Market Internals

Introduction

When last night's Chinese manufacturing PMI and this morning's two U.S. versions came in stronger than expected, many global equity and commodity traders decided to take profits. Headlines speculated again on the timing of a Fed move to taper the asset purchasing programs.

Yields on ten-year and thirty-year bonds climbed, and homebuilders dropped. A report by the National Retail Federation hit some brick-and-mortar retailers, although WMT recovered from early losses. That report said that Thanksgiving weekend sales were 3.0 percent lower than last year's sales. Some equities and metals retreated under the multiple pressures.

Volume was light today, this first Monday after the Thanksgiving weekend. Markets might have traded Friday, but many traders and investors were just returning to their desks. The SPX dropped 0.27 percent; the Dow, 0.48 percent; and the NDX, 0.19 percent. The RUT fell a harder 1.20 percent, and the SOX, 0.17 percent. The Dow Jones Transports managed a gain of 0.25 percent. Volatility indices were up strongly. Yields on the ten-year and thirty-year bonds climbed, although neither topped their November highs.

Traders dumped metals. Gold futures for February delivery (/GC), currently the highest volume contract, settled at 1221.9, down 28.5 points. Those gold futures settled at a level not seen since early in July. Silver futures for March delivery (/SI), also the highest volume contract, settled at 19.289, down 0.744 points. Copper futures for March delivery settled at 3.1825, down 0.0225 points.

Crude futures reacted differently to the prospect of tapering due to improving economics. Light sweet crude futures (/CL) for January delivery settled at 93.82, up 1.10 points.

Monday's Developments

Today's trading tenor was set last night, with U.S. results then adding to the tenor set by China.

Last night, China's HSBC/Markit November manufacturing PMI measured 50.8, up from the prior preliminary reading of 50.4 and above the expected 50.5. The number was below October's 50.9, however. Markit pointed out that new order growth increased at its fastest rate for eight months, as did output. That new order growth appeared to be supported by domestic demand, boosted by the launch of new products and improved business conditions. Manufacturers trimmed staff, however, although only slightly. That trimming of staff lengthened the backlog of work and slowed the rate of increase in purchasing activity. Costs rose, but producers were able to at least partially pass on the increases to customers.

Geopolitical tensions heightened in the region, however, as Japan reacted to China's assertion of air space rights over contested islands. In addition, riot police in Thailand fired stun guns and teargas this weekend as protestors campaigned against Prime Minister Yingluck Shinawatra.

Asian bourses turned in mixed performances. The Nikkei 225 eased 0.04 percent; the Hang Seng gained 0.66 percent, and the Straits Times added 0.39 percent. China's Shanghai Composite fell 0.59 percent.

European bourses reacted to those influences and more. Most manufacturing PMI numbers released in Europe today met expectations, but the U.K.'s jumped more than expected while Spain's dropped below 50, to 48.6. Italy's PMI also dropped heavily, and France's disappointed. The general interpretation was that the European economy was diverging.

Fitch today said that the rise in bad debt in Portuguese banks would slow next year, and the country's treasury secretary said there was strong investor demand for Portuguese bonds. Of course, how much should we trust the rating agencies such as Fitch, Moody's and S&P? The European Securities and Markets Authority today spoke out against all three for their lack of confidentiality controls and delay in publicizing rate changes.

The FTSE 100 fell 0.83 percent; the DAX, 0.01 percent; and the CAC 40, 0.16 percent. Spain's IBEX 35 dropped 0.79 percent, and Italy's FTSE MIB, 1.52 percent. Why the outsized drop in Italy? Political upheaval again threatened Italy, with the country's president and prime minister today agreeing to call a confidence vote. That vote could be as early as next week.

In the U.S., economic releases began with the Markit Final Manufacturing PMI. Markit headlined the report by noting that, at 54.7, PMI jumped to its highest reading since January. Output and new order growth, at 57.4 and 56.2, respectively, accelerated "sharply," Markit concluded. New export orders and backlogs of work also expanded more rapidly. Stocks of purchases were still in contraction mode, and stocks of finished goods contracted more strongly. At 52.3, employment remained above the benchmark 50 but was described as expanding at a slower rate than previously. Input prices rose at a slower rate while output prices rose at a faster rate.

