Keystone's Morning Wake-Up 10/24/12; PMI's; Housing Data; Oil Inventories; FOMC Rate Decision

China Flash PMI is at a three-month high. Copper and commodities receive a lift, however, the Chinese markets are not all that enthusiastic. China is probably more concerned with creating a soft landing rather than worrying about continued growth.  The happy news starts Europe off on solid footing but the fun turned to failure quickly.  Swedish confidence falls.  France and German PMI's are worse than expected.  Eurozone PMI worse than expected.  German Business Confidence is down. The euro falls thru 1.30, down to 1.2923 as this missive is typed.

Housing data is important at 10 AM EST today, look for a market pivot point. Oil Inventories are 10:30 AM and the main event of the day is the FOMC Rate Decision at 2:15 PM where a market pivot point will occur. The Fed reaction may be muted today since Bernanke will not want to make any waves ahead of the election and he may attempt to be quiet as a church mouse. The earnings are important today, especially BA, GD, LLY, KMB, LMT, OC, T and ZNGA. The markets have experienced significant technical damage in the last few days. The major sectors in the bear camp, as measured by Keystone's algorithm, are semiconductors, utilities, volatility, retail, copper and commodities.  Two of these will directly dictate market direction today; RTH 44.47 (retail sector) and GTX 4895 (commodities sector). We watched the drama with RTH 44.45 yesterday and the sector closed at 44.46. This is not bullish, however, since Keystone's algo is constantly recalculating and in the final half hour of trading the level of interest pushed upwards two pennies to 44.47, as it is to start today, which provides the bears a one penny advantage to start the Wednesday session. If RTH moves above 44.47 today, the broad indexes will rally. Likewise, if GTX moves above 4895 the markets will rally even stronger. Use these two as a gauge for upside strength as the day moves along.

Volatility jumped over 19 yesterday and closed at 18.83, above the 200-day MA at 17.86 and above the 16.10 level that Keystone's algo is tracking as a bull-bear line.  Seasonality-wise, volatilty typically bottoms in August then peaks in the October-November period. Volatilty did not bottom in August and last year the peak was later as well, so volatility is likely right-translated this year. Thus, keep your helmet on for the weeks ahead, perhaps you can remove it at Thanksgiving dinner. Many traders have moved to buy downside protection but many others continue to drink the QE3 elixir of immortality and think that markets will not go down any further. Keystone is looking for the VIX to print in the 27-30 area which is one scenario that would identify a market bottom.  This move would correlate to a 5 to 10% further pull back in the broad indexes.  A second scenario is a much larger spike in the VIX to 40 or more which would correspond to a 10 to 20% downside move from here. Watch the CPC put/call since stocks are really not worth buying long until the CPC moves above 1.20 ($CPC is 1.06).

The vibe over the last few days is that many funds and investment houses are starting to lock in the gains for the year.  Why would you give up this year's double digit return with only two months remaining?  It is smarter to cash in and take a holiday rest on the beach, plotting a strategy for 2013, while enjoying the beautiful scenery. This behavior would obviously add to market weakness.  Also, a fear of higher taxes, especially on capital gains next year, encourages traders to lighten up and reduce exposure as the election and end of year plays out. Further, those that missed the bullish action this year, and tried to play catch-up, are having their heads handed to them on a platter, now in deeper trouble.

Confidence is being lost in the Fed's easy money policies. Is the Bernanke put dead? QE3 Infinity is announced and now markets are below where they were for the actual announcement. The dollar is not dropping but rather rising. The yields are starting to drift lower. All the money in the world can sit at the banks and the printing presses can operate 24/7 but if there is no money velocity the Fed is pushing on a string. No one wants loans since business is slow. Many consumers and businesses continue to deleverage. Lots of drama will play out over the next couple months. The U.S. Presidential elections are now only 12 days away on 11/6/12. Seasonality-wise, the last days of October are typically bullish. The full moon is Monday evening and markets are typically buoyant in front of the full moon. A Bradley turn date is Thursday, 11/1/12, so a window opens for a market trend change to occur anytime from tomorrow thru 11/8/12, especially between 10/29/12 and 11/5/12.

For the SPX today, starting at 1413, the bulls need to touch 1434 to create an upside acceleration while the bears need to drop under 1408 to create a downside acceleration.  A move thru 1409-1432 is sideways action today.  Pay attention to the 10 AM and 2:15 AM pivots and RTH 44.47 and GTX 4895.

Note Added 10/24/12 at 6:55 AM:  LLY missed on earnings. EMC lowers guidance.

Note Added 10/24/12 at 7:36 AM:  BA beats but top line is a hair light, they upgrade guidance. This is odd since plane cancellations have been occurring, perhaps the bad news is already in the current Q4. T earnings are in line but top line a hair light. EMC is down 7% pre-market. FB is up 12%. NFLX is down 17%.