Market Internals

Introduction

Long ago, the group Blood, Sweat and Tears released a song, "Spinning Wheels," that began with the assertion that "what goes up must come down." That song played through my head this afternoon as I counted the number of up days produced without even a minor pullback.

What's going to propel prices higher without first having a pullback to confirm support? A buying crescendo could do that, and just such a crescendo could be delivered by got-to-get-in buyers after today's new record closing highs on the SPX, Dow, and RUT. The Nasdaq Composite reached levels not seen since September, 2000. In addition, a buying crescendo could be delivered by something said in testimony by Fed Chairman Ben Bernanke later this week.

However, charts suggest that such a buying crescendo will be necessary to drive the indices much higher. Based on the number of days of gains since the June low and other evidence, it's soon going to be time for a pullback. In truth, the charts are ripe now for a pullback.

What's happening that drove the indices higher on a day like today? It's not economic growth. Today, perhaps in response to retail sales and inventory numbers, Goldman Sachs cut its estimate for the US second-quarter GDP. The firm reduced its GDP estimate to 1.0 percent from the prior 1.3 percent.

Despite the new records achieved today, gains were not generally large. The SPX gained 0.14 percent; the Dow, 0.13 percent; and the NDX, 0.03 percent. The RUT gained a larger 0.64 percent, but the SOX dropped 0.06 percent. The transports gained 0.50 percent, and the financials, as represented by the BKX, rose 0.33 percent. The homebuilders, as represented by the Dow Jones US Home Construction (DJUSHB) Index, did not fare so well. This index dropped 3.16 percent. Curiously, the RUT's volatility index, the RVX, gained today, while the VIX and VXN eased. Perhaps we should watch the RUT closely the next few days.

The dollar futures (/DX) and ten- and thirty-year yields showed similar patterns today. All three jumped higher at the open, but then trended down during the day. Most dollar-denominated commodities took the opposite path, dipping at the open and trending higher during the day. Crude(/CL) for August delivery settled at 106.32, up 0.37. Gold (/GC) for August delivery settled at $1283.50, up $5.90. Silver (/SI) for August delivery settled at 19.830, up 0.48. With China consuming 40 percent of the world's copper supply and with China's GDP at least meeting expectations, copper (/HG) for August delivery settled at 3.1490, down only 0.105.

Ahead of FOMC Chairman Ben Bernanke's two-day testimony beginning Wednesday, ten- and thirty-year yields dropped today. Someone expects some dovish talk during that testimony. Dollar futures followed the same pattern as the yields, jumping higher in the morning and then trending down through the day.

Monday's Developments

As Jim Brown suggested would happen, China's second-quarter GDP was closely watched after this weekend's "6.5 percent" comment from Chinese Finance Minister Lou Jiwei. For those who might have missed this weekend's Wrap, most market watchers had expected China's GDP to indicate 7.5 percent growth. The finance minister's suggestion of 6.5 percent growth this weekend shocked those trying to accommodate themselves to a Chinese economy growing only 7.5 percent.

By Saturday, China's official news agency had corrected the finance minister and said he had misspoken and meant 7.5 percent. Did anyone doubt then what the number would be? China reported its GDP at 7.5 percent. A number that would have proved sobering last week now was converted to a relief.

Growth was characterized by China's government as "stable and moderate." Policies are "centered on improving the quality and efficiency of economic growth," the government release commented, with government policies aimed at reforms that will build in the potential for economic growth. The government reported year-over-year growth in all 41 industrial divisions, but profits were a different matter. In the first five months of the year, profit increased in 33 out of the 41 industrial divisions, but fell in 6, with one division suffering less losses and another turning losses to gains in the government's summary of events. Output increased in only 325 out of 464 kinds of industrial products. This information came straight from a perusal of the government's summary, with a Reuters article later deeming this a "minor undershoot" of production expectations.

Retail sales proved better than many experts had anticipated, however. They grew 12.7 percent, 0.3 percent more than in the first quarter. Retail sales were, however, 1.7 percentage points lower than in the year-ago period. Sales of motor vehicles and furniture were both lower than in the year-ago period, but sales of household appliances and audio-video equipment were higher.