An hour later, the more widely known Institute of Supply Management released its November Manufacturing ISM report, showing a jump to 57.3 percent, well above expectations of 55.2. As Markit had done, ISM found that new orders and production had expanded. This is the highest PMI reported by ISM this calendar year. Fifteen out of eighteen manufacturing industries reported growth.

ISM also noted inventories and employment growing, with inventories growing at a slower rate and employment expanding at a faster rate. This differed from the Markit survey. The employment component, at 56.5 percent, is the highest reading since April 2012, the ISM noted.

Customer inventories were termed "too low." The backlog of orders is growing. Exports were growing faster and imports, slower. Prices increased but the increase slowed.

These PMI reports turned out to be mostly good news for the economy. They weren't such good news to those who want to see more quantitative easing.

September's Construction Spending had been delayed 31 days due to the government shutdown. That spending dropped 0.3 percent rather than rising 0.5 percent, as expected. That report was rendered old news by the October report that followed closely.

October's Construction Spending jumped 0.8 percent. That was more than the anticipated 0.4 percent gain but was produced by spending in the government sector. Private construction spending decreased 0.5 percent in October, down from the 0.4-percent gain in September.

Moody's weekly Survey of Business Confidence rose to 30.3. The prior number had been 28.7. Moody's repeated the "brighter hue" comment when referring to hiring, which had been a persistent soft spot in the survey for many months.

This weekend, Jim Brown detailed a number of "equity bubble" denials. As if to counter the Fed speakers who had denied the likelihood of an equity bubble, Robert Shiller, famously known for predicting a bubble in the U.S. housing market, spoke to a German publication Sunday. He said that he was worried about a "boom" in the U.S. stock market. He appeared to stop short of calling the equity rally a bubble just yet, but he believes that his cyclically adjusted price-to-earnings ratio could be pointing to the possibility of a bubble.

Story stocks included Amazon (AMZN, 392.30, down 1.32 or 0.34 percent). In this weekend's Wrap, Jim Brown talked about some of AMZN's programs. Last night on 60 Minutes, Jeff Bezos took producers through the research-and-development department to look at drones. Bezos hopes these will, within the next four or five years, be delivering packages of under five pounds to homes and businesses within ten miles of a fulfillment center. He points out that their electric motors mean that they'll use less energy than trucks, and they will not require monitoring like a radio-controlled plane or heli that a hobbyist flies. He said that new rules from FAA addressing such deliveries would not be forthcoming before 2016, at the earliest, so the drone program cannot be utilized before then. A Senate committee will also be reviewing the risks and benefits of unmanned vehicles in U.S. airspace.

Apple (AAPL, 551.23, down 4.87 or 0.87 percent) bought Topsy Labs Inc. for $200 million. Topsy Labs is a social-media analytic company that captures data from Twitter Inc. (TWTR) for analysis of consumer sentiment and popularity of topics and particular items.

Stocks of some healthcare providers such as HUM and WLP showed big green candles today after the end-of-month rollout of the improvements in the HealthCare dot Gov site. UNH also produced a green candle, but that candle was rising from a morning gap lower. Page-response times have been reduced to less than a second with the ability to respond to 50,000 simultaneous users. Up to 800,000 total visits a day can be handled with the site being up and running 90 percent of the time. These are significant differences from the original rollout, techie reviewers noted. November enrollment increased substantially, but enrollment still remains well below forecasts. NBC's "First Read" suggested watching for the big insurers to run more ads on television as a positive sign for the program.

Bank of America (BAC, 15.73, down 0.09 or 0.57 percent) announced a settlement with Freddie Mac (FMCC, 2.59, up 0.18 or 7.47 percent) or the Federal Home Loan Mortgage Corporation. The settlement resolves all issues related to residential mortgage loans sold to Freddie Mac by BAC from January 1, 2000-December 31, 2009. The settlement also covers some past and potential losses due to those loans. BAC pays $404 million, less credits of $13 million, with the payments covered by existing reserves. The agreement does not cover certain exceptions that BAC does not believe material.

