U.S. traders woke to sharply higher futures this morning. With the NY Empire State Manufacturing Index surprising to the upside, cash equity markets followed through at the open.
Market participants across the globe looked forward to clarity from the FOMC meeting this week. Shortly after the open, the NAHB/Wells Fargo Housing Market Index also surprised to the upside. However, by the time the Housing Market Index was released, gains were already stalling on the fast-moving indicator indices such as the $DJT and RUT.
Perhaps market participants had begun to worry that the strong economic numbers were too strong. Whether those worriers are correct remains to be seen, but they theorized that the better-than-expected economic outcomes put the "sooner, rather than later" scenario for ending quantitative easing back on the table for discussion when the FOMC meets. Those prone to worry were helped along by a Financial Times commentary by economics professor Robin Harding, who posited the theory that FOMC Chairman Ben Bernanke will hint to markets to be prepared for the tapering of Fed bond purchases.
At least that's one theory. What we know for certain is that equity markets pulled back from this morning's resistance tests and fell back into the consolidation zones they've been churning out ahead of the FOMC meeting. Woe to anyone who adjusted early, however, as the late-day action produced big bounces off the day's lows.
What was the end result? By the end of the day, many indices had again produced those small-bodied candles indicative of indecision that we've been seeing so often when resistance is tested. The SPX gained 0.76 percent; the Dow, 0.73 percent; and the NDX, 0.93 percent, but much of those gains were produced on the initial gap higher. The KBW Bank Index, the BKX, gained 0.76 percent. The RUT gained 0.66 percent, and the SOX, 1.46 percent. The Dow Jones U.S. Home Construction Index, the DJUSHB, gained 1.89 percent. The Dow, producing its fifth straight day of triple-digit moves, avoided the small-bodied candle of some other indices, although it left behind an upper candle wick or shadow. Its sister index, the Dow Jones Transportation Index ($DJT), dropped 0.19 percent, however, diverging from these other indices.
Metals also produced small-bodied candles indicative of indecision. Society Generale lowered its gold forecast for the fourth quarter to match that of Bank of America. Both predict that the price will drop to $1,200/ounce. Gold moved lower, but reduced output from Australia may have limited declines. Gold futures (/GC) for July delivery settled at 1383.0, down 4.6. Silver futures (/SI) for July delivery closed at 21.8050, down .1960. Copper futures (/HG) for July delivery settled at 3.1975, down .0040. Meanwhile, crude futures (/cl) closed at 97.81 per barrel, down three cents from Friday's close, on low volume.
On Monday, Goldman Sachs reaffirmed its 17,000 upside target for the Nikkei 225. In overnight trading, the Nikkei 225 reversed early losses and climbed. Many other Asian bourses also produced gains. The Nikkei 225 gained 2.73 percent; the Hang Seng, 1.22 percent, and the Straits Times, 0.70 percent. China's Shanghai Composite, however, slipped 0.25 percent.
Currency moves helped support the gain in the Nikkei 225, with news that the Bank of Japan would likely increase the purchase of Japanese real estate investment funds. The Bank of Japan has already exceeded its previous year-end forecast for those purchases.
Defensive stocks performed best in Japan, however, and, with a close at 13,033.12, the Nikkei 225 remains well below that GS year-end target. The headline number on Japan's Tertiary Industry Activity Index, a leading indicator of economic health, disappointed, measuring 0.0 percent instead of the expected 0.2 percent. However, the prior result was revised all the way from -1.3 percent up to -0.2 percent, a bigger upward revision than the small miss on the current number.
Europe's bourses produced gains as delegates began arriving for the two-day G8 meeting. In Europe, Germany is expected to show strong second-quarter growth. However, Germany's Bundesbank, the central bank, cautioned in its monthly report that Germany's growth might slow this summer. European bourses closed higher, although most dropped off their highs of the day after the U.S. gains stalled. The FTSE 100 gained 0.33 percent; the DAX, 1.15 percent; and the CAC 40, 1.54 percent. Spain's IBEX 25 rose 0.87 percent, and Italy's FTSE MIB, 1.35 percent.
Article writers debated the relevance of this week's G8 meetings, hosted by British Prime Minister David Cameron and held in Northern Ireland. Some felt the G8 meetings were not as relevant to market behavior as the FOMC meeting; some thought more attention should be focused on the G8 meetings than on the FOMC meeting. The influential Mohamed A. El-Erian, CEO of PIMCO, thought the focus should be on the G8 meetings, although he doubted that the meeting's goals would be reached.