Many experts across the globe have been watching electrical usage in China, and the government reported that number first in the summary: electricity rose 4.4 percent, the government said. The growth rates of both imports and exports declined, with the larger decline in exports. The year-over-year growth of imports and exports was 8.6 percent, 4.9 percentage points lower than that seen at the end of the first quarter. Year-over-year growth in exports was 8 percentage points lower than that seen at the end of the first quarter. Producer prices again declined. Income rose, with rural residents seeing a higher growth in their incomes. Money supply was characterized as seeing "relatively high growth."

Another China development occurred over the weekend. China's regulators almost doubled the qualified foreign institutional investment quotas. Most commentators interpret this change as showing that the regulators seek more capital inflows into the country. Increases in these quotas often produce jumps in the Shanghai Composite. Of course investment in China produces its own risk, including those experienced by four employees of GlaxoSmithKline PLC, arrested today in China in a bribery probe.

How did Asian bourses react? Not all Asian bourses were open last night. The Nikkei 225 was shuttered for a holiday, but the /NKD futures are currently higher. The Hang Seng rose 0.12 percent, and the Straits Times, 0.02 percent, but the daily candle shapes on these indices showed indecision or even bearishness. Their highs were achieved early in their sessions, and prices declined from there. China's Shanghai Composite gained 0.98 percent. The Shanghai Composite closed nearer the middle of its day's range than the top of the day's range, also producing a daily candle that showed indecision.

European bourses dealt with the ramifications of China's news as well as news out of Spain. Spain's economy minister said this weekend that Spain is out of recession, but the IMF said the risks to Spain's economy and banking system remain elevated. Of special interest to active traders is the IMF's conclusion that new transaction taxes in France and Italy have reduced the number of transactions. The FTSE 100 gained 0.65 percent; the DAX, 0.27 percent; and the CAC 40, 0.61 percent. All were off their day's highs, however. Spain's IBEX 35 gained 0.13 percent, and Italy's FTSE MIB, 1.08 percent.

In the U.S., early economic reports showed mixed results. Those economic reports included the July NY Empire Manufacturing Survey, surprising to the upside. Economists had expected the headline number to slip to 5.0 from the prior 7.8, but instead it zipped up to 9.5. The Federal Reserve Bank of New York concluded that conditions had modestly improved except in the labor market, where indices were mixed and little positive momentum was noted. New orders, shipments and the number of new employees rose, but the average workweek was still well below the zero benchmark, at -7.6. Prices paid fell to 17.4, and prices received slipped ten points to 1.1, not so far above that zero benchmark. Companies showed more optimism about future conditions, with that component rising seven points to 32.0. When narrowed down to the employment component, however, future employment indices indicated little change was expected.

The Federal Reserve Bank of New York questioned companies about their response to the Affordable Care Act. About 75 percent responded that they had not made and did not plan to make any changes in their healthcare plans. Only about 15 percent responded that they would outsource more work, but a majority believed that it would increase their health insurance costs.

The Advance June Retail Sales were reported as the same time as the NY manufacturing results, but that result disappointed. Experts had predicted a 0.7-percent rise in sales, measured against a prior gain of 0.6 percent. Instead, overall retail sales measured only 0.4 percent growth, and the prior number was revised lower to 0.5 percent. The broad motor vehicle and parts dealers category produced the strongest results. That category increased 7.2 percent from the year-ago level, and narrowing down to auto and other motor vehicle dealers showed their sales rising 8.3 percent over the year-ago level.

Some experts pegged the disappointment in the headline number on lower spending at restaurants and building materials outlets. Among the different categories, electronics and appliance store sales for the half year slipped 0.8 percent from the year-ago level, and department store sales declined 4.9 percent from the year-ago level, but other categories were all higher than the year-ago retail figures.

Core retail sales also disappointed. This figure strips out the automobile sales, sales that had kept the overall retail sales from disappointing more than it had. Core retail sales were expected to show a 0.5 percent gain but instead were flat.

