Market Internals

Introduction

Today, volume tracked lower than normal as the East Coast dug itself out from under the weekend's storm. Market participants waited to see what would happen now that earnings season is winding to a close. Many indices showed losses for the day, but small losses that amount to flat-lining rather than a true pullback. New sources reported after-hours that Goldman Sachs send out notes that cut the firm's outlook on global equities to neutral ratings from overweight rating. GS advised that the equity markets needed an opportunity to deal with recent gains, an outlook that many of us would share after watching the unrelenting climb. The firm views any sell-off, should it come, as a buying opportunity.

The SPX lost 0.06 percent; the Dow, 0.16 percent; and the NDX, 0.03 percent. The RUT eased lower by 0.07 percent, but the SOX gained 0.10 percent. The mighty Dow Jones transports pulled back all of 0.04 percent.

Some technology stocks and financials showed strength, but sometimes that strength was only in comparison to the rest of the market. Financials as represented by the BKX gained 0.24 percent, for example. Technology giant AAPL gained 1.04 percent, however, YHOO rose by 1.95 percent, and AOL jumped 7.44 percent.

The NYMEX was also reporting that volume was tracking underneath volume from the last two trading days. Crude futures dipped in early morning trading but reversed into gains when the euro reversed higher, according to the NYMEX commentary. Crude (/cl) closed just off its high of the regular session, closing at 97.01.

Why did the euro reverse higher? Last week, some market watchers had speculated that the ECB would ease at their meeting, an action that wasn't taken. Today, ECB head Jens Weidmann said that the ECB had already stretched its mandate and that no efforts should be made to weaken the currency. In response, the euro strengthened, although it was to drift down off the morning spike almost to its position before that spike. We can look forward to more statement/reaction pairs this week as finance ministers meet.

Metals such as gold and silver futures weakened. Gold (/gc) dropped to an intraday low of 1644.10 and closed the regular session at 1648.90. Silver (/si) dropped to an intraday low of 30.82 and closed at 30.92. NYMEX commentary speculated that gold was losing its allure as a safe haven due to last week's trade numbers in the U.S. and Asia.

Monday's Developments

With Asian markets mostly closed for the Lunar New Year and few economic releases here in the U.S., attention turned to the meeting of Eurozone finance ministers. Of particular concern is the plan for Cyprus. Recent headlines suggested that the plan to stabilize Cyprus would require holders of the country's debt and uninsured depositors in the country's banks to accept losses. Today, the country's finance minister said the Cyprus would not accept losses for uninsured depositors.

In Europe, looming elections in Italy and political uncertainty in Spain add to economic concerns as the Eurozone meeting opened and the G20 meeting approaches at the end of this week. European bourses mostly opened slightly underwater, mostly mounted a recovery into positive territory midday, and mostly dropped off their midday highs, ending with mixed performances. The FTSE 100 gained 0.21 percent; the DAX lost 0.24 percent; and the CAC 40 was flat, up 0.03 percent. Spain's IBEX 35 had a different pattern, however, failing in each attempt to move into positive territory. The IBEX 35 dropped 1.18 percent.

Monday tends to be a slow day for economic releases, and today was no exception. Moody's released the results of its weekly Survey of Business Confidence from February 8. Business confidence rose to 21.5 from the prior 19.3. The four-week moving average has turned up. However, as that moving average approaches 22, it still remains far below its last peak near 25 back in the middle of January. The report's summary still included that the results are "consistent with an economy that is growing at the low end of its potential" statement.

The National Association of Realtors issued its quarterly report on existing-home prices on 152 MSAs or metropolitan statistical areas. The NAR headlined its report with the title "Fourth Quarter Metro Area Home Prices Show Strongest Performance in Seven Years." Prices on existing single-family homes rose in 133 out of those 152 MSA's, the NAR reported. Statistics were gathered from closings in the fourth quarter. The NAR's chief economist pointed to the lowest inventory level in twelve years, pent-up demand, job creation, and continued low mortgage rates as building toward this strong result.