Prime Minister Cameron set out what he deemed "modest" goals. One goal was successful negotiations between U.S. and EU on a trade deal that could bring $100 billion into the coffers of both. France wants an exception for audiovisual equipment, and other countries worry about national autonomy, so there was no guarantee that the meetings would end with the agreement in place. Also on the agenda are discussions about closing tax loopholes. The U.S., in particular, wants countries to close loopholes that allow U.S. companies such as Apple (AAPL) and Google (GOOG) to escape paying taxes, charges that both companies dispute. Transparency on who owns what companies is also to be discussed. Other issues certainly include Syria and broader economic concerns.
Presidents Obama and Putin held a bilaterial meeting today. The two countries hold opposite views on how to deal with the situation in Syria, but countries other than the U.S. also oppose President Putin's support of Syrian President Bashar al-Assad. Delegations arriving for the meetings criticized Russia and urged the U.S. to take a stronger stance.
The meeting was variously described as "tense" and "icy," and, as expected, the two could not reach an accord. President Putin said that they were able to reach agreement that both parties in Syria should be brought into negotiations and the violence should stop. President Obama added that both he and President Putin wanted to see chemical warfare stopped.
In other geopolitical news, Yukiya Amano, head of the U.N. nuclear agency warned about Iran's nuclear program. He said the country has been making steady progress. He does not believe that sanctions are working. Hassan Rohani, elected Iran's president last Friday, said today that his government would be more transparent but would not stop enriching uranium. In this weekend's Wrap, Jim Brown detailed the reasons that President-elect Rohani might not have much control over what happens with that program.
The June NY Empire Manufacturing Survey led the list of today's U.S. economic releases, appearing before the open. The headline number surprised to the upside. Consensus had been a rise to a flat-line level after the prior month's -1.4, but the index rose to 7.8.
Details didn't impress, however, and perhaps should not have alarmed the "porridge is too hot" faction. New orders tumbled eight points to -14.5, for example. The Federal Reserve Bank of New York noted that most indicators fell. Shipments were among the declining indicators, dropping twelve points to -11.8. The index for the six-month outlook continued its decline. The average workweek tumbled ten points to -11.3, and the index measuring the number of employees fell to zero. The inventories index fell to -11.3, continuing its decline from the previous three months.
Not all indicators dropped, of course. June's general business conditions index rose nine points to 7.8. It was due to this indicator that the Federal Reserve Bank of New York concluded that that conditions had improved modestly. Prices paid stayed at 21.0, but prices received rose climbed seven points to 11.3.
The Federal Reserve Bank of New York asked supplemental questions about the impact of Superstorm Sandy. Firms in New York City, Long Island, and the Lower Hudson Valley said that their businesses were impacted for up to two weeks, while those in upstate New York said they were little impacted.
At 10:00 am EST, the June NAHB/Wells Fargo Housing Market Index (HMI) measured 52. Industry experts had expected the headline number to inch up to 45.0 from the prior 44.0, so the number was ahead of expectations. As we know from other diffusion indices, any number over 50 indicates expansion. The National Association of Home Builders/Wells Fargo noted that this was the first time the index has measured more than 50 since April 2006. They also noted that the eight-point jump from 44 to 52 was the biggest one-month gain since August and September of 2002. The association expects new home sales to top the 1 million mark this year for the first time since 2007. They affirm their forecast of a 29-percent increase in total housing starts for the year.
The Housing Market Index (HMI) includes three components: current sales conditions, expectations for future sales, and traffic of prospective buyers. All three gained, with gains of eight, nine and seven points, respectively.
Moody's weekly Business Confidence Survey rose to 28.5 from the prior 28.2, reversing a several-week period of declines. The reversal wasn't meaningful yet, as the number squiggles between 28 and 29.1 since dropping off its late March high. Moody's was encouraged that there had been "no spring swoon" or signs of one. Demand for office space remains soft, but other indicators are "consistent with growth at the high end of the economy's potential," Moody's said.
Story stocks included Siemens AG (SI, 106.51, up 1.13 or 1.07 percent), with the company saying it would shutter its solar business. The company had sought a buyer for the business but had not found one.