Later in the morning, the U.S. Department of Commerce reported May's Business Inventories rising 0.1 percent from April's number. Experts had expected inventories to remain the same after 0.3-percent growth at the prior report. Sales rose 1.1 percent. The total inventories/sales ratio measured 1.29, dropping from the prior 1.30. Markets liked the results, with index performances improving after the release.

Moody's weekly Business Confidence Survey rounded up the list of economic reports. Reported at 28.8, the number jumped back above the 28 prior support base. This volatile report so far stays in a pattern of lower higher off the spring levels. It won't take much of a gain to break that pattern now, however.

Companies reporting earnings today included Citigroup (C, 51.81, up 1.00 or 1.97 percent). As Jim Brown noted in this weekend's Wrap, financials are the category of companies expected to produce the best earnings results this earnings cycle, but C has exposure to Europe and emerging economies, as does Morgan Stanley. That exposure focused concern on what C might report.

C beat expectations on both earnings/share and revenue. The company reported earnings of $1.25/share and revenue of $20.5 million, with expectations of $1.18 and $19.79 billion, respectively.

C notes that the increase in earnings was propelled by higher revenue and lower net credit losses--decreasing 25 percent--but hurt by higher legal and related costs and a lower loan loss reserve release. That does not mean no loan loss reserve release was applied in the kind of accounting trick that Jim Brown mentioned in the weekend's report. C released $784 million. That's just less than the $1 billion release applied in the prior year-ago period. In addition, those legal costs include $1 billion to Fannie Mae to settle claims related to bad mortgages sol to FNMA. BAC's settlement was a much larger $10 billion.

C's international revenues had been of some concern. They grew 6 percent when compared to the year-ago level, however, and 5 percent on a "constant dollar basis," helped by 8-percent growth in Latin America. Higher international revenues were undermined by a one-percent decline in revenues in North America GCB, however. In North America, lower mortgage origination and servicing revenues had been balanced against a gain from the sale of a mortgage portfolio. The company said that retail banking revenues would likely continue to be hurt by lower mortgage original revenues and spread compression. Total card revenues on Citi-branded cards and Citi retail services were flat, the company said.

Other companies reporting earnings included JB Hunt Transport Services (JBHT, 76.22, up 0.49 or 0.65 percent). Companies in the transportation business have much to tell us about the health of the economy. The company disappointed, reporting $0.73/share and revenue of $1.38 billion, against expectations of $0.74/share and $1.4 billion, but market participants liked something about the report.

Commercial Metals Company (CMC, 14.96, up 0.14 or 0.94 percent) reported. The company reported net income of $18,964,000, measured against $4,577,000 in the prior quarter.

Cintas (CTAS, 47.88, down 0.12 or 0.25 percent) dropped in after-hours trading. Revenue appeared to meet expectations of $1.13 billion, but earnings per share looked to be a penny short, if various sources were comparing apples to apples. The company is known for its design, manufacture and implantation of corporate identity programs.

Brown & Brown (BRO, 33.79, up 0.03 or 0.09 percent) jumped in after-hours trading after reporting earnings. The company reported earnings of $0.36 per share on revenue of $325 million.

After the close, Occidental Petroleum Corp. (OXY, 90.51, up 0.29 or 0.32 percent) announced an offshore deal with Qatar. The company will invest more than $3 billion to develop the next phase of the development of an offshore field where the company has already begun work.

Various downgrades and upgrades appeared to impact some stock behavior. Yelp (YELP, 38.67, down 0.73 or 1.85 percent) fell after a downgrade from a UBS analyst. NetApp Inc. (NTAP, 40.10, up 0.80 or 2.04 percent) rose after a Morgan Stanley upgrade.

Consol Energy Inc. (CNX, 28.07, up 0.40 or 1.45 percent) offered production guidance today. The gas division's 38.6 Bcfe is consistent with guidance previously offered, the company said, with well completions to be weighted toward end of the year. The coal division's production was above prior guidance, but prices weakened during the quarter for the low-vol coking coal from the Buchanan mine. Thermal coal inventory decreased with customers taking all the coal they had been contracted to take. Third quarter gas is expected to increase 14 percent when compared to the second quarter, to 43-45 Bcfe. Total coal production for the third quarter is expected at 13.4-13.9 million tons. The company also initiated its 2014 production estimates.

