Market Internals


If the title of tonight's Wrap sounds like an advertising come on, it's not. The International Monetary Fund updated its global outlook today, issuing a number of reports. The IMF's message to the eurozone, the U.S. and various emerging markets appeared to be uniform: act now and don't stall.

Mostly, the IMF was content enough with the performance of emerging markets such as China's, although it downgraded China's outlook along with that of many other countries. As Option Investor writers mentioned this weekend, China's not-as-bad-as-it-could-have-been report last Friday helped propel bourses higher across the globe. Today China's Premier Web Jiabao let some of the air out of that balloon when he warned that economic stresses could extend for some time.

The timestamp on the Associated Press article quoting the premier did not clarify whether those comments were made before or after Asian bourses concluded their trading days but some evidence would suggest that China's markets, at least, reacted. Asian bourses closed with mixed performances. The Nikkei 225 was not open for business last night. The Hang Seng closed higher by 0.15 percent and the Straits Times, by 0.11 percent, but China's Shanghai Composite dropped 1.74 percent. That marks a three-year low for the Shanghai Composite, also pressured lower by warnings from important companies Suning Appliance, a large home-appliance retailer, and ZTE Corp. a telecommunications-equipment company.

This morning, the IMF added another concern for troubled market participants. The report appeared to be released about the time or slightly after U.S. cash markets opened for trading, but the prospect of the report could have weighed on futures beforehand. The IMF's Christine Lagarde had been hinting that downgrades might be found in the latest update.

As had been feared might happen, that update included a downgrade of the 2013 growth estimate for the U.S., edging the growth estimate down to 2.3 percent from the former 2.4 percent. Market watchers anticipated that China and the eurozone would see downgrades, and they did: China's to 8.5 percent from the prior 8.8 percent, and the eurozone's to 0.7 percent from the prior 0.9 percent. Spain's economy is expected to contract 0.6 percent, more than the prior prediction of 0.1 percent. India's growth estimate was rolled back to 6.5 percent from the prior 7.3 percent. Japan's growth estimate declined to 1.5 percent versus the prior 1.7 percent.

On the IMF's website, the IMF's summary article was titled "Weak Global Recovery Depends on Progress in Europe and United States." The IMF deemed the downward revisions to global growth estimates slight but seemed to hike the worry factor. Olivier Blanchard, in charge of the department that prepared the current World Economic Outlook, warned, "More worrisome than these revisions to the baseline forecast is the increase in downside risks." The IMF's modest downgrade was predicated on three assumptions: there will be sufficient policy action in the eurozone, including Greece and Spain, to muddle through 2013; U.S. fiscal policy will not include sharp tightening next year; and growth-stimulating efforts currently underway in major emerging markets will gain traction.

Risks have risen since the April report, the summary noted. The IMF warns that delays in dealing with the eurozone crisis or U.S. political gridlock that stalls temporary tax cuts or the raising of the federal debt ceiling could exacerbate global weakness. The report indicated that eurzone steps in the right direction include the recent agreement to create a single banking supervisor and directly inject capital into banks from the European Stability Mechanism. More needs to be accomplished, however, the IMF felt, and accomplished in a timely manner. Those further steps should include a pan-European deposit insurance guarantee of some sort, the IMF warns, along with other actions. In the U.S., the WEO estimates that political stalemate could lead to a "severe decline in U.S. growth, with 'significant spillovers to the rest of the world.'" Without a successful resolution of these issues, U.S. debt could be downgraded again.

Immediately after this report was released, our ten-year's yield reached a new record low. With the previous record low at 1.437, according to one source, with differing quotes on different sites, this morning's yield dropped to 1.442, although yields did bounce off that low. Meanwhile, Spanish 10-year's were seeing rising yields again. Although the yields stayed under 7.00, they climbed 0.154 to 6.817 percent.

European bourses provided little insight today for U.S. traders. They swung like weather vanes with the winds shifting back and forth from declines back to the flat-line level. They opened lower, but steadied after a slew of eurozone economic releases appeared and then began climbing toward the flat-line again. The FTSE 100 closed down 0.07 percent; the DAX, up 0.13 percent; and the CAC 40, down 0.03 percent. Spain's IBX 35 closed sharply lower by 1.99 percent, however.

The eurozone CPI and core CPI both came in as expected, but the Italian and eurozone trade balances both came in much stronger than anticipated. The Eurostat stated that the eurozone's most notable increases in exports were to Brazil and Russia.

