Market Internals

Introduction

Today marks the 100th birthday of the Federal Reserve, established after the disastrous Panic of 1907. Some historians believe that John Pierpont Morgan's actions in drawing together a coalition of stronger banks that could guarantee the deposits of weaker banks saved the U.S. from financial collapse during that panic. Afterwards, an effort was made to formalize the role that Morgan had taken upon his shoulders during the panic. People can argue and have argued over the history, Morgan's role, and the benefits and dangers of the federal reserve system then and now, but today marks its 100th birthday.

Perhaps as its founding was commemorated, it was appropriate that the Federal Reserve today proposed restrictions on its ability to be the lender of last resort. These restrictions proposed today are meant to put the 2010 Dodd-Frank law into practice. Those restrictions include the requirement that loans are broad-based rather than directed to a single institution and cannot be obtained by insolvent institutions.

Just in time for a celebration, another titan in the financial world, the International Monetary Fund, predicted that the U.S. economy would show stronger growth next year. The IMF's managing director, Christine Lagarde, made the prediction yesterday. She noted positive economic data, signs of compromise in Washington, and lower unemployment.

Another titan in the financial world, the firm Goldman Sachs, had something to say this week. Goldman Sachs warned that investors should scale back their exposure to emerging markets (CNBC). Those markets could experience "significant underperformance and heightened volatility." Goldman Sachs included countries such as Brazil, China and Russia in this assessment of possible underperformance and increased volatility in emerging markets.

It was a day for such broad pronouncements. Societe Generale said, "Gold has lost its role as a safe haven against systemic risk in 2013." What does that mean for the future? For 2014, Societe Generale's Patrick Legland thinks that deflation is more feared than inflation, despite current solid underlying demand for gold. He believes that gold remains overvalued over the long run.

That solid demand wasn't in evidence today. Gold futures (/GC) for February delivery settled at 1197.0, down 6.7 points. Silver futures (SI) for March delivery settled at 19.413, down 0.040 points. Copper futures (/HG) for March delivery settled at 3.3075, down 0.0005 points. Light sweet crude (/CL) for February delivery settled at 98.91, down 0.41 points. Natural gas futures (/NG), however, gained due to weather projections. NG futures for January delivery settled at 4.463, up 0.045 points.

The SPX gained 0.53 percent; the Dow, 0.45 percent; and the NDX, 1.08 percent. The RUT jumped 0.94 percent, and the SOX, 0.87 percent. The VIX dropped, but the RVX, the RUT's volatility index, was unchanged. Perhaps that was due to the strange things going on with the RUT this morning. We'll discuss that later.

Financials as represented by the KBW Bank Index (^BKX) gained. Technology was strong today with some notable exceptions, such as Micron. Homebuilders as represented by the Dow Jones U.S. Home Construction Index (^DJUSHB) soared 3.95 percent today, many on strong volume. With the first ACA deadline--the last day to sign up if coverage is to begin on January 1--originally to have been today, insurers such as HUM (103.07, up 1.18 or 1.16 percent), UNH (74.35, up 1.00 or 1.36 percent) and AET (67.47, up 0.49 or 0.73 percent) produced gains, albeit on low volume. That deadline was extended by a day.

Monday's Developments

The globe's trading day began last night in Asia. In China last night, short-term money rates temporarily hit a recent swing high of 9.8 percent, despite Friday's infusion of more than 300 billion yuan into the interbank market by the People's Bank of China (PBOC) (Reuters). Still, most Asian bourses gained. The Nikkei 225 was shuttered last night in celebration of the emperor's birthday. The Hang Seng gained 0.48 percent, and the Straits Times, 0.70 percent. China's Shanghai Composite percent managed a 0.24 percent gain.

Andrew Bailey, deputy governor of the Bank of England and a key figure in the oversight of the country's mortgage industry, spoke to The Telegraph this weekend about controls that the central bank could institute if the housing market heats up too much. He did not believe that housing prices had risen so much as to create a bubble just yet, but he said that the central bank would be closely monitoring housing prices next year.