The national median existing single-family home price rose 10 percent from the year-ago level. Sales of distressed homes made up only 23 percent of the sales as compared to 30 percent a year ago. Even with the price increases, low mortgage rates meant that the annual Housing Affordability Index rose to a record high of 193.5, up from the prior 186.4.

At 1:00 pm EST, Federal Reserve Governor Janet Yellen, a voting member of the FOMC, spoke in Washington, D.C. Titling her speech "A Painfully Slow Recovery for America's Workers: Causes, Implications, and the Federal Reserve's Response," she spoke to the AFL-CIO. Audience questions were accepted.

In her prepared remarks, Fed Governor Yellen noted that the Federal Reserve "is the only agency assigned the job of pursuing maximum employment." This task is mentioned as a general goal in a law passed in 1946, but it is surprisingly included nowhere else, including even in the Labor Department's mission statement, she claims. In an argument that I haven't heard posed in just this way previously, she said that the aging of the population has lowered the participation in the labor force, resulting in employment that hasn't needed to grow as quickly to keep up with an expanding potential workforce as it did in the 1970s, for example. During that time, Boomers were expanding the workforce.

Although discretionary fiscal policy has in the past provided a tailwind for recovery in employment, it hasn't performed this same function this time, she said. It has restrained the recovery since state and local governments cut spending and sometimes raised taxes. With looming discussions on spending cuts at the federal level, she expects discretionary fiscal policy to continue to function as a headwind rather than tailwind as it has in other recoveries.

Housing has been another restraint to recovery, when housing has been a tailwind in other recoveries. She also blames a failure to have faith that the economy would soon return to normal.

She outlined the actions the Federal Reserve has taken and said that she believes those actions helped and are continuing to help. She pointed to unusual features of the Great Recession--including the housing crisis--that have meant that lowering interest rates has been less effective in increasing spending than in some other recessions. She warns that the effects of the slow recovery have most harmed those most vulnerable, resulting in a sharp rise in the poverty rate.

The average time to find a new job has risen as high as 20 weeks at some points during the Great Recession, when it was 12 weeks during its worse point in the 80's. Not only is this an effect of the Great Recession; but also, it creates its own headwind to recovery, she pointed out. The Great Recession resulted in a greater number of people suffering permanent job loss rather than being temporarily laid off.

With this background, the FOMC frequently asks whether we must anticipate that "the best we can hope for, even in a healthy economy, is an unemployment rate significantly higher than what has been achieved in the past." If that is so, and if the unemployment is due to structural and not cyclical problems, then FOMC policy would have little effect. Her personal conclusion, however, is that the increase is mostly cyclical, not structural. She cited research that leads her to this conclusion and further stated that a healthy economy will boost demand for labor.

She went on to discuss the 6-1/2 percent unemployment rate that has been much discussed. She clarified that this number and that suggested for inflation are "thresholds," not "triggers" that will result in the FOMC immediately raising rates.

Story stocks included Ford Motor Co. (F, 13.11, up 0.01 or 0.08 percent). Yesterday, the company announced that it would match dealer investments in shop upgrades in 2013 dollar-for-dollar up to $750,000. The company would consider reimbursing dealers for recent upgrades on a case-by-case basis. The match includes funds spent for new construction and other upgrades, but the company hopes that a large proportion of the funds will be spent to enhance the customers' digital experiences. That would include their ability to connect with dealerships via tablet computers.

Market participants debated the particulars of various permutations of a prospective Dell (DELL, 13.70, up 0.07 or 0.51 percent) deal today. A company filing with the SEC today claimed that taking the company private would best serve the shareholder's interests. Jim Brown covered some of the shareholder protests over the proposed buyout price in this weekend's newsletter.

Dell is not the only company considering going private. Some market observers claim that the Nasdaq (NDAQ, 30.38, up 0.91 or 3.09 percent) exchange seriously considers going private. The first contender to bring it private was reportedly the Carlyle Group (CG), although market observers say that talks between the two have currently broken down.