Our futures had trended down all night, so it wasn't clear that they were reacting to the Chinese premier's sober caution as they had trended lower. We had our own concerns, including our morning's releases to come, the impending IMF report, the ramping up of earnings reports and tomorrow's testimony by FOMC Chairman Ben Bernanke. Some articles pegged the overnight futures' declines on the Chinese premier's statement, mostly ignoring the import of the impending IMF's outlook. News sources speculated on the efficacy of Spanish reforms and worried over the ease with which the Libor rate was manipulated.

The day was ready to begin, but with weathervane swings back and forth in Europe and our breath held here until tomorrow's testimony begins, could we hope for anything particularly predictive?

Monday's Developments

Since the IMF pegs so much of the global outlook on the U.S., how is the U.S. doing? This morning at 8:30, the U.S. Department of Congress released the headline retail sales as well as the core retail sales without the volatile auto sales. Experts predicted that both the headline and core retail sales would tick up by 0.1 percent after dropping 0.2 and 0.4 percent, respectively, in the last reading. Minutes before the release, I was reading a Bloomberg article speculating that auto sales would probably push headline retail sales higher.

Unfortunately, that speculation was wrong. June's retail sales dropped 0.5 percent and core sales declined 0.4 percent. Retail sales measured 3.5 percent higher than in June 2011, however.

Better news came from the Federal Reserve Bank of New York when it released its July diffusion index gleaned from surveying New York state's manufacturers. With zero as the expansion/contraction benchmark, market watchers predicted a climb to 3.9 from the prior 2.3, but the number jumped to 7.4. While still deemed a modest expansion by this federal reserve bank, the index clearly beat expectations.

The news wasn't all good, the bank revealed in its summary. New orders dipped into negative territory for the first time since last November, dropping to -2.7. Prices paid dropped twelve points, to 7.4, the lowest number reported since mid-2009. Employment, shipments and prices received climbed while the average workweek declined. The general impression was that many indices continued to slide lower, so that the optimism seen earlier in the year might be waning. One hopeful aspect came from a series of supplemental questions in which respondents answered that they had "ramped up rather than scaled back production plans since the beginning of the year."

At first, futures responded only slightly, with a slight dip that was soon corrected. Within about fifteen minutes, they seemed to soften again, however, perhaps as the reports were digested and details studied. That IMF report may have already been impacting futures, however.

The Census Bureau reported on Business Inventories, month over month, at 10:00 AM. Analysts predicted that inventories would rise 0.2 percent, less than the prior rise of 0.4 percent. The report shows that inventories had risen 0.3 percent. Rising business inventories can be interpreted differently depending on other market conditions, but in this case, rising inventories and softer-than-expected retail sales did not make a good combination.

GlaxoSmithKline (GSK, 45.30, up 0.30 or 0.67 percent) figured among the story stocks today, with rumors flying this morning that the company would finally clench the deal to obtain Human Genome Sciences (HGSI, 14.19, up 0.61 or 4.49 percent) after pursuing the company for three months. Reuters writers Soyoung Kim and Ben Hirschler reported that the company would probably hike its $13/share offer to about $14/share. With the acquisition of Human Genome Sciences, GSK would acquire full rights to Benlysta. GSK and HGSI had previously partnered on this biologic that targets lupus, an autoimmune disorder that usually requires lifelong treatment.

When the reports of the deal did materialize, GSK's "hostile takeover bid" had been transformed to a "friendly deal" in headlines. HGSI might have felt friendlier because the ante was upped to $14.25 a share, well above the initial offer of $13 a share and even above the speculations of $14 a share. Companies reporting earnings today included Citigroup (C, 26.81, up 0.16 or 0.60 percent). C reported earnings, minus various adjustments, of $1 a share, higher than the anticipated $0.89 a share and well above the whisper number of $0.88. Revenue, excluding adjustments, dropped seven percent from the year-ago report, to $18.8 billion. Expenses also dropped, by six percent. Investment banking revenue dropped 21 percent, with revenue from trading stocks and bonds falling 9 percent. One article specifically pegged the decline in revenues to the winding down of Citi Holdings, saying that revenues in the parent Citigroup remained about the same.