On Sunday, the European Central Bank warned Italy that the country needed to control its finances. The country's government is still trying to approve its 2014 budget bill before the end of the year, and the ECB doesn't believe that bill will do enough to curb debt. Although some European bourses got off to a rough start this morning, they posted gains by the close. The FTSE 100 gained 1.09 percent; the DAX, 0.94 percent; and the CAC 40, 0.51 percent. Spain's IBEX 35 gained 0.71 percent, and Italy's FTSE MIB, 0.71 percent.

This morning economic releases in the U.S. began with November's Personal Spending, Personal Income and the Core PCE Price Index. Experts predicted that personal spending would rise 0.5 percent, more than the previous 0.3 percent climb. Those experts proved right on target with the prediction, with personal spending rising 0.5 percent, the highest amount in five months. October's spending was revised higher to a 0.4 percent gain, too. When purchases were split into durable and non-durable goods, they showed spending on durable goods rose 2.2 percent. Spending stayed flat on non-durable goods.

Experts expected personal income to rise 0.4 percent after dropping 0.1 percent in the prior release, but personal income rose only 0.2 percent. Some commenters noted that the miss was due to a decline in earnings by farmers after commodity prices fell. Disposable income increased 0.1 percent.

The Core PCE Price Index was expected to gain 0.1 percent, in line with the prior 0.1 percent gain, and the actual number was in line with predictions and was 0.9 percent higher than the year-ago level. This price index measures the change in the prices of goods and services consumers purchase. Energy and food are excluded when the price index is calculated. CPI is another measure that looks at prices for purchased goods, but the PCE Price Index focuses on services and goods that individuals purchase, not those purchased by businesses.

The savings rate fell to 4.2 percent from October's 4.5 percent, however. Some commenters didn't like the combination of higher spending and lower savings, saying that it wasn't as strong a sign when spending was accomplished by drawing down savings.

Moody's weekly Business Sentiment rose to 37.7 from the prior 36.2. The firm noted that the survey result was ending the year at a record high. Moody's said, "There are no discernible blemishes in the survey results." The firm expects the economy to accelerate further.

Experts forecast that the revision of the Reuters/University of Michigan Consumer Sentiment for December would result in that number being revised higher from the prior estimated 82.5 to 82.9. Before its release, I read about expectations that ranged as high as 83.5, but the number reached only 82.5, equal to the prior estimate. Despite the miss in the headline number, the more optimistic of analysts pointed to the comparison of the headline number to November's 75.1. Optimists also pointed to the surge in current conditions to 98.6 from November's 88 and well above December's prior 97.9 estimate. That surge brought the current conditions component to the highest level since mid-2007.

Pessimistic analysts noted a string of disappointments in the final Reuters/University of Michigan Consumer Sentiment numbers as well as the role that renewed discounting had in increasing consumers' plans to buy. They also note that increases in income were mostly seen among those in the upper third of incomes.

The revised University of Michigan Inflation Expectations remained flat at 3.0 percent. However, the five-to-ten-year outlook for inflation dropped to 2.7 percent from the prior 2.9 percent.

Despite all the good news about sentiment and spending, customers weren't in a spending mood last weekend, according to RetailNext. The analytics firm reported that retail sales and visits to brick-and-mortar stores fell on Friday and Saturday when compared to year-ago levels. This occurred despite bigger discounts than those seen in the same period last year. Consumers are reportedly waiting later to complete their Christmas shopping and holding out for more bargains.

Today, Richmond Federal Reserve Present Jeffrey Lacker made some predictions, too. He predicted that early 2015 would be the "lift off" date for raising the fed fund rates. The $10 billion taper announced last week could serve as the baseline for decreases announced at future meetings, too, he said, although he reiterated the FOMC stance that whether or not there would be tapers announced and their amounts would be data dependent. Lacker will be an alternate member of the FOMC voting group next year and will not be a voting member again until 2015.