Krispy Kreme Doughnuts, Inc. (KKD, 20.19, up 0.09 or 0.45 percent) announced that its board had approved an increase in its credit line to $40 million from the prior $25 million, as well as a $50 million stock buyback. The company also reaffirmed its prior guidance or $42-45 million for the fiscal year ending in February. That's above the average $38.5 million predicted by analysts following the company, but, again, in line with prior guidance by the company.

Three stocks had been in the news late last week and over the weekend. Boeing (BA, 105.66, up 3.79 or 3.72 percent) rebounded today on more than double the average daily volume. This occurred after the initial investigation into a fire in London on a 787 Dreamliner found no indication of battery problems. Leap Wireless (LEAP, 16.95, up 8.97 or 112.41 percent) bounded higher after AT&T's takeover bid, reported in this weekend's newsletter. Alexion Pharmaceuticals (ALXN, 107.93, down 6.33 or 5.54 percent) had zoomed higher Friday on hopes that Roche Holdings acquire the company. However, over the weekend and today, investors or momentum players apparently questioned how likely the deal would be, helped along by nay-saying industry analysts. The stock retreated off Friday's high.

Rumors circulate that Verizon (VZ, 49.96, down 0.45 or 0.89 percent) may not be selling as many iPhones as it thought it would. Verizon declined, but Apple (AAPL, 427.44, up 0.93 or 0.22 percent) continued higher. AAPL's climb was on approximately half the average daily volume, however.

Let's look at the daily charts. If the indices ever succumb to the "what goes up must come down" assertion of Blood, Sweat and Tears, how low would they likely go?

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:

Once indices broke up through descending trendlines from the May highs, they converted those trendlines to likely support on any downturns. Indices have driven so far above those trendlines, however, that we must look at the possibility that higher support will be found before those trendlines could even be tested.

In strong rallies, first potential support on pullbacks is typically found at the red 9-ema, with that moving average for the SPX likely located somewhere from about 1643-1658 if it's tested sometime in the next few days. Bulls would want to see daily closes maintained at or above that average and then a bounce higher from there. Failure to hold daily closes at or above a rising 9-ema suggest a decline to about 1610-1628 is possible. No damage to a bullish pattern is done if support on daily closes is maintained at that level and the SPX soon scrambles back above the red 9-ema and posts new highs. However, a deeper decline or another rollover under the 9-ema sets up the next potential downside target and undoes the bullish tenor.

We can't presume that the SPX will decline immediately into a 9-ema test, of course. By any count you might perform of higher closes in a row or since the June low; green candles in a row or since the June low; or record days (candlestick theory) since the June low, common sense and probability suggest that it's time for the retreat right now. The SPX ended the day jammed under potential resitance.

However, that's exactly what could propel the SPX higher, if higher prices force shorts to cover and offer the propellant to a buying crescendo. Reason and the Keltner charts tell us that the SPX would be likely to find prohibitively strong resistance on daily closes from the current level up to about 1695, but does anyone doubt the seductive qualities of another siren call up to the next round number, 1700?

Probability suggests a new breakout shouldn't happen before a support test. Probability isn't enough to be certain that it can't. Trading for more than a few hours at or above 1700 might propel whatever hapless shorts or as-yet-uncommitted longs there happen to be left to buy.

Annotated Daily Chart of the Dow:

The Dow's setup is similar, and we know that this narrow index can be driven here and there easier than the broader SPX. Let's talk about what would normally be the most probable case first. It's time for the Dow to pull back into a 9-ema retest, with the 9-ema perhaps anywhere from about 15254-15360 by the time it would be tested over the next few days. In strongest rallies, the Dow would find support there and bounce. A failure to find support on daily closes at the 9-ema sets the potential for a decline to 15000-15130 to test Keltner and trendline support. Sustained daily closes at or above that trendline do not unravel the bullish case as long as the Dow scrambles back above the 9-ema and then soon posts new highs. However, a failure to maintain daily closes at or above the former descending trendline off the May highs or another rollover beneath the red 9-ema sets the next marked potential downside target and unravels the bullish case.