The revenue from trading stocks and bonds might have fallen below expectations, but that decline was somewhat offset by underwriting revenues and fees for advising on mergers and acquisitions. More money was set aside for future losses on loans outside North American by the consumer-banking unit. C announced that it would not seek to increase shareholder payouts this year, backing off from earlier attempts to do so.

JB Hunt Transport Services Inc. (JBHT, 58.33, down 0.76 or 1.29 percent) reported after the close, and the stock dove immediately. It was 55.21 or down 3.12 below the close as this report was edited. Analysts predicted earnings of $0.69. The whisper number was $0.68, but the company has a strong history of beating the whisper number. It didn't beat this time. JBHT reported earnings of $0.67. A Reuters article claimed that it was projected to be $0.67 all along, but that's not what I was reading on other sites. Revenue disappointed, however, coming in at $1.26 billion, lower than the expected $1.3 billion. Load growth in Intermodal (JBI) was 13 percent, and in Integrated Capacity Solutions (ICS), 16 percent. There was disappointment here somewhere, and, in addition to the perhaps-lower-than-expected EPS and definitely lower-than-expected revenue, a 3-percent decrease in the JBT segment revenue might have been partly responsible.

Cintas (CTAS, 39.41, down 0.46 or 1.15 percent) also dropped after its after-hours report. It was at 38.40 or 1.01 below the close as this report was prepared. It reported $0.60 per share, in line with expectations, but revenue was slightly shy of the $1.07 billion projection, at $1.05.

Also featured in after-hours announcements, Yahoo (YHOO) tapped Google (GOOG) executive Marissa Mayer to be its new chief executive. Her transition to her new job won't take long: she begins tomorrow, just in time for YHOO's earnings announcement tomorrow afternoon. Ross Levinsohn has been serving as interim CEO. Mayer, reported to be one of the first GOOG employees, has a reputation of being a key person in GOOG's search business. She is an engineer.

Other story stocks included J.P. Morgan (JPM, 35.09, down 0.98 or 2.72 percent), declining after reports that a brokerage client had sued. The client allegedly claims that the firm had promoted its own funds even though they underperformed others. In other news, Vivus Inc. (VVUS, 28.70, up 1.55 or 5.569 percent) believes the FDA will rule on its diet drug Qnexa by tomorrow.

We should also note while recounting today's events that today a U.S. Navy ship fired at a fishing boat that was approaching while off the coast of the United Arab Emirates. Reuters reported that one person was killed and three others injured. Reuters reported that it not yet clear why the boat had approached and then not heeded warnings to stop, and whether the incident might have been triggered by a misunderstanding.

Let's look at charts.


As anticipated, the SPX did make a trip back down through its rising regression channel. It also performed a picture-perfect bounce from the rising channel's lower support.

Annotated Daily Chart of the SPX:

This morning's dip brought the SPX back to test the 9-ema, and the SPX did bounce from that moving-average test. As has been mentioned, when the SPX is trending higher, it tends to do it by sustaining daily closes on or above this average on most days. See the action on the far left-hand side of the chart for comparison.

hose hoping for more sustained gains want to see the SPX maintain daily closes above that 9-ema as it reaches toward potential resistance. That potential resistance can be found at the midline of its rising regression channel, historical resistance levels and potential Keltner resistance, all grouped from about 1364 up to the July 3 high of 1374.81. Sustaining daily closes above that 9-ema on pullbacks sets up a potential next upside target at the top of the rising channel up to about 1398. Sustained daily closes above that next level set the next higher potential target, marked on the chart.

However, any action that punches the SPX below that 9-ema on sustained daily closes and particularly below the bottom of the rising channel, now near 1329-1330, sets up a potential downside target near 1267-1268 or maybe even the early June low of 1266.74.

The chart looks short-term bullish. However, under-the-market signs are not so bullish--those rising Spanish 10-year yields, for example--so I can't bring myself to trust what the charts are saying. It must be acknowledged, too, that the SPX remains in the lower half of that rising channel, the less-bullish half. It's time for it to pop back into the upper half or risk declining to test support instead.

As is often true, the Dow's chart features a similar setup. Like the SPX, it bounced from last week's test of a rising channel. Like the SPX, it dropped to test its 9-ema and other converging potential support levels today and maintained those on the daily close. When the two charts are viewed in close proximity, however, the Dow appears to be underperforming the SPX with regard to distance to the midline of the price channel, the piercing of the price channel last week and other similar matters. Are those differences meaningful? Not yet, but they warn us to watch.