Later in the day, Dallas Federal Reserve President Richard W. Fisher one-upped Lacker and said that he wanted a $20 billion taper since he is concerned about the liquidity that has to be reabsorbed and thought the economy was ready for a bigger taper. Fisher's late-day revelations may not be well received when the markets open, although the Santa Claus rally may be too well-established in the light volume holiday week for any impact to be felt. Fisher will be a voting member in 2014. He declined to characterize the stock market rally as a bubble.

Story stocks included Apple (AAPL, 570.09, up 21.07 or 3.84 percent). The company has secured a deal with China Mobile (CHL, 52.47, up 0.84 or 1.63 percent) to offer the latest iPhones. This deal has been anticipated. The state-owned China Mobile will begin selling the 5S and 5C on Friday, January 17. Apple should have an idea before then about whether consumers will flock to the more expensive iPhones rather than the lower-priced smartphones, including Samsung Androids, that have proven to be steep competition in China so far. The iPhone has been available in China via two smaller carriers, but Apple's percentage of smartphone sales in China has declined over the last year.

Nevertheless, Apple's CEO Tim Cook believes that sales in China will eventually top those in the United States. No news was offered as to how Apple and China Mobile will split costs. Apple received a number of upgrades, and Stifel raised its price target for the stock to $650 from the prior $600. Some memory and some chipmakers benefited from the confirmation of the deal, too.

What about Blackberry (BBRY, 7.47, up 0.25 or 3.46 percent)? The company gained big on Friday after reporting earnings and, together with FoxConn, announcing Blackberry 10 devices to be introduced next year. Today, BBRY continued its gains despite garnering a downgrade.

Micron (MU, 21.49, down 0.68 or 3.07 percent) also received a downgrade, this one from Merrill Lynch. Merrill Lynch mentioned oversupply in the DRAM market.

Retailers Jos. A. Bank (JOSB, 56.29, down 0.74 or 1.30 percent) and Men's Wearhouse have been jockeying to buy each other for several months. Today it was Jos. A. Bank rejecting Men's Wearhouse's buyout offer, but it's been the other way around, too.

The Netherlands Arbitration Institute in the Netherlands ordered Tiffany and Co (TIF, 90.50, down 0.12 or 0.13 percent) to pay about $449.50 million in damages to The Swatch Group, announcing the decision on December 21. As a result of that ruling, TIF said today that the impact would be $2.30-2.35 to its full-year earnings per share for 2014.

Despite offering a discount to impacted customers whose credit- and debit-card data was recently stolen, Target (TGT, 61.88, down 0.61 or 0.98 percent) declined again. TGT was one of the retailers seeing fewer customer visits and lower sales. Saturday's sales were lower by five percent than in the same period a year ago, but in TGT's case, this was about more than the trend seen at other retailers.

The data stolen from TGT shoppers shortly before and after Thanksgiving has now appeared on the black market, although the data doesn't yet appear to be being used for fraudulent buying on a large scale. Some customers hit by the security breach struggle with Christmas shopping while dealing with spending limits imposed by some banks issuing the credit cards that were compromised. For example, my daughter and a friend had to split up their grocery shopping lists for a planned joint cookie-baking day because neither could buy all the ingredients at once due to the imposed spending and ATM limits. Multiply that by the estimated two million customers hit by such restrictions. Moreover, banks are telling customers that the restrictions might not go away, and that it's better to replace the cards.

Let's look at daily charts.

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:

Today, the SPX hit a new intraday and closing high. In doing so, the SPX also tested the new breakout level I had detailed in last Monday's Wrap, with the outcome of that test as yet undecided. The SPX did close slightly above the breakout level, but this is just one close above it on a candle that left a small upper candle shadow or wick.