Apple (AAPL, 479.90, up 4.95 or 1.04 percent) made the list of story stocks today, too, as is typical for a Monday. Today's chatter took up from last week's "fight for Apple's treasure," covered in Jim Brown's weekend Wrap. Today saw renewed speculation that the company would soon announce a dividend. However, AAPL has in the past disappointed speculators who bought stop on hopes of an imminent announcement about a dividend. That wasn't the only reason AAPL grabbed attention today, however, as many speculated on pros and cons of the rumored iWatch.

Yahoo (YHOO, 20.90, up 0.40 or 1.95 percent) broke above the 1/29 intraday high this morning, trading at a high of 20.98. That meant that the stock hit a new 52-week high. In fact, it hit a new intraday high not seen since 2008. A second attempt at that 20.98 intraday high in the afternoon fell short, with selling hitting a few cents below that level.

AOL (36.22, up 2.50 or 7.41 percent) was another high flyer in early trading, with investors and/or speculators supposedly encouraged to buy by a boost in a price target as well as recent earnings. Jefferies raised its price target from $44 to $50. AOL still has a long way to go before it hits a new 52-week high, however.

Netflix (NFLX, 177.89, down 3.08 or 1.70 percent) did not share the joy. Today, Starz (STRZA) announced that it would extend its content agreement with Sony (SNE) through 2021 rather than ending it in 2016. NFLX diehards believe that the original content offered through NFLX such as the newly released Kevin Spacey series "House of Cards" will entice and hold NFLX subscribers. Amazon (AMZN, 257.21, down 4.74 or 1.81 percent) also suffered, perhaps due to that STRZA decision.

The New York Post reported that the FCC will hold to the original timetable for Sprint Nextel's deal with Softbank. Sprint Nextel (S, 5.78, up 0.01 or 0.17 percent) said that Nemo caused no major problems with service in the areas impacted by the storm.

Ericsson (ERIC, 12.17, up 0.07 or 0.58 percent) inked a deal with Reliance Communications, a telecommunications service provider in India. The agreement is an eight-year one, with ERIC to manage the day-to-day operations, among other tasks.

Celgene Corp. (CELG, 99.94, down 0.19 or 0.19 percent) announced today that Revlimid was approved for China. The drug is used to treat refractory or relapsed multiple myeloma, a cancer of a type of white blood cell.

Facebook (FB, 28.26, down 0.28 or 1.00 percent) made the story stock list in after-hours trading, when the stock was downgraded and suffered a knee-jerk pullback of $0.50 off the closing level.

HCA Holdings, Inc. (HCA, 36.66, down 0.56 or 1.50 percent) dropped another 0.66 in after-hours trading after the company announced a 50-million share secondary just hours after Morgan Stanley initiated coverage with an "overweight" rating and a $47.00 price target.

Story stocks included those companies reporting earnings today. Lions Gate Entertainment Corp. (LGF, 19.74, up 0.61 or 3.19 percent) also reported after the close and was last at $19.94 or up $0.20 from the close. The entertainment company lists motion picture production and distribution, television programming and syndication, and digital distribution among its businesses, and is the independent studio associated with the Twilight and Hunger Games movies. The company reported an adjusted $0.37/share against expectations of $0.24/share and revenue of $743.6 million versus expected sales of $719.5 million. In the year-ago period, the company lost a cent.

Home improvement and building products company Masco Corp. (MAS, 17.79) reported after the close, and was last down $0.22 from the closing value, at $17.57. No details were available as this article was edited for publication.

LinkedIn Corporation (LNKD, 155.41, up 4.93 or 3.28 percent) jumped immediately after announcing earnings this afternoon, but then dropped back to 155.25 as this report was prepared. Earnings were an adjusted $0.35/share on revenue of $303.60 million. Expectations were an adjusted $0.19/share on $280 million. The company pointed to its hiring services businesses and strong international growth as prompting the beat. The company also guided higher on revenue for the next quarter.