Dow Chemical Company (DOW, 39.98, up 0.92 or 2.36 percent) announced that the company would pare away assets representing a major portion of its chlorine value chain, involving about $5 billion in total revenue and approximately 40 manufacturing facilities, 11 sites, and almost 2,000 employees. These are being pared away for future transactions. In addition, the company will shut down about 800,000 tons of chlorine and caustic equivalent capacity in Freeport, Texas, with that capacity to be replaced by the start-up of the Dow Mitsui joint venture, due to come on line early next year.

International integrated steel and mining company ArcelorMittal (MT, 17.29, up 0.12 or 0.70 percent) has joined a consortium buying the ThyssenKrupp Steel USA rolling and coating plant in Calvert/Alabama for $1.55 billion. Nippon Steel and Sumitomo Metal are also part of the consortium. As part of the deal, the consortium has agreed to purchase two million tons of slabs per year until 2019 from ThyssenKrupp CSA in Brazil.

Provider of content delivery and cloud infrastructure services Akamai Technologies, Inc. (AKAM, 44.11, down 0.61 or 1.36 percent) will buy another cloud-based company, security services provider Prolexic Technologies, Inc. for about $370 million. AKAM said the deal will dilute non-GAAP net income per share by about $0.06-0.08 in the first year, but reaffirmed the fourth-quarter guidance. That fourth-quarter report will not include the purchase since the purchase likely closes early next year.

A number of retailers reported after the close. Krispy Kreme (KKD, 24.55, down 0.83 or 3.27 percent) was expected to report earnings of $0.15 per share on revenue of $114.1 million. The company reported adjusted earnings of $0.16 on revenue of $114.2 million, but its guidance disappointed. In after-hours trading, the stock was last at $21.95, down 2.60 or 10.59 percent from the day's close.

Specialty retailer Ascena Retail Group, Inc. (ASNA, 20.88, down 0.42 or 1.97 percent), known for its Justice, Lane Bryant, maurices, dressbarn, and Catherines stores, was expected to report earnings of $0.32 per share on revenue of $1.18 billion. Adjusted earnings were $0.36 per share. The company predicted a challenging retail environment but said that it had been conservative and had "developed promotional contingencies to ensure we end the season clean." The company reaffirmed its guidance for 2014. As this report was prepared, the stock was last at $21.80, up 0.92 or 4.41 percent.

QEP Resources, Inc. (QEP, 32.32, up 0.30 or 0.94 percent) announced after the close that it would split off its QEP Field Services Company and the interest in QEP Midstream Partners. QEP Resources, Inc. characterizes itself as a leading independent natural gas and crude oil exploration and production company. The stock had climbed 5 percent above the closing price at one point in after-hours trading.

Let's look at daily charts. Many indices produced bearish candles today. How bad was the damage?

Charts

Those new to my Monday Wraps might find the following 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 rectangles, usually green for upside and red for downside. Orange rectangles 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 rectangle, 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:

Despite today's uncertainty in some equity classes, the SPX still so far maintains its strongest rally pattern, if only barely. It has been bouncing along the spine of a rising (red) 9-ema. The SPX was due for a retest of the 9-ema and perhaps even of the lower boundary of its smallest (grey) Keltner channel, and today's retreat delivered the 9-ema retest. That lower boundary of its (grey) Keltner channel now coincides with the top of the former rising regression channel.

Currently the SPX seems stuck between presumed strong resistance and presumed nearby strong support on daily closes. The SPX has been producing small-bodied candles in this zone that stretches from about 1,797-1,820, but today's pullback produced a slightly larger candle. What if the 9-ema support holds and the SPX bounces tomorrow? It's not until the SPX sustains daily closes above about 1,820 that we can assume it's broken free of that resistance. No further upside targets are indicated by this daily or the monthly chart. The SPX would be in runaway mode if it broke that direction, according to the Keltner outlook.

If the SPX sustains daily closes below about 1,797, a retest of the lower boundary of its grey Keltner channel may be in store. That boundary might extend anywhere from about 1,775-1,787 by the time it is tested. Bulls looking for a Santa Claus rally would want to see daily closes sustained at or above 1,775, and then they would want to see a quick bounce back above 1,800 and then 1,820. Bulls should be aware that 1,800-1,820 zone might be strong resistance on a bounce after a support test.