The SPX needs consistent daily closes above about 1,827 to sustain that breakout. Such closes would show us that the SPX has moved into a momentum run, outrunning all upside targets on this daily chart. Furthermore, although the weekly chart is not shown here, the SPX is already in a momentum run on its weekly chart, having outrun all targets and obvious resistance levels there.

This is a dangerous situation for bulls and bears alike, as followers of Bollinger bands will understand. Clearly, the SPX has outrun normal parameters for its behavior. Such behavior makes it ripe for a pull back inside the nested Keltner channel. Some market watchers could argue that the SPX is overdue for a drop back into a retest of the central channel lines, now at the configuration that's between about 1,722-1,740. One day, the SPX will in fact pull back to retest those channel lines, just as it did in June, August and October.

However, here's where the danger to bears comes in. There's no guarantee that this current momentum run will end any time soon, or that, if it does end, it will end with a pull back all the way to the central channel lines. Nor is it guaranteed that when the SPX does eventually pull back to the central channel lines, they'll be anywhere near their current levels. They're rising now and could continue to rise before they're tested.

The danger to bulls comes about because we can see from the chart that the SPX looks overdue for such a pullback. Even such a pullback would be normal behavior during the course of a long climb inside a rising regression channel and, therefore, just a normal part of trading behavior for the SPX.

What is a short-term or medium-term trader to do? It's important to just trade what you see, setting some parameters for determining when the momentum has waned and when it's reversed course. This will be true of the other indices that have broken out into momentum runs.

As long as the SPX maintains daily closes above about 1,826-1,827 over the next week, it's in breakout mode. Closes between about 1,813-1,827 mean that it's still testing former resistance to see if it holds as support on daily closes. No particular meaning can be assigned to such testing. Sustained closes below about 1,813 mean that the SPX is slipping back inside the Keltner channel system.

A test of the (red) 9-ema and former rising regression channel's top boundary could be next, however, once the SPX slips back inside the Keltner channels. A test of the next potential target near 1,793-1,806 is not particularly bearish, but if the SPX successfully tests that potential target and then bounces, resistance might have firmed again near 1,813-1,827. Bulls should be prepared for a possible rollover if it's retested.

If the SPX tests 1,793-1,806 and sustains daily closes beneath 1,793, it sets a next potential downside target near 1,767-1,781. Additional lower targets are also marked in case subsequent support levels should fail. 1,700-1,720 marks important support of the must-hold type to preserve any kind of long-term bullish tenor.

Annotated Daily Chart of the Dow:

The Dow also hit new intraday and closing highs. Unlike the SPX, the Dow has not yet outrun all upside targets, however, although it's currently approaching its last Keltner target on the daily chart. If the Dow continues to climb, it will also soon butt up against the bottom boundary of its former regression channel, a boundary that rolled the Dow lower in late November and early December. Bulls should therefore be protective of gains as the Dow tests these converging potential resistance levels. It's not until the Dow sustains daily closes above about 16,420 that it's outrun its Keltner channel system and moved into breakout mode and has also broken back above a former resistance trendline. If it does break out, it's also broken out above potential resistance on the weekly chart, and no further upside targets are offered in the Keltner channeling system I employ.

If the Dow turns lower instead of breaking out, one potential downside target is the possible support on daily closes from about 16,070-16,180. If that support should fail, with such a failure marked by sustained daily closes below about 16,070, a next potential target lies from about 15,750-15,870. Additional lower potential targets are also marked in case that support fails. The 15,400-15,520 level is a must-hold type of level if the long-term tenor is not to change.

Annotated Daily Chart of the NDX:

After the Nasdaq rebalancing on Friday, the NDX gapped higher today, producing another new recent intraday and closing high and another daily close in the breakout zone. The shape of the candle indicated indecision, however, so it's just as possible that the NDX might pull back to retest support--perhaps at this morning's gap level--as it is that it will continue to climb. If the NDX climbs, it's in the breakout zone on both the daily and the weekly charts, so the Keltner channeling system offers no new upside targets. As is true of the SPX and any other index running away above the top of the Keltner channeling system, such a momentum run can be dangerous for both bulls and bears.