Coinstar (CSTR, 49.25, up 0.78 or 1.61 percent), operator of RedBox DVD-rental kiosks, was reportedly dropping heavily in afterhours trading. My quote sources were not listing an after-hours trading amount, and we know that these can change before the open the next day. EPS of $0.75/share beat expectations of $0.74/share, but revenue of $564.1 million was short of expectations of $577 million. The company's expectations for the next quarter fell shy of expectations.

Let's look at daily charts for some of the major indices. We'll be looking at those daily charts, but I wanted to mention that last week's weekly charts on the SPX, Dow and RUT all produced small-bodied candles with long lower wicks or shadows. When such candles appear, traders are warned to be protective of profits in long positions. Bears are not promised a protracted or immediate turnaround. The bearishness of candles such as last week's weekly candle need to be confirmed by an actual pullback. Recent market actions have shown that when the bearish potential of a certain formation is rejected, it is often rejected quite soundly.

Charts

Those new to my Monday Wraps might find the following two paragraphs useful when interpreting my charts. Those who have read the Wraps can skip straight to the charts. I set up nested Keltner channels on my charts. It's a run-of-the-mill channeling system like the more familiar Bollinger Bands. As with those more familiar BB's, channel boundaries are often targets for upside or downside moves. They also mark levels where prices might find support or resistance on closes. When several channel lines converge, that potential resistance or support might appear stronger, just as it would if 20-, 50- and 100-sma's all converge in one spot.

For the benefit of subscribers, I mark potential upside and downside target/support/resistance levels with ovals, usually green for upside and red for downside. Orange ovals are sometimes used when the darker-colored ones would not allow for a clear examination of the next target. From now on, I will mention the nearest potential support or resistance level in the discussion on the chart, but not the further-out ones. They can be located on the charts if price breaks through the nearest levels on consistent daily closes. If an interpretation such as "support levels appear stronger than resistance, so up looks more likely than down" is possible, I'll tell you. Often we traders must be able to defend our trade against a move in either direction.

As with any type of potential support or resistance, those with profits should be protective of those profits as support or resistance is tested. If prices find support and climb, look to the next higher oval, even one just broken through, as potential resistance. Do the reverse when resistance is breached. Hopefully, this format provides you with the information you need without requiring all night to read as happens when I list each potential support or resistance level individually.

Annotated Daily Chart of the SPX:

Last Monday, the chart setup showed the SPX adhering to its often-employed rally pattern with one caveat. That rally pattern was a strong bounce from a 9-ema test followed by 3-5 days of small-bodied candles moving sideways to sideways-up, followed by another 9-ema test. Last Monday, instead of producing the de rigueur small-bodied candle moving sideways from the prior gain, the SPX and many other indices retreated right back to the 9-ema, reversing the prior trading day's gains. That didn't fit with the pattern, but the SPX did manage a daily close near the 9-ema.

The SPX, along with many other indices, was long overdue for a test of the lower boundary of its smallest grey Keltner channel, still in keeping with an overall bullish pattern. Was last week finally going to be the week that they pulled back far enough to test that channel's support?

Nope. So far, the SPX still produces most daily closes at or above the sharply rising 9-ema. It maintains a potential upside target near 1520-1530. However, the SPX is even more overdue for a test of that lower grey channel boundary's support. While the SPX's pattern follows its rally pattern in the strictest sense, those bunched-up candles just don't engender strong enthusiasm.

Bears need to guard again a potential resistance test near 1520-1530. Bulls need to guard profits against a drop to 1490-1495.

If the SPX should drop to the bottom of that grey channel during this week, that's still consistent with a bullish overall behavior as long as it clears the 9-ema again on daily closes within a day or two. Stalling and rolling over on a retest of the 9-ema suggests that bullish hopes should be tempered until the SPX proves its next direction. In the event of a stall at or underneath the 9-ema, that next direction could as easily be a deeper drop to deeper support as it could be a gap up one fine morning and a move to higher highs. You have your benchmarks. They're not foolproof, but they give you an easy scenario against which to test market action.