Annotated Daily Chart of the Dow:

As long as the Dow maintains daily closes above the grouped moving averages just below the current price, it maintains a possible price target near the midline of that rising channel. That midline now crosses just above 12900, where historical and potential Keltner resistance also lurk, all the way up to the 7/5 high of 12961.30. That's the zone that should be watched for next potential resistance on daily closes if the Dow should continue to rally. Sustained daily closes above that level set the next higher potential target, marked on the chart.

If the Dow slips below or gaps below the 9-ema and other potential support levels clustered below today's close, another channel support test might be in the making, with that channel's lower support now crossing near 12600. I would look at a zone around 12600 and not that specific number. If the Dow slips below that for more than a couple of hours, the next downside target and potential support on daily closes is near 12440-12450. If that potential support is lost, then the Keltner-suggested next downside target is near 12200-12220, with potential interim support just above 12300 where some May swing lows are found. If a big downdraft starts rolling downhill, I would not be surprised to see a drop to retest the June low of 12035.09.

With more swing highs and lows to test and determine conformations, the NDX's regression channel has been redrawn as a rising price channel. The NDX, like the SPX and Dow, bounced from its test last week of that price channel's support, but like the Dow, the NDX pierced that support before it climbed. Unlike the SPX and the Dow, the NDX has struggled a bit more with the grouped resistance capped by the 9-ema. It has not been able to break free of that resistance. So, for the NDX, that resistance holds so far.

Annotated Daily Chart of the NDX:

It's possible to use Friday's 2589.93 intraday high as a benchmark for a breakout, for those who don't follow moving averages. If the NDX, then, can maintain a daily close above that level and perhaps even just maintain values above that for more than a couple of hours, it sets a potential upside target near the midline of the rising price chart, up to about 2625-2640, where historical and Keltner potential resistance wait to stall further rises. I would extend that potential resistance zone up to the 7/5 swing high of 2660.26. Sustained daily closes above that level set the next higher potential target, marked on the chart.

However, this chart shows less bullish potential than the SPX's. A pullback to retest that rising channel's support doesn't look like much of a drop. If the NDX rolls down and sustains values much below the 7/12 intraday low of 2522.89 for more than a couple of hours or through a daily close, it sets up a potential downside target near 2460, with interim potential light support near a historical swing low of 2478.36. If that support level is pierced, I would of course also watch for some dip-buyers to step in at the June 4 swing low of 2443.92, but if a retest of that results in a further drop that isn't quickly reversed, the next Keltner target should be considered. It's marked on the chart.

More swing highs and lows also allowed a redrawing of the RUT's automatically created regression channel to a plain price channel with more convergences at the swing highs and lows.

Annotated Daily Chart of the RUT:

The RUT also bounced from a retest of channel support, although the RUT appeared to find support slightly above the price channel support, at the Keltner support marked by the grey line. The RUT zoomed back up to retest the midline of its rising price channel before dropping back today. It hovers near the 9-ema, not able to break free of it and climb again but also not significantly violating that support. We have no answers with RUT, as the chart setup shows it might be as easy for it to zoom up to 807.50-812.50 as it would be for it to drop to retest the various forms of support grouped near the bottom of that rising price channel.

RUT investors or traders await further developments. If the RUT can sustain values above about 812.50 on a daily close, it sets up a potential upside target near 826-833. Traders should of course be protective of bullish profits as the 7/5 swing high of 820.44 is approached, too. A sustained breakout above 833-835 sets up a next potential upside target marked on the chart.

A breakdown below the bottom of the channel sets up a downside target near 736-745. That's a wide band that would likely narrow toward the bottom of the band if the RUT should barrel lower. Despite that potential downside targets, traders should probably act to protect bearish profits near 760, too, as the RUT enters a former congestion zone. Support can exist anywhere within that rather broad congestion zone. If the RUT should break through 735-736 on sustained daily closes and particularly if it drops below the early June low of 729.75, a new downside target is set, as marked on the chart.

The RLX, the S&P Retail Index is another of those indicator or weathervane indices we can watch. Lately, that weathervane index hasn't been pointing any particular direction. After running up sharply, it has been churning in an ever-narrowing range.