As was true with the SPX, we can't ignore the possibility for further gains before a pullback to the 9-ema. The Dow's setup looks as if the range from 15477-15630 could be prohibitively strong resistance on daily closes, and resistance faced after a long string of gains without appropriate pullbacks. The Dow, of course, is already testing that zone. That's why shorts might be tempted to fade the current move and could be surprised into covering if prices are sustained above May's 15542.40 high for more than a few hours. Bulls discouraged by waiting for a dip-buying opportunity might help shorts fuel further gains. A buying crescendo can't be ruled out, but probabilities tell us to expect at least a modest pullback soon.

Annotated Daily Chart of the NDX:

The NDX shows us a picture of what can occur when prices leap above a presumed strong resistance area, prompting strong price gains. In the process of breaking above the May high and a concurrent Keltner channel high, the NDX has set a potential upside target of about 3100-3128.

However, the NDX, like the other indices, has produced many days of higher closes, green candles, and record days in a row with only minor interruptions since the June low. As is true of the other indices, it's time for the NDX to retreat and retest support. That doesn't mean it will happen, as a buying crescendo could send prices up to that next upside target.

On the event of a pullback that begins in the next day or two, first support might be found in the vicinity of its May intraday high of 3053.51 down to about 3028, the top of its gap higher in early July. If that support should fail on sustained daily closes, potential historical and Keltner support on daily closes might be found from about 2990-3018. A failure to sustain daily closes at or above either of those zones targets the former descending trendline off May's high.

Annotated Daily Chart of the RUT:

Here stands the RUT as the poster child for runaway prices. The RUT is on a momentum run, outstripping historical and all Keltner upside targets up through the daily chart. I have not shown the weekly chart, with a potential new upside target there near 1076-1080 as long as the RUT maintains weekly closes at or above about 1000. However, even on the weekly chart with that next potential upside target already set, the RUT is butted up against potentially strong resistance on weekly closes.

It should be time for a RUT retreat to retest the levels it broke through, to establish whether they're now support. Potentially strong support on daily closes now exists from about 1016-1033, and then from about 998-1012. If the RUT dips to 1000 before finding support on daily closes and then bounces, short-term bulls should be cautious with profits as the 1020-1033 zone is again approached. Its resistance could hold on a second test.

Failure to find support on daily closes at 998-1000 targets the former declining trendline off the May high.

There's nothing to keep the RUT from continuing to climb. There's nothing, that is, except the fragile, gapping structure it's built zooming higher without even minor pullbacks to support. Perhaps we should fear a buying crescendo with this index, too, but with both the NDX and RUT, I wonder if we haven't already seen at least a portion of such buying crescendos playing out. Now even the strongest bull should want to see some consolidation and testing of support.

Annotated Daily Chart of the Dow Jones Transports:

The DJT is not echoing the wild abandon of its sometimes runaway mate, the RUT. It's not leading to the upside, even underperforming by Keltner standards its sister index, the Dow. Moreover, when I check the index of their third sister, the Dow Jones Utilities, this normally defensive sector is zooming higher from its June swing low. So far, the Transports signal nothing more than some caution about jumping on that celebratory bandwagon, but keep it on your radar screen and maybe consider adding the DJU to that radar screen, too. This normally defensive sector certainly is bouncing strongly.

Tomorrow's Economic and Earnings Releases

This week's important economic events are carried forward from Jim Brown's weekend Wrap.

Companies reporting earnings tomorrow include CMA (BMO), CSX (AMC), GS (BMO), IBKR (AMC), JNJ (BMO), KO (BMO), MOS (BMO), SCHW (Time Not Supplied), URI (AMC), and YHOO (AMC).

What about Tomorrow?

The indices have outstripped 30-minute targets, so all intraday charts will be 60-minute intraday charts. Most of these indices have developed a pattern of 60-minute closes at or above their red 9-ema's, so that should be the first marker to determine whether there's been any change in tenor.

