Keystone's Morning Wake-Up 12/18/12; Fiscal Cliff

The bulls pushed the SPX strongly higher into the close yesterday as volatility plummeted. VIX 15.83 is key, as long as volatility is above 15.83, the bears are in the game. The bulls cannot make substantial headway higher unless the VIX drops under 15.83, which would send the SPX well into the 1340's. Yesterday was a mini Tepper Rally. The fiscal cliff meeting between Speaker Boehner and President Obama yesterday is the fuel for the bulls. Traders firmly believe a positive resolution to the fiscal cliff is coming at any time.  Boehner offered the taxing of the one million and higher earners, and the president has now raised his tax limit from 250K up to 400K. Thus, the republicans are on board with tax increases which is a big part of the story. Both parties are Keynesian's that cannot stop spending money.

In negotiations, the magnitude of the moves are important. Obama offered 400K which is a 150K move from the 250K.  Thus, the expectation, at a minimum, for Boehner's next offer, would be 850K (1 mill minus 150K). If the bare bones 850K is the counter offer, that shows that Boehner is not happy with Obama's small move from 250K to 400K and the talks are steering towards bad faith.  But if Boehner makes a stronger drop in the counter offer, say, 750K, or 800K, that will show that the republicans want to work towards a quick resolution, and would further encourage the market bulls. If counter offers occur every couple days, with at least three or four iterations ahead, this is at least another week of talks. In deal-making, however, anything can happen, good or bad, it comes down to the art of the negotiation.

Small caps and tech led the way, slightly, yesterday, which is bull friendly. The Apple positive divergence on the minute and hour chars bounced price off the bottom which helped the Nasdaq stage a turn-around.  The SPX closed above the election day market top at 1429, also above the 50-day MA 1414.67.  The 8 MA is up thru the 34 MA on the SPX 30-minute chart which signals bullishness for the hours and days ahead.  The bulls firmly believe that a positive solution to the fiscal cliff is imminent. This is evidenced by the plunge in volatility and also the CPC put/call printing 0.71 yesterday.  This signals complacency in the markets, the boat is fully loaded on the bull side, the champagne is flowing like water, and no one has a care or worry that markets will sell off. The complacency hints that the markets are at or near a market top rather than the start of a rally. The TRIN is at 0.48, uber low, uber bullish. A reading this low typically needs to see a market sell off move, even if only for a few hours, to relieve the exuberant over-the-top bullishness.

Financials ran strongly yesterday. Many pundits profess that financials will run higher from here. The XLF gains over 2% yesterday now at 16.33, well above the 15.80 bull-bear line. After the close, Meredith Whitney banking analyst says buy the banks moving forward. Watch the behavior in XLF since it will steer the broad indexes.  The bulls can squeeze the bears on these low volume days forcing the markets higher. The interesting aspect yesterday was the dead flat euro at 1.3160. The euro would not tip its hand on which side of 1.3160 it prefers. A move under 1.3160 will send equity markets lower, a move above 1.3160 will send markets higher.  Spain's bad debt ratio pops higher again, now at 11.2%, an obscene number, and rising at about one-half percent per month. Oddly, the terrible news does not affect the euro. At this writing, the euro is up, now at 1.3185, favoring the bulls moving forward, and the S&P's are up five. China is forecasting another year of 7.5% growth so this helps create the market buoyancy this morning along with the fiscal cliff positivity. The 10-year Treasury yield ran higher showing that money was moving from bonds to the riskier assets, helping the equity bulls.  Watch the 200-day MA at 1.75%. Equity market bulls are happy seeing the 10-year yield above 1.75% and moving higher. Market bears will start to growl happily if the 10-year falls under 1.75%.

Current Account data is released at 8:30 AM, Housing Index at 10 AM, 5-Year Note Auction at 1 PM and Fed's Fisher speaks at 1:15 PM. For OpEx Tuesday's, a low typically occurs that leads to a higher high on Wednesday. SPX resistance above is 1433, 1435, 1438 (where QE3 was announced in early September), 1441 and 1446.  In a nutshell, VIX 15.83, euro 1.3160 and 1.75% on the 10-year yield are three key parameters to watch today. ORCL earnings after the bell will affect the tech sector and Nasdaq.