Keystone's Trading Week in Review and Path Ahead for Markets 1/5/13; The Bulls Are Running in 2013

On Friday, 12/28/12, futures deteriorate as traders and markets are becoming tired of the fiscal cliff theatrics.  The broad indexes drop lower after the opening bell. Copper weakens but markets remain in a holding pattern until the 3 PM meeting at the Whitehouse. At 3 PM, the broad indexes start to collapse but the S&P rating agency releases news that they will not downgrade U.S. debt based on the fiscal cliff impasse. The stick-save bounces and stabilizes the markets but President Obama says there will not be a new offer proposed at the meeting. The markets immediately sell off. The president offers nothing new and pushes off responsibility to the Senate requesting that Leaders Reid and McConnell develop a plan.  The broad indexes drop into the closing bell with the SPX closing at 1402 under where all the recent Fed and ECB quantitative easing programs were announced. Keystone’s SPX:VIX Ratio Indicator drops under 68 indicating a large triple digit down day for the Dow Industrials is on tap, which occurs today, and also that the broad indexes have fallen into a bear market pattern and the potential exists for a market crash in the coming days. After the bell, the e-mini S&P futures plummet about 25 handles punching out a low at 1383, lower than the 1391 low from a few days back. If the markets were to open now, the SPX would be down 40 handles and the Dow Industrials would lose well over 300 points.  The fate of the markets is in the hands of Leaders Reid and McConnel this weekend. They need a package that can be approved Sunday evening, otherwise, the markets are going to sell off strongly come Monday morning. The SPX finishes down 16 points, -1.1%, to 1402.  The Dow is down -1.2%, the Nasdaq off -0.9% and the RUT -0.63%. Tech and small caps did not lead the downside but for the week overall, tech did lead the markets lower. On a positive note, the dockworkers strike, which would have crippled the East and South U.S. Coasts, is averted for thirty days.

On Saturday, 12/29/12, France is overturning the ridiculous 75% tax rate on the wealthy but the damage is likely already done and the new taxes will occur anyway.

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On Sunday, 12/30/12, President Obama appears on Meet the Press Sunday political talk show to defend his fiscal cliff decisions. The fiscal cliff negotiations continue but the lawmakers are not providing commentary. Merkel says the European debt crisis is “far from over.”

On Monday, 12/31/12, China PMI is 51.5 showing growth so copper jumps higher and the news sets a positive tone for markets. The PBOC says stable and appropriate growth will be targeted. Japan markets are closed today and many European markets close early.  Today is the last trading day of 2012 and begins with a downward bias but optimism over a positive fiscal cliff resolution turns the markets positive.  The semiconductors and copper drive the broad indexes higher.  President Obama speaks at 1:30 PM which causes markets to sell off slightly, but Senator McConnell provides encouraging words from the Senate floor and the markets catapult higher. The indexes experience the largest up day for the last day of trading in a year ever. Keystone’s SPX 60-minute chart shows the SPX above the 200 EMA signaling bullish markets ahead.  Keystone’s 30-minute chart shows the 8 MA up thru the 34 MA signaling bullish markets ahead.  Keystone’s SPX:VIX ratio moves back above 68 which places the bulls back in the driver’s seat.  The SPX closes at 1426.  The broad indexes move almost 2% higher. The VIX tumbles 20% lower dropping to 18.  Keystone’s trading algorithm, Keybot the Quant, flips to the long side at SPX 1419. The fiscal cliff drama continues into the evening.  The S&P futures are up over 30 handles showing an excitement building in the markets.  Vice President Biden and Senator McConnell work all night and hash out an agreement at 2 AM. Since the House still has to approve the measure, the country is now over the fiscal cliff but tomorrow is the New Year’s holiday offering one day of breathing space.

On Tuesday, 1/1/13, U.S. markets are closed to for the New Years Day holiday. Europe’s ESM is officially open for business but will not be fully operational. The House reconvenes late morning and there are rumblings about the Senate proposal and perhaps some amendments will be added to the Senate bill. Leader Reid says the Senate has gone home and “I’ve already done what I’ve done.” The House approves the fiscal cliff bill in the evening averting the fiscal cliff but the debt ceiling is not addressed. The Keynesian’s win again with both political party’s happily approving higher taxes and more spending driving the country deeper into debt and future disaster. Congress and the president did the absolute minimum amount of work necessary to kick the can down the road again.

On Wednesday, 1/2/13, first Day of Trading for 2013. The fiscal cliff resolution has global markets running higher. China and India PMI Manufacturing data is better than expected further encouraging the bulls. The European markets are up 2%. The S&P futures open and jump up over 20 points. WTIC oil is at 93 and Brent oil at 112 both above their 90 and 110 pivots, respectively.  Markets explode to the upside at the opening bell. The SPX tags 1457 resistance. Lower volatility and stronger commodities and utilities help increase the gains. In the afternoon, Moody’s rating agency says that the U.S. debt may be downgraded due to lack of deficit reduction in the fiscal cliff bill. Traders ignore the warning and pour another glass of liquor instead, running the markets higher into the close as traders that shorted the opening bounce now cover.  The broad indexes set records for a first day of trading with the largest up move in one year.  The SPX is up 36 points, +2.5%, to 1462, above the strong 1460-1461 S/R, and near the highs of 2012. Also within three points of five-year highs. The Dow Industrials are up 308 points, +2.4%, to 13413.  The Nasdaq leads the parade higher, a bullish sign, up 93 points, +3.1%, to 3112. The RUT is up 24 points, +2.8%, to 873. The TRIN was under 0.25, NYAD over an obscene +2600 (a multi-month and year high number that indicates excessive bullish euphoria), TICK printing +1400 numbers over the last two session, and the VIX plummeting from the 20’s to under 15 at 14.68, the sharpest volatility drop in four years. The bull euphoria and buying is at a grand scale. Gold is flat at 1685. The 10-year yield jumps to 1.84%. The bulls start the year with a historic record-setting bullish rally. Despite all the universal bullishness, the euro falls under 1.32.