Possible other downside targets are marked in case the tenor changes.

Annotated Daily Chart of the Dow:

Same deal with the Dow. The Dow has so far managed to maintain daily closes at or above the rising 9-ema, maintaining a potential upside target near 14080-14160. Bears need to guard against the possibility that the Dow could push right up there any time.

However, the Dow also is long, long overdue for a support test of the lower boundary of its smallest (grey) Keltner channel. Bulls need to guard profits against the possibility that such a test could happen at any time. If so, bulls want to see the support hold at the lower end of that channel on daily closes. Then they want to see the Dow producing daily closes back above the 9-ema within a couple of days, just as it did back in the last similar test in late December-early January. A stall at the 9-ema retest or a rollover suggests caution about the bullish prognosis. It could suggest that a deeper support test is needed, the tenor is changing altogether, or just that big money was going to have to gap prices higher and flush out shorts to cover and send prices past the stall point.

Possible downside targets are marked in case the tenor changes.

Annotated Daily Chart of the NDX:

What can I say about the NDX? There's still no real pattern here, other than another megaphone-shaped consolidation setting up. This action is a sign of instability, emotion-based trading, all those things we've talked about in the past. It's also a sign that we don't know which direction the NDX will break, or even what constitutes a breakout, since it's a widening formation by definition. The NDX could as easily push up to 2795-2815 as it could drop to 2695-2710, and vice versa. The 9-ema is useless as a predictor of next action as long as the NDX chops back and forth across it so easily. If you see a pattern of closes at or above a rising 9-ema or at or below a falling 9-ema, you have a trend. Right now, there's no trend.

Annotated Daily Chart of the RUT:

The RUT's setup is more congruent to the SPX's and Dow's than to the NDX's, with one exception: the RUT has broken out of all but the smallest of the Keltner channels in a momentum run. It's exceeded its primary targets on this chart, with the upper boundary of its smallest (grey) Keltner channel, now near 920, providing the only potential upside target and guide to be watched in that direction.

Just as was true with the SPX and Dow, the RUT is long overdue for a test of the lower boundary of its smallest (grey) Keltner channel. The RUT has a thicket of potential support levels between its current level and that grey channel line near 895, however, and we can presume that it's also got psychological support at 900. When Keltner channels line up like this, one of two things typically is needed to allow such a support retest: time spent chopping around so that the lines separate and the potential support weakens or a hard tumble that slices through potential support.

Once support is broken, it can sometimes then serve as resistance. If the RUT slices cleanly through all that potential support, the lines will not have separated. Here's how that translates into real-world actions: those who waited for a breakout in the RUT above 900 before they piled into small caps may be weak hands who are startled by too sharp a drop, particularly if the RUT heads much below 895. They may be waiting for a retest of 900 to sell, stalling any bounce back up to that level.

Or not. As was mentioned this week, bulls have been rewarded for holding on through thick and thin, and they're not likely to change that behavior until they're hurt by it. However, if a pullback is sharp or if the RUT stalls near 900-905 on a bounce attempt, be cautious about new long bets and protective of prior long profits .

First, we need a pullback before we assess how the RUT reacts after such a pullback. As long as the RUT is still managing daily closes at or above the 9-ema, the pullback is just part of its recent rally pattern.

Annotated Daily Chart of the Dow Jones Transports:

The $DJT has been a canary in the coal mine for us. Back in December, it was showing clean and clear air ahead. The index soared into breakout mode, far exceeding the upside target predicted by its prior rectangular consolidation pattern.

The $DJT is not optionable. We're not watching this to trade it but rather to gain insight into how the economy performs and investors feel. So far, it's still finding support on a sharply rising 9-ema. However, it's more than time for a pullback to the lower boundary of its smallest Keltner channel, now near 5775-5780. Because the $DJT has been on such a momentum run, that's a more than 100-point drop for the $DJT. If that drop should occur, watch how the $DJT's prices behave on retest of the 9-ema for clues about how other indices--especially the SPX, OEX, and Dow--might behave.