Boeing (BA, 103.03, up 1.20 or 1.18 percent) will provide nine Boeing 777-300ER airplanes to Qatar Airways in an agreement valued at $2.8 billion at current prices, the two companies announced at the Paris Air Show. Two of those nine planes had previously shown up on BA's orders although their buyers had not been previously identified. The CEO said that he expects a lot of "wide-bodied action" at the air show, but he expects BA to continue to dominate that market. Also at the Paris Air Show, BA's CEO said that the company is confident that the 787 battery problem has been fixed.
General Motors (GM, 33.73, down 0.56 or 1.63 percent) recalled 2006 Chevrolet Trailblazer EXT's and GMC Envoy XL's, and 2006-2007 Chevrolet Trailblazers, GMC Envoys, Buick Rainiers, SAAB 9-7X's and Isuzu Ascenders. The recall was pegged on a problem that can result in a short in the circuit board on the driver's door modules. Fire, smoke, odor, and intermittent or inoperative power door locks and power window switches could result. Today's decline was on low volume.
Terex (TEX, 29.29, down 2.45 or 7.72 percent) lowered guidance for the second quarter. Analysts had expected $0.82/share, but the company guided to expectations of $0.50-0.60, ex-items. The company also guided lower for the year. The company said that it had expected strengthening sales growth but instead had experienced softened sales, especially in construction, material handling and port solutions. Strong performance in sectors such as aerial work platform products and materials processing could not offset the weakness in those other sectors. Europe remains a challenging environment and North America improves at a slower rate. The company denied that the current softening was a sign of a lengthy slowdown.
The company will also offer 28 million common shares. The company additionally announced a new CEO and also revealed that the board is considering various strategies related to Weyerhaeuser Real Estate Company. This real estate development and homebuilding business could be sold or spun off, continue to be held and operated by Weyerhaeuser or merged.
Today, the Supreme Court issued a ruling that impacted Actavis (ACT, 124.94, down 1.51 or 1.19 percent), formerly known as Watson Pharmaceuticals. At issue was an agreement that the generic drug manufacturer had made to postpone the generic version of a testosterone-replacement drug. The FDA does not like such agreements, considering them anti-competitive, but lower courts had not supported the FTC. Today, the Supreme Court ruled that such agreements, known colloquially as "pay for delay" agreements, were subject to court challenges.
Smithfield Foods (SFD, 33.08, up 0.28 or 0.85 percent) has been featured in the Monday list of story stocks in recent weeks, and it's taking its place today, too. The company has informed its board that it wants to explore the option of piece-by-piece sales of the company's disparate operating divisions. The company believed that the previously proposed merger with Shuanghui undervalues the company. They also stated their belief that Smithfield's Hog Production operations "have strategic value to the entire U.S. agricultural sector and global pork supply chain."
After a previously announced outage and startup at its Covington, Va. Paperboard mill took longer than anticipated, Meadwestvaco (MWV, 35.70, down 0.02 or 0.06 percent) guided analysts and investors to expect the profit range for its food and beverage unit to be down year over year. The new range is between $45-50 million. The company said demand was solid in its targeted markets.
Netflix (NFLX, 229.23, up 15.24 or 7.12 percent) announced that, together with DreamWorks Animation (DWA, 23.74, up 0.93 or 4.08 percent), it will develop an original TV series. More than 300 hours of new, original programming will be directed mainly to children and will debut in 2014. The content will be based on DreamWork's characters and animated franchises. The agreement also includes the Classic Media library that Dreamworks owns. You Bullwinkle fans who have subscriptions to Netflix will be happy even if your children and grandchildren are unhappy that Netflix let "Dora the Explorer" license deal with Viacom expire.
Also of interest to storm watchers and those following the crude market was another large area forming over the Honduras and Northwest Caribbean. As of 5:00 pm EST, predictions were that it had a 40 percent chance of strengthening over the next 48 hours, but that it was likely to move into Mexico rather than challenge either the U.S. or U.S. oil or natural gas producing operations.
Let's look at daily charts. We're going to find that last week the indices dipped back into the support zones they had tested the previous week as they continued chopping between support and resistance. I didn't want to clutter my charts, but I could have drawn descending price channels on most of these charts as prices pulled back from May highs. By today, most indices had jumped up to test--or, in some cases--to slightly exceed--the upper boundaries of those declining price channels. None covered here exceeded their last swing highs from last week before pulling back by the end of the day.