Other potential lower targets are marked. They roughly coincide with the midline and lower boundary of the rising regression channel, too.

Annotated Daily Chart of the Dow:

The Dow, too, has been maintaining its strongest rally pattern, skipping higher along the spine of a climbing (red) 9-ema. As long as it's maintaining daily closes at or above that red 9-ema, it's maintaining a potential upside target from about 16,216-16,341. However, keep some skepticism about that target unless the Dow can soon maintain daily closes above about 16,129. Buyers are having some trouble pushing the Dow above that resistance zone, with daily candles again showing some indecision. Today the Dow closed at or slightly below that moving average, having been run lower in the last hours of trading, so that upside target is questionable. This afternoon's support test needs to be followed by either a steadying or a bounce tomorrow to avoid setting a new downside target.

If the Dow should sustain daily closes below today's close and particularly below 16,000, of course, it sets a new short-term potential downside target at about 15,844-15,950. A drop to this level followed by a quick bounce back above the red 9-ema would maintain the bullish case, but a bounce that's stopped cold back at the red 9-ema would not look as bullish.

Other lower potential downside targets are also marked, in case the Dow should fail to find support on tests. The potential support near 15,600-15,724 should be particularly strong because of the historical support that would join the Keltner potential support. Therefore, it's important that this support hold to maintain a short-term bullish outlook.

Annotated Daily Chart of the NDX:

The NDX has been in breakout mode by any standard you want to apply. It's pulled well away from the top of its former rising regression channel. The NDX has also broken out of the Keltner channels on the daily chart and is attempting to do so on the weekly chart, too. It's dangerous to speculate on when that momentum might wane and dangerous to think that it never will. Was today merely a pause or was it the beginning of a deeper pullback?

If the NDX were to pull back again on the first half of this week, support on daily closes might be found from about 3,432-3,465. The NDX, however, often does not stop at the red 9-ema's support once it pulls back that far, instead driving all the way through its smallest Keltner channel to test the opposite boundary. Therefore, it's possible that the NDX could drop all the way to 3,385-3,417 and still maintain a bullish aspect, as long as it's soon back above the top of the rising regression channel. Other, lower potential downside targets are marked in case the higher support does not hold.

Annotated Daily Chart of the RUT:

The RUT's drop was outsized compared to those other indices, and that's a troubling sign to bulls since the hope is that less liquid small caps lead any rally. The RUT had again climbed toward the top of its rising regression channel, but it had again been stalling ahead of a touch of that upper boundary. That channel boundary now crosses near 1,162, but it's likely to be closer to 1,171 by the end of this week. That 1,162-1,171 zone can be presumed to be the potential upside target for the RUT if it can bounce again and then maintain daily closes above about 1,141. The zone from about 1,141 down to about 1,126 is a noisy zone, with zigs and zags within that zone not telling us much about ultimate direction for the RUT. The RUT mostly zagged through that zone today, barely holding its support.

If the RUT maintains daily closes beneath about 1,126, it sets a potential downside target near 1,109-1,117, with Keltner potential support roughly coinciding with the midline of the rising regression channel in which the RUT has been moving. Other, lower potential downside targets are also marked in case higher levels of support fail to hold.

Annotated Daily Chart of the Dow Jones Transports:

The Dow Jones Transports often serve as an indicator index. Especially when this index diverges from the direction of the SPX, OEX and Dow, we should pay attention. Today the $DJT appeared to be printing a strong green candle until it fell back this afternoon, leaving a long candle upper candle shadow or wick. This index is not optionable, so we're not looking at it as a trading vehicle. Even with the potential bearishness of that long upper candle shadow or wick, the $DJT outperformed the other indices. Its composite companies perhaps reacted to those stronger PMI numbers. It might be a good idea to continue watching the $DJT to see if it breaks higher and maintains the breakout or falls back.

There's another indicator index we sometimes watch. That's the VIX.