This Week's Economic and Earnings Releases

Borrowed from Jim Brown's Wrap this weekend, we see the upcoming events for the rest of the week.

Earnings for Tuesday through Friday:

What about Tomorrow?

Annotated 30-Minute Chart of the SPX:

The SPX continued chopping around in the sideways-down pattern that it had adopted early Friday morning. Prices chop back and forth across the flattening 9-ema, reiterating the lack of a trend. The pattern looks a bit like a bull-flag pullback except that it has extended too long in comparison to the rise that preceded it. About all that can be concluded is that a move up to next resistance marked by a rectangle is as likely as a drop to next support marked by a rectangle, and vice versa.

Further out potential targets and the support and/or resistance they might offer on 30-minute closes are marked. When the SPX is well behaved under rational or normal market conditions, 30-minute closes tend to be contained within the purple channel's boundaries, but that channel can be slanted higher or lower due to price action. On breakout or breakdown moves, the SPX might hit all those potential targets on either the upside or the downside.

Annotated 30-Minute Chart of the Dow:

The Dow's pattern looked a little weaker in comparison with the SPX's. Most 30-minute closes were below the flattening 9-ema today. Still, as a whole, the day's pattern included a sharp drop and then a coiling motion within the first hour's price range. There's not much to be determined with certitude from that pattern. Up is as easy as down, and vice versa. Potential next and further-out targets are marked.

Annotated 30-Minute Chart of the NDX:

Coiling: that's what describes the NDX's action today, too. Investors in NDX stocks attempted to send NDX stocks high enough to break higher from the flag-like pullback from Friday's highs, but the attempt wasn't sustained. A late-day push looks like another breakout attempt and perhaps one that is valid. Or perhaps not. There's nothing definitive here.

As with the other indices, down is as likely a next move as up, and vice versa. Potential next targets are set, with potential support and/or resistance on 30-minute closes at those targets.

Annotated 30-Minute Chart of the Russell 2000:

The RUT coiled beneath a descending 9-ema and above a flattening 45-ema on the 30-minute chart. That jump up to 913-915 looked as likely as a drop down to 905-907 most of the day, and the RUT did a better job of breaking up to reach for the upside target than the NDX did in its late-day push. Barring a sharp move that slices through waiting Keltner targets, resistance and/or support might be found on 30-minute closes at those targets. If not, other potential targets are marked, with the caveat that sharp or prolonged price movement will nudge them in the direction of that movement.

Goldman Sachs had more to say than that global equities needed time to digest recent gains. They don't anticipate a ravaging of equities over this three-month downgrading of their outlook, but their strategists do believe that for both the U.S. and Europe, downside risks remain due to the "sovereign situation." They upgraded their cash position to overweight for the next three months. They still maintained an overweight equity outlook for the 12-month period, contrasting with the downgrade for the shorter-term outlook.

How should you trade this GS call? You shouldn't. It's my belief that almost all of us should have some sort of Armageddon hedge in our long-term portfolios and what that is depends on your age, savings, income and risk tolerance. As for the shorter-term stuff, we've had these benchmarks to watch for quite a while. We can all see that the equity markets need to pull back and digest gains. We've known to follow those benchmarks higher with our stops if we're protecting short-term gains. As for me, if you've been reading these Monday Wraps, you know I think it's way past time for the lower end of those smallest Keltner channels to be retested. It's been time for several weeks now. If such pullbacks occur and go deeper than that, or if prices fail to scramble back above the 9-ema's if they do stop at those first support levels, then I'm going to be cautious about the rally immediately resuming. If the indices reach down to test those lower boundaries of the smallest channels and bounce right back up above the still-rising 9-ema's, I'm going to have to believe that the rally pattern is still being followed.