If the NDX pulls back, support might exist anywhere from about 3,496-3,546, with various levels and types of potential daily support found within that range. Tests of such support are not bearish, but sustained daily closes below about 3,496 do set a new potential downside target. That target ranges from about 3,400-3,437. Other potential downside targets are also marked on the chart, in case higher support fails. The 3,265 level is probably a must-hold level for daily closes if the NDX is to maintain the support at the bottom of its long-term rising regression channel.

Annotated Daily Chart of the RUT:

Wow, that's some daily candle on the RUT, isn't it? Something untoward happened at the open this morning. RUT cash prices gapped higher, much higher than appears feasible, especially when compared with the action of other indices. RUT futures (/TF) did not show an analogous movement, reaching an early high of 1152.50--later to be eclipsed--while the RUT was showing those out-of-bounds opening prints. Theories as to what happened included some imbalance due to Friday's Nasdaq rebalancing. Some of the Nasdaq stocks involved in Friday's rebalancing are also components of the Russell 2000. Perhaps some gaining stocks were making high initial prints while the other RUT component stocks' opening levels were yet to print, but I could not find a definitive answer today. I've left the daily candle as it is for now, although I believe the true shape of the candle should have been a relatively small-bodied candle with a lower shadow or candle wick. I did change the candle on the 30-minute charts, as will be evident later, estimating where prices "should" have been by looking at futures' values.

On the daily chart, RUT prices remain within a rising regression channel, but today the RUT again challenged the resistance at the top of its Keltner channeling system. The resistance ranges from about 1,147-1,165, so the RUT would have to sustain daily closes above about 1,165 before we could say that it's broken out into a momentum run. In addition, although the automatically drawn regression channel's top boundary is higher, a trendline drawn along the RUT's recent swing highs now crosses at about 1,165, so the RUT hasn't pushed above that trendline's (not drawn) resistance, either. From all this evidence, we can conclude that the RUT is not yet in a momentum run, and resistance just overhead could be strong.

If the RUT breaks out to the upside, the Keltner channel system offers no further potential upside targets. If it rolls down, sustaining daily closes beneath about 1,147, it sets a potential downside target at about 1,100-1,131. Other lower targets are also marked in case higher support fails on daily closes. Support near 1,063 appears particularly important. A failure of that support to hold would mean the RUT is breaking down out of the rising regression channel and also violating a Keltner support configuration that has held on recent downturns.

Annotated Daily Chart of the Dow Jones Transports:

Today, the Dow Jones Transports finally followed the industrials into a higher intraday and closing high, but the pullback off the day's high left a small upper candle shadow. Such upper candle shadows at new highs are often, but not always, followed by pullbacks on the Dow Jones Transports. This index should be watched to see whether it pulls back this week and how deeply it does so. The Transports can lead other indices and so serves as a bellwether index.

Another bellwether index we often watch is the VIX. As might be expected, the VIX has tumbled during this Santa Claus rally, but its descent has so far stopped at the support of a descending trendline that was once resistance. The VIX, of course, should also be watched to see whether it breaks sharply lower (bullish for equities) or merely slides slowly lower (not a strong predictor either way) or bounces again (bearish for equities).

Tomorrow's Economic and Earnings Releases

This week's important economic events are carried forward from Keene Little's weekend Wrap. Thanks, Keene, for putting together this week's report.

Remember that equity markets close early tomorrow, at 1:00 pm ET, and will be closed Wednesday, the 25th, for Christmas. Thursday, the 26th, will be a full trading day.

The DAX will be closed tomorrow through Thursday. It appears that the London Stock Exchange will be closing at 12:30 London time tomorrow and stay closed through Thursday. Many other European markets will be closed (perhaps) early tomorrow, and then stayed closed through Thursday as well but confirm all this information for yourselves. It proved surprisingly difficult to confirm this information.