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:
For the last two weeks, indices have been chopping back and forth across a flattening red 9-ema. This is visual evidence of a consolidation, a trendless period. Closes above and below those flattening 9-emas are not as predictive of next action as they are during trending periods. All movements between support and resistance, and all daily closes between them, is nothing more than noise.
That's what's happening with the SPX. Currently, prices remain toward the top of that chop zone. However, today's candle was a relatively small-bodied one. Also, it's not until the SPX can maintain daily closes above about 1648-1650 that it convincingly breaks out to the upside. If that should occur, the SPX sets a potential new upside target at about 1658-1672, where resistance might be found on daily closes. If the SPX should sustain closes above that 1672 range, the next resistance test would likely be on the approach to May's 1687.18 high. It's not until the SPX moves convincingly above that May high and sustains closes above it that we can say that it has breached resistance.
Traders must also consider the possibility that the SPX will instead dip to retest support. Support on daily closes is layered within the range of about 1597-1620, with the 1615-1620 zone looking like potentially strong first support on daily closes. Sustained daily closes beneath that 1615-1618 zone are a change in tenor for the SPX compared to its behavior the rest of this calendar year, but support could catch hold anywhere down to about 1597. Daily closes lower than that or even several hours spent lower than that may set a new downside target, from about 1547-1567.
Annotated Daily Chart of the Dow:
The Dow has also created a consolidation zone as it chops back and forth across a flattening red 9-ema. This is trendless behavior, and we can believe neither the zips up to resistance or the drops toward support. It's not until resistance or support is broken that we have a new direction.
The Dow must break through about 15300 on sustained daily closes before it convincingly sets a new upside target, with that target not all that far ahead in Dow terms. It's from about 15360-15470. Resistance on daily closes might be strong in that zone, so bullish gains should be protected in that area. If the Dow should push above that resistance on sustained daily closes, it still might find resistance at May's 15542.40 intraday high. It's not until the Dow produces sustained daily closes above May's high that we can be convinced that it's broken free of resistance.
With the chop back and forth across the red 9-ema, the Dow could as easily head down again. If it does, it targets a zone from about 14840-15015. Support on daily closes might be found in this area, particularly near 15000-15015.
If the Dow should collapse beneath the 14840 zone on sustained daily closes or perhaps even more than a few hours, it sets a potential downside target near 14490-14570. It should be assumed that round number and historical support might kick in near 14400, too, if the Dow slips all the way through the higher section of that support zone.
Annotated Daily Chart of the NDX:
The NDX's behavior echoed that of the other indices, except that the NDX's red 9-ema is still descending. Still, the NDX chops back and forth across it within a (not drawn on this chart) descending price channel, as price does with the other indices.
The NDX also wasn't able to breach last week's last swing high on today's early rise. Since declining off May's high, the NDX has twice retested that 3000 level and has fallen back each time, so that's an obvious potential resistance zone on daily close if the NDX should jump higher. Further potential resistance on daily closes can be found from about 3018-3042, with next resistance above that near the May intraday high of 3053.51. It's not until the NDX can maintain daily closes above that May high that it's climbed free of recent, thickly layered resistance.
As was true with the other indices, the NDX could as easily chop back below the red 9-ema as continue above it. If that should happen, strongest potential support lies from about 2909-2936, a potential downside target for the RUT if weakness prevails. If that support zone fails to provide support on daily closes, support might also catch near 2900. Failure to hold support there on sustained daily closes sets a new downside target from about 2820-2860.
Annotated Daily Chart of the RUT:
The RUT also churns back and forth across a flattening red 9-ema, verifying the impression of chop we get from looking at the chart. The RUT came close to breaking through last week's high of 992.69 this morning, but couldn't manage it on a daily close. If the RUT succeeds in doing so, it sets a potential upside target from about 1000 up to the May intraday high of 1008.23. Resistance on daily closes might be found to be strongest from 1003-1010. It's not until the RUT can sustain daily closes above that resistance zone that we know it's broken free of resistance.
The RUT could as easily drop back toward support as climb toward resistance. The next support zone on this chart lies from about 958-975, with support on daily closes currently looking strongest from about 965-975. If the RUT falls through the bottom of that support zone on daily closes, it sets a new tentative downside target from about 922-936.
Annotated Daily Chart of the Dow Jones Transports:
I've placed an automatically drawn regression channel on the $DJT's descent off May's high. We can see that the Dow Jones Transports have tried both Friday and today to break up through the top of that descending price channel, with both attempts rebuffed.