Annotated Daily Chart of the VIX:

Today, the VIX broke above the descending trendline that had defined short-term tops in recent weeks. The VIX isn't always a perfect market-timing tool, but this index now needs to be on traders' radar screens. Traders need to watch to see if the VIX maintains this breakout attempt and rises further, which would be negative for equities, or drops back again. One caution in drawing too many conclusions about this breakout just yet: the VIX sometimes steadies or rises ahead of important economic releases such as this week's non-farm payrolls, then collapses again after that release.

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 60-Minute Chart of the SPX:

By midafternoon, the SPX had fallen to an intraday low lower than than Friday's. On the 60-minute chart, sustained 60-minute closes beneath about 1,801 set up a potential downside target from about 1,789-1,794. Sustained 60-minute closes above about 1,806-1,807 suggest a potential upside target near 1,810-1,813. Movements that mostly chop around between 1,801-1,807 are possible tomorrow and would not tell us much about next direction. In the case of a breakout on 60-minute closes above the next upside target or below the next downside target, other targets are marked.

Annotated 60-Minute Chart of the Dow:

Today's Dow movements broke the Dow out of that chop zone mentioned on the SPX's 60-minute chart and did set a short-term potential downside target for the Dow. That target stretches from about 15,917-15,974, and would remain in place as long as the Dow cannot sustain 60-minute closes back above 16,043-16,078. If the Dow can push above 16,078 or gap above it tomorrow morning and then maintain closes above it, it erases that potential downside target and sets a new potential upside target near 16,111-16,145. It would not be surprising to see the Dow attempt a bounce tomorrow to retest that 16,043-16,078 zone, but neither would it be a surprise to see it drop right to the already set potential downside target. We just have to see whether support or resistance is tested and how that test ends. Other targets are marked on the chart in case the Dow breaks through the mentioned ones.

Annotated 60-Minute Chart of the NDX:

The NDX drifted lower, creating a flag-like shape that could as easily serve as a bull flag as it could something more bearish. In the last few minutes of the trading day, the NDX tested the bottom of the potential support/chop zone that extends from about 3,475-3,496. Sustained 60-minute closes beneath that zone set a potential downside target of about 3,450-3,460, with lower potential support zones also marked in case the NDX should break through support. If the NDX instead bounces and sustains 60-minute closes above about 3,496-3,500, it is in runaway mode on this 60-minute chart, too, just as it is all the way up through the daily chart. No further guidance in the form of potential upside targets is made available by these charts in that case.

Annotated 60-Minute Chart of the Russell 2000:

The RUT's underperformed the other indices on a Keltner basis, breaking through more layers of potential support. The close beneath the 1,130 level set a potential short-term downside target of 1,119-1,124. That should be strong potential support on 60-minute closes so short-term bulls should be wary if it fails on sustained 60-minute closes.

It would not be surprising to see the RUT bounce up or even gap up to retest or exceed the 1,130-1,133 potential resistance zone, but if it should, resistance from about 1,135-1,142 appears to strengthen, with the red 9-ema likely shoved up to converge with other potential resistance. A new breakout above 1,142 would cheer bulls, but be wary of rollover potential until that occurs.

It is of course just as likely that any early bounce attempt will fail at the nearest resistance and the RUT will roll down to its now-set nearby downside target.

What did we learn today? We learned mostly that the equity markets are susceptible right now to emotion-driven trading. Several indices ended the day with new short-term downside targets, targets that would bring them down to test short-term breakdown levels on the daily charts, too. If the indices fall immediately toward those lower short-term targets, they're in danger of also falling toward lower targets on the daily charts unless they soon bounce back. We know that can happen, so there is little use in making predictions at this point until we see how it plays out, especially since we know that markets are in part reacting to news bites. If the indices bounce tomorrow morning, most will soon face possible resistance on the 60-minute charts, marked and discussed. Early rallies, unless driving strongly through that resistance and holding, should be greeted with at least slight skepticism, especially as long as volatility indices maintain their gains.

The NDX was an exception, not setting new downside targets on either the 60-minute or daily chart, and so perhaps should be watched for further divergence tomorrow morning. The RUT's outsized downdraft today, compared to other indices, is a concern and so is the jump in the VIX and RVX.

Linda Piazza

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