Annotated Daily Chart of the RLX:

In standard technical analysis lore, the RLX should have broken one direction or the other about two-thirds of the way into the apex of that triangle it's been building. Otherwise, the formation has supposedly lost its prediction factor. However, I would watch the RLX to see which way it breaks, but I would want sustained daily closes above or below that formation before I believed its evidence too strongly.

Tomorrow's Economic and Earnings Releases

Economic Releases and Events:

Of course, the testimony of Federal Chairman Ben Bernanke will figure greatly in the day's trading pattern. Prepare for possible volatility beginning a few minutes before the testimony, as the prepared portion of his speech is often released just before he speaks. It is of course during the Q&A session that we could see the most volatility, however. Expect dire scenes to be set as politicians posture for the camera.

Important earnings tomorrow include those from AMTD (BMO), GS (BMO), INTC (AMC), JNJ (BMO), KO (BMO), and YHOO (AMC).

What about Tomorrow?

This way or that way? On an intraday chart, the SPX looks as likely to go this way as to go that way.

Annotated 30-Minute Chart of the SPX:

The SPX looks as likely to climb toward 1360 as it does to drop toward 1348-1351. Unfortunately, this chart suggests that neither movement is particularly predictive of the next action, either. It's only sustained 30-minute moves or a many-pointed move outside those zones that would predict much about the next direction. The next upside target would be near 1370, with that marked green target likely to change if the dynamic Keltner channels are pushed around by big price movements. The next downside target would be near 1340, with the next potential support likely to be pushed around by a big downside move, too. Potential targets if that support or resistance is violated are also marked.

The Dow's 30-minute chart also displays a similar doesn't-mean-a-lot churn zone.

Annotated 30-Minute Chart of the Dow:

As long as the Dow churns between potential support on 30-minute closes near 12700 and potential resistance from 12750-12800, the movements aren't particularly predictive of the next action. Perhaps after they've churned a bit more, moving averages will realign themselves and formations will solidify and appear more predictive. For now, however, we would have to see sustained 30-minute breakouts above resistance or below support, or a large price movement above or below, to tell anything about next direction.

If the breakout is to the upside, the next potential Keltner target is set near 12900-13000. If the break is to the downside, the next downside target is set near 12600, with a sustained breakdown below that looking likely to retest last week's low.

Along with the RLX, the NDX may give us a first heads-up about which way indices will break out of that newest churn zone. As of the close, the NDX had sunk into the support zone.

Annotated 30-Minute Chart of the NDX:

At the close, the NDX was deep into the potential support zone that stretches down to about 2567-2570. It hadn't broken through, but it's close enough that a gap lower could set a new downside target unless it's quickly reversed. That potential downside target would extend from just below 2550 to 2554. A failure of that support to hold on 30-minute closes sets up a next potential downside target near last Thursday's low.

If the NDX bounces tomorrow morning instead, it now must content with potential resistance stretching up to about 2584, another potential resistance zone from about 2587-2592 and then the potential historical resistance now near 2596-2600. Only on sustained moves above 2600 would the new upside target near 2730 be set.

Like the NDX, the RUT dipped to test support but didn't break through it.

Annotated 30-Minute Chart of the Russell 2000:

The churn zone for the RUT extends down to about 796. Sustained 30-minute closes beneath that or a big price move below it set a potential downside target 789-791, where next potential support on 30-minute closes might lie. If that support can't be maintained, a retest of last Thursday's low might result.

If the RUT instead bounces higher tomorrow morning, it now facts potentially strong resistance from 799-800 and again near 802-803. Only if the RUT can sustain 30-minute closes above that zone does it set the next potential upside target, now at about 808-809.

What do I think? I think market participants are waiting for FOMC Chairman Ben Bernanke's testimony and for a few more company reports before they decide next direction. None of us can guarantee what will be said in that testimony tomorrow and Wednesday, and most of us are not privy to companies' earnings releases before they're released. The SPX looks rather bullish over the short-term while the NDX looks as if it's probably more likely to test the bottom of its rising price channel on the daily chart. Even to draw those conclusions is stretching things, but there is that slight difference in performance. Since I don't believe either index is likely to move big in one direction with the other moving big in the opposite direction, that evidence seems to cancel out and prove useless.

Markets look due to breakout again, but they're not signaling the direction. I'm going to be watching the benchmarks laid out here along with our subscribers. I'll also have the RLX and BIX on my radar to determine which direction they're heading. They may give us a heads-up or at least confirm the strength or weakness we're seeing in other indices.