping that everyone forgot his powerful words last week about promising to save the markets. No such luck. Perhaps Merkel, donning her dominatrix outfit with whip in hand, brought Draghi to submission, neutering his grandiose plan. Markets sold off and are parked on the fence overnight for the Jobs Report in the morning.  The circus came to town last Thursday morning when Ringmaster Draghi announced that a grand plan and action was coming this week. The carnival barker created a market jump from SPX 1340 to 1360 within one-half hour of trading. The markets continued to receive the Draghi and Bernanke pump resulting in the SPX topping on Monday morning at 1392. Thus, the central banker (CB) dog and pony show resulted in a 52 handle move from Thursday to Monday.  Markets closed at 1365 this evening--exactly in the center of the move from 1340 to 1390-ish. Thus, the CB's are the smart ones. They are still 25 handles ahead.

How odd is it that both Bernanke and Draghi decided to provide the markets butkis this week? Perhaps crazy like a couple of foxes?  Obviously the global leaders are operating in a coordinated intervention mode. Look at China this morning releasing more news on easing programs at the same time as the BOE rate decision, just like last month. The CB's are all acting in collusion, this is obvious. So why did Bernanke and Draghi freely disappoint the markets?  The central bankers know they risk a 'boy who cried wolf' scenario, they are smart men. Perhaps over a snifter of brandy, the two leaders discussed the ramifications of over promising and under delivering, and came to the conclusion that the Pavlovian market, that responds to stimulus like Keystone responds to pie, would sustain a sideways malaise move despite their inaction.

Bernanke and Draghi are playing chicken with the markets and daring the markets to sell off large and force them into action.  But, as the markets drop, the Bernanke and Draghi put will support the market, never allowing the downside to become too out of hand. Traders will then be eager to buy in anticipation of the coming CB easing. But, as the central bankers remain quiet, traders will lose hope and become negative, markets will drop, but then traders will again support the market trying to front run the Fed and ECB. Do you see a circular loop of logic occurring?  It is an ingenious idea that may create a tight rotational market circle moving forward with an oveall sideways glide path, which, in essence, will kick that proverbial can down the road once again.  Perhaps this ingenious path forward is one of the 'new tools' that Bernanke mentions. Interestingly, this new tool is in place now and traders do not even realize the game, at least not yet. The risk is that traders decide to call the CB's bluff and drive markets lower, which will occur at some point anyway when traders realize they are being gamed. Sustained selling will then simply result in a move by the CB's as promised. Bernanke and Draghi are not as dumb as they look. The days and couple weeks ahead will prove quite interesting.

While the central banker drama plays out in the background now, tomorrow morning all eyes will focus on the Monthly Jobs Report at 8:30 AM EST, one of four remaining reports before the presidential elections in November. The futures will react immediately on the news so strike up the caliope as the third ring of this weeks three ring circus plays out (Fed, ECB, Jobs). Keystone's algorithm came within a hair of flipping back to the long side in the final minutes of trading today but remains short overnight tonight. Watch XLF 14.50 since it will immediately provide tomorrow's answer. The XLF closed at 14.48 contributing market bearishness. As XLF goes, so goes the markets.  Financials will react strongly to the employment data. In addition, watch NYA 7760 (the 40-week MA); price is now at 7766, barely on the bull side.

The SPX 60-minute chart with 200 EMA cross (see the Turn Signal page on this site) at 1356 is important. The market bears got nothing unless they push under 1356. Keystone's SPX:VIX Ratio Indicator is 78; the bears got nothing unless they push under 68. For the SPX starting at 1365, bulls win over 1375, bears win under 1355. A move thru 1356-1374 is sideways action. Markets will likely commit to a side upon release of the jobs number. XLF 14.50 and NYA 7760 will immediately dictate market direction for Friday. If the XLF moves above 14.51 and higher (only three pennies away), Keystone's algo, Keybot the Quant, will likely flip long. If XLF stays under 14.50, Keybot will likely remain short. Thus, markets are sitting on the fence tonight. China manufacturing data is important overnight tonight since it will effect copper, watch the JJC, and commodities, watch the CRB. The grand finale occurs tomorrow at 8:30 AM, then the circus will fold the tent and leave town until next month. Will the markets erupt in upside cheers for the CB's high-wire act, or, will the markets collapse and search for Bernanke and Draghi to force them to clean the elephant cages? If they are crazy like foxes, then they already have a good hiding place planned.