The Transports serve as a good indicator index. They, together with the RUT and, sometimes, the financials, tend to lead to the upside or the downside. They're not leading to the upside, not even after today's economic results, but neither are they leading to the downside. For now, they show the same indecision depicted on other charts.
Tomorrow's Economic and Earnings Releases
This week's important economic events are carried forward from Jim Brown's weekend Wrap.
What about Tomorrow?
Annotated 30-Minute Chart of the SPX:
On the thirty-minute chart, the SPX's morning high challenged potential resistance on 30-minute closes, pushing the purple channel's upper boundary higher but not managing to break out above that potential resistance. In the afternoon, after a successful red 9-ema support retest, the SPX rose again, but it was to be rebuffed again, falling to the next potential support zone indicated on the 30-minute chart. It was churning on this chart as well as on the daily chart.
Unfortunately, not until the SPX breaks above the resistance near 1646-1650 or below the support near 1615-1625 on sustained 30-minute closes do we know that it's breaking out of the churn zone. It's likely to get harder to make predictions tomorrow. Just in case, next potential downside and upside targets are marked. They're marked with rather wide rectangles because all the churning can move the dynamic Keltner levels more than is typical.
Annotated 30-Minute Chart of the Dow:
The Dow also tested the upper boundary of a Keltner channel this morning, pushing it slightly higher without producing 30-minute closes above it. After a fall back to support, the Dow rose again in the afternoon, but that second push was also destined to be short-lived, as it was with the SPX.
As with the SPX, the Dow churns back and forth from one support or resistance zone to the other without the moves being predictive of next direction. Unfortunately, it's not until the Dow breaks above resistance from 15270-15300 or below deep support near 15000-15030 on sustained 30-minute closes that we have a sounder prediction that resistance or support has been broken.
Just in case, potential support and resistance zones within the churn zone are marked, and so are potential next targets if the Dow breaks out. Those potential upside and downside targets are marked with wide rectangles. That's because the volatile churn moves the dynamic Keltner lines and a rapid move on a breakout or breakdown would move them more.
Annotated 30-Minute Chart of the NDX:
The NDX pushed against an upper Keltner channel boundary all morning, pushing it higher than its 2978 level at the open. The NDX held onto its resistance test longer than many indices, but still wasn't able to sustain 30-minute closes above that resistance during the push that extended into early afternoon. Then the NDX tumbled back to support along with other indices.
Unfortunately, it's not until the NDX breaks through potential resistance from about 2985-3000 or below potentially strong support from 2930-2940 on sustained 30-minute closes that we have anything other than churn. If such breakouts occur and are sustained on 30-minute closes, the next outer potential target is set. Those targets are wide for the same reason they're wide on other indices: the volatile churn has widened them, and a breakout that might be accompanied by a strong move would push the Keltner lines even more in the direction of the move.
Annotated 30-Minute Chart of the Russell 2000:
The RUT also pushed against potentially strong Keltner resistance this morning, but it appeared to drop back more quickly than the other indices when we view this action on a Keltner perspective. It never closely approached that Keltner resistance again before it tumbled lower into next potential support.
Unfortunately, not until the RUT breaks above the resistance near 992-994 or below the support near 976-978 on sustained 30-minute closes do we know that it's breaking out of the churn zone. The RUT churns back and forth across various presumed historical, trendline and Keltner support levels without any meaningful prediction attached to such movements. It's likely to get less predictive tomorrow. Just in case, next potential downside and upside targets are marked. They're marked with rather wide rectangles because all the churning can move the dynamic Keltner levels more than is typical.
Today indices produced the type of candles we would expect to see if resistance were strong enough to repel price action. Normally, we would then expect a fall back to retest support. By tomorrow, however, market participants will be gaming their view of what will or won't appear in the FOMC's statement the next day. Under such conditions, scenarios built on candle shapes, normal relationships to moving averages or other such technical analysis proves less predictive of actual outcomes.
The chop zones increase the confusion. We can't assume that the pullbacks from May highs are the beginning of a summer swoon. They could as easily be bull-flag type pullbacks such as the rather violent one from late February into the middle of March. Prices could break higher out of those flags at any time.
Neither can we assume that these are bull flags and not the beginning declines of a summer swoon. Don't put more money at risk than you feel comfortable defending. This is not the week to dramatically size up on your weekly trades, for example.