Annotated 60-Minute Chart of the SPX:

The SPX has been producing those 60-minute closes at or above the 60-minute chart's red 9-ema since the afternoon of Tuesday, July 2. Those wanting to see a change in the tenor will want to see that pattern change. With potentially strong support ranging down to about 1670, those wanting a change in tenor would like to see a further weakening, with closes sustained below 1670. They want to see weakening persist long enough to flatten the 9-ema and then turn it lower.

Subsequent potential downside targets are marked in case such weakening should develop. As long as the SPX maintains 60-minute closes at or above a climbing red 9-ema, however, it maintains a potential upside target from about 1684-1690, with the SPX reaching the bottom of that potential resistance zone today. The top of that zone could easily be pushed higher, toward or even slightly beyond 1700, by a strong or prolonged move upward.

Annotated 60-Minute Chart of the Dow:

The Dow hasn't done quite as good a job of maintaining 60-minute closes at or above its red 9-ema, but most closes since the afternoon of Tuesday, July 2 have been above that moving average. That moving average serves as a benchmark for short-term changes in tenor for the Dow, too. Sustained 60-minute closes beneath that benchmark, then confirmed by a drop below 15400, set a new potential downside target from about 15300-15325. Subsequent potential downside targets are also marked.

Without those sustained 60-minute closes beneath the red 9-ema and maybe beneath 15400, however, the Dow maintains a potential upside target near 15600-15640. That potential target can easily be pushed even higher by a strong or sustained move higher.

Annotated 60-Minute Chart of the NDX:

Since the afternoon of Tuesday, July 2, the NDX's 60-minute closes have been climbing the spine of the red 9-ema. That moving average is now the benchmark for any change in tenor, with the potential support of that benchmark now joined by other potentially strong support now grouped down to about 3063. Look to the daily chart for new upside targets if the NDX continues to skip along the spine of a rising 9-ema.

If, however, the NDX should break through that support down to about 3063 on 60-minute closes, it sets a potential downside target from about 3040-3054. If the NDX should break lower and test that 3040-3054 range and then bounce back toward the red 9-ema, bulls should be protective of profits when the NDX again approaches 3060-3070. Rollover potential might be found there on a retest from the underside.

Any sustained 60-minute closes beneath 3040 target the next potential support grouped around 3020. That includes gap support.

Annotated 60-Minute Chart of the Russell 2000:

Like the NDX, the RUT has broken out into a momentum run. It's broken through the upside targets on all the intraday charts through the 60-minute chart. The 60-minute red 9-ema has been bouncing the RUT since the afternoon of Tuesday, July 2, just as it's done with other indices. That moving average can serve as the benchmark for determining any change in tenor in the RUT, too. As long as the RUT sustains closes above about 1036-1037, there's no change in tenor. In that case, the only upside potential target we have is that provided by the weekly chart, mentioned earlier. I would not count on the weekly target being met without any interim pullbacks, however.

If the RUT breaks below the red 9-ema on 60-minute closes, the next potential downside target is from 1027-1032. If the RUT hits that level and bounces, bulls in short-term trades should guard profits on bounces back to the red 9-ema. That moving average could be resistance on 30-minute closes if retested from below.

Sustained closes beneath about 1027 target 1020-1022.

Tomorrow? Tomorrow will likely be about positioning ahead of Wednesday's testimony unless GS's earnings shock or the slew of economic numbers out of Europe about 5:00 am tomorrow morning change the tenor of trading. We'll see who fears the Fed the most, bulls or bears, and I'd be guessing to predict which that will be. Emotion-based trading can take markets almost anywhere or stall them in their tracks with escalating implied volatilities.

Watch that 60-minute 9-ema, easy to place on your own charts, as a benchmark. Bounces from a rising 9-ema mean the bullish tenor is still in place. Chop that travels back and forth across a flattening 9-ema signal indecision, and the eventual breakout could be in either direction. Declines under a sloping-lower 9-ema means we're seeing a first and tentative sign of a change in tenor.