What about Tomorrow on Intraday Charts?

Annotated 30-Minute Chart of the SPX:

The SPX broke out on the 30-minute chart today, but it didn't do a great job of maintaining that breakout. That resistance that it broke through appeared to be sticky or to have a strong gravitational pull. By the close, the ability to sustain the breakout had been questioned. Sustained 30-minute closes above about 1,828 are needed to maintain breakout status on this chart. The SPX could then perhaps run up to about 1,830-1,835 before it hit next potential short-term resistance.

Sustained 30-minute closes below about 1,824 would violate the tenor of the last three trading days (notice the Keltner configuration from which the SPX has bounced those days) and set a new short-term tentative downside target. That target would be about 1,812-1,816. If the SPX should test 1,812-1,816 and bounce from there, the 1,824-1,828 area could present relatively strong resistance on 30-minute closes, so short-term bulls should be wary of rollover potential.

Other potential downside targets are marked if support fails, and they range from about 1,802-1,806 and 1,777-1,780. On a strong downdraft, each of those zones could be pushed 2-4 points lower.

Annotated 30-Minute Chart of the Dow:

The Dow also did not do a great job of maintaining its breakout status this morning. However, if the Dow can maintain 30-minute closes above about 16,300, it moves back into breakout status on this chart. If, however, it sustains 30-minute closes beneath about 16,263, it changes the tenor of the recent trading days. It then sets up a potential downside target of about 16,175-16,206. If the Dow were to test 16,175-16,206 and bounce, be aware that resistance near 16,300 may have firmed and could roll the Dow lower again when retested.

If potential support near 16,175 is violated on sustained 30-minute closes, the Dow sets a potential downside target near 16,060-16,110. If that support should fail, another potential short-term downside target is found at about 15,820-15,850.

Annotated 30-Minute Chart of the NDX:

The NDX did a better job of maintaining its breakout today. Sustained 30-minute closes above about 3,563 maintain the breakout mode. However, sustained 30-minute closes below 3,552 would mark a change in the short-term tenor established over the last three trading days. That would set a new short-term potential downside target of about 3,523-3,532. If the NDX should drop to that level and then bounce, be aware that resistance near 3,552-3,563 might have strengthened and could roll the NDX lower again.

Sustained 30-minute closes beneath about 3,523 set a new potential downside target of about 3,498-3,508. One lower potential downside target of about 3,440-3,446 is also marked on the chart in case higher support fails.

Annotated 30-Minute Chart of the Russell 2000:

As the chart's annotations indicate, I "guesstimated" what the RUT's first 30-minute candle might have looked like if some anomaly hadn't occurred, basing that guess on a comparison with RUT futures levels--which didn't show the anomaly in trading--and the typical difference today in futures and cash prices. We could argue that I should have used the values that were printed or we could argue that this guess was a truer indication of what prices should have been, but that anomaly distorted Keltner patterns. The RUT actually appeared to trade in relatively good accord--when compared to other indices--with the Keltner channel lines on the doctored chart, so I feel comfortable with this guess.

The RUT did a relatively good job of maintaining its breakout today, bouncing above the red 9-ema on the doctored chart, also producing most 30-minute closes above the top of the 1,152-1,155 zone. As long as most 30-minute closes are above about 1,155, it's in breakout mode on this chart. Sustained 30-minute closes beneath about 1,145 set a new potential short-term downside target near 1,139-1,142. If that support should fail on sustained 30-minute closes, subsequent lower potential short-term downside targets can be found at about 1,129-1,134 and 1,112-1,114.

On the intraday charts, the RUT and the NDX are doing the best job at maintaining short-term breakouts, so it might be a good idea to watch them tomorrow morning to gauge whether the upside momentum remains strong or is waning.

Merry Christmas to subscribers who celebrate this holiday! May all subscribers enjoy the break from trading. Linda Piazza

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