On Thursday, 1/3/13, the euro drifts lower losing the 1.31 level at 6 AM.  The European markets are negative but to no great extent. Futures are negative but that would be expected after the two-day bull orgy.  Many CEO’s voice disappointment in the fiscal cliff deal since it does nothing to reduce the deficit. The New Congress takes over today. U.S. automobile sales are up with most manufactures beating estimates; the Hurricane Sandy replacements likely provided the extra fuel.  The Nasdaq experiences more trading glitches. The markets are flat and the SPX teases the 1465.77 closing high for 2012. At 2 PM, the FOMC Minutes show that half of the members are concerned about QE and would like to see the bond-buying end in 2013.  This is a big surprise and the 10-year yield leaps above 1.90%. The dollar jumps higher. The SPX drops about 10 handles but recovers. Many traders profess that this signals the end of QE and the exodus from bonds should now begin. The fact is that the Bernanke, Yellen, Dudley and Evans doves run the show at the Fed and they will likely run the printing presses indefinitely, until there are no longer any trees remaining, and probably up thru QE17 when it all falls apart. The Fed minutes add excitement to the afternoon but the broad indexes close flat on the day.

On Friday, 1/4/13, Abe says it is the duty of the BOJ to achieve the 2% inflation goal and beat deflation. Dollar/yen hits 88.18 at two and one-half year highs.  China HSBC Services PMI surprisingly drops. China is touting the “China is the manufacturer of the world” line so that hints that the move to a domestic-led economy in China is likely occurring at a far slower rate than hoped.  The euro is down to 1.30.  The Monthly Jobs Report announces 155K jobs, with a slight revision to last month’s 146K up to 161K, and a tick up in the unemployment rate to 7.8%. Average hourly earnings increased 0.3% which is an encouraging two-month trend that may be developing. However, the 155K number remains shameful, since it does not even handle the new workers entering the workforce let alone the 25 million people in the U.S. that are either unemployed or underemployed struggling each day..The markets move sideways for much of the day. The standard Friday afternoon buoyancy occurs as short traders pare back positions into the weekend. The financials explode higher in a bull feeding frenzy today receiving over a one-half percent rally in the final hour of trading. Traders expect great things from financial earnings announcements in January.  The 10-year yield is 1.91% after spiking up to 1.97% intraday. The euro recovers to 1.3069. Gold drops to 1626 but recovers thirty bucks to 1658 after the precious metals receive a spank down from the FOMC Minutes.  At the close, the SPX squeezes out a five-year closing high at 1466.47. The SPX is not yet above two September-October intraday highs in the 1470’s. The VIX plummets under 14 in a record-setting near 40% drop this week, at levels not seen since the September market top. The bulls came to play this week, aided by a new year with new money coming into the market, as well as the fiscal cliff resolution. For the week, the SPX closes up 4.6%, the Dow Industrials are up 3.4%, the Nasdaq up 4.8% and the RUT up a large 5.7%. Tech and small caps led which is a bullish signal but tech faded late week. The Dow lagging shows that traders want to believe in an up year for 2013 and are chasing into small caps. The headline for the weekend newspapers, cable shows and blogs is written; “SPX Closes at 5-Year High.”

On Saturday, 1/5/13, Fed’s Yellen speaks on the weekend and will likely continue with her dovish talk favoring more future QE and tamping down any expectations in the FOMC Minutes that bond-buying would end in 2013.

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On Monday, 1/7/13, first full week of trading in 2013.

On Tuesday, 1/8/13, NFIB Small Biz Optimism Index.  Consumer Credit.  AA kicks off earnings season. MON earnings.

On Wednesday, 1/9/13, Oil Inventories. 10-Year Note Auction.

On Thursday, 1/10/13, Jobless Claims. Wholesale Trade. 30-Year Bond Auction.

On Friday, 1/11/13, International Trade and Import and Export Prices. WFC earnings important for banks and mortgages. Crop Report. New moon.

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On Tuesday, 1/15/13, PPI and Retail Sales.

On Wednesday, 1/16/13, CPI.

On Thursday, 1/17/13, Housing Starts.

On Friday, 1/18/13, Consumer Sentiment. Three-day weekend ahead.

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On Monday, 1/21/13, U.S. Markets are Closed in Observance of Dr. Martin Luther King Day. Presidential Inauguration.  The president will have the debt ceiling, sequester and continuing resolution hanging over his head as he assumes the oath of office.

In February, the Debt Ceiling hits.

In February, Italy elections.

In February or March, the National People’s Congress convenes.  China President Xi Jinping and Premier Li Keqiang take over complete control and the ten-year transition of power is finished. China now sets inflation and budget targets moving forward. China will push to a domestic-led economy, private consumption, rather than an export-led economy, but a domestic economy will grow at a slower pace.

On Friday, 3/1/13, the Sequester hits with automatic spending cuts for government.

On Wednesday, 3/27/13, the Continuing Resolution is required to fund the government.

In March and April, the BOJ head’s will be replaced so strong QE will likely begin. Perhaps a low in the Nikkei in January or February may provide an attractive entry for a long trade once the money-printing begins (weaker yen).

In September, Merkel (Germany) seeks re-election and will not want to see Greece exit the euro before the election but will not care afterwards. Perhaps Greece and Germany will both exit the euro in the future.