Market Internals


Where are all the put buyers? Apparently they've all gone away along with all the fear in the market. Today, the VIX dropped into levels not seen since 2007. Meanwhile, the index with the options against which the VIX is calculated, the SPX, climbed into levels also not seen since 2007. By mid-afternoon, the SPX had pulled up until it was less than nine points away from its all-time closing high, tantalizingly close. It was not destined to reach that new all-time high today.

Today's euphoria wasn't matched by advance/decline figures or volume itself. Throughout most of the day, advancers ran only slightly ahead of decliners, and volume was lackluster. That wasn't exactly a strong endorsement of the gains. By the end of the day, the NYSE advancers, at least, were a little more ahead of the decliners, but the volume still failed to impress.

You won't find this article pointing to the VIX's level and warning of impending doom. Yes, the VIX usually reverses when it dips to or below these levels. However, in late 2004, the VIX also dropped into this current level. That time it mostly stayed there until early 2007 when it began rising, eventually into its all-time high in 2008.

Therefore, bears should be aware that the VIX can stay at these levels longer than anyone thinks it should. Years longer than anyone thinks it should. We all should be forewarned of potential reversals in the volatility and equity indices, but we're not promised they'll occur any time soon.

While I'm not going to warn of doom until the markets confirm weakness, I'm going to warn bulls, too, to exercise caution. Bulls should follow their trades higher with stops if they are short-term trades and should consider buying some cheap puts or other hedges for long-term portfolios. Bulls who employ complex options positions that include selling options are collecting less monies for the risk they're taking. Iron condor sellers, for example, may have to bring their sold strikes in closer to the action to collect reasonable credits. If the VIX does reverse higher while equities reverse lower, there's less credit against which to balance the losses, while those sold strikes will be hit sooner.

I don't know whether we'll see another period such as 2004-2007 or whether the VIX will revert to the mean a bit sooner than it did then. I do know that we should all spend some time with just-in-case stop-loss planning. Do it tonight.

The SPX gained 0.32 percent; the Dow, 0.35 percent; and the NDX, 0.28 percent. The RUT was flat, but the SOX rose 0.14 percent. After all the news about the financials, traders and investors weighed in inched the BKX higher by 0.92 percent. The VIX closed at 11.56. Although gold was weak early in the session, gold and crude posted modest gains and silver was flat.

Monday's Developments

Last night, Asian bourses turned in mixed performances. China reported inflation numbers that hit a ten-month high. Both consumer spending and factory output disappointed. That was not a fortuitous combination. The entire region was faced with renewed rhetoric from North Korea. Japan was reacting to core January Machinery Orders as well as experiencing the second anniversary of the earthquake and tsunami. Core machinery orders disappointed so strongly, down 13.1 percent rather than the expected drop by 1.6 percent, that it was difficult to see why the Nikkei 225 posted another strong gain.

Perhaps those economic reports supported continued quantitative easing. The Nikkei 225 has been soaring since the middle of February, when promises of aggressive easing surprised the currency markets and boosted Japanese equities. It was only on February 27 that the Nikkei closed at 11,293.57, more than a thousand points below last night's close of 12,349.05. If there ever was an index that looked as if it needed at least a short-term pullback to retest and reconfirm support, it's the Nikkei 225, but we know that momentum runs can continue far beyond the time when we think they should pause.

Last night the Nikkei 225 gained 0.53 percent, the Hang Seng was flat, gaining only 1.13 points, and the Straits Time gained 0.10 percent. China's Shanghai Composite dropped 0.34 percent.

European bourses were all over the map today as they reacted to Germany's January Trade Balance, France's January Industrial Production and Italy's Q4 Final GDP. Germany's Trade Balance disappointed, as did France's Industrial Production. After a slow start swimming at the waterline, the FTSE 100 gained 0.16 percent. However, the DAX lost 0.15 percent, and the CAC 40, 0.06 percent. Spain's IBEX 25 dropped 0.93 percent, and Italy's FTSE MIB, 0.69 percent.

This weekend, Jim Brown reported on the results of the stress tests on U.S. banks. Today, Reuters added information about the banks. Reuters' David Sheppard reported on the results of commodity trading at Goldman Sachs (GS), JPMorgan Chase & Co. (JPM) and Morgan Stanley (MS). All experienced double-digit percentage declines in their commodity trading last year as they reacted to stricter regulations on proprietary trading and prepared for the possibility of even more stringent regulations. Some in government want to rein in risks of another collapse. Sheppard reported that GS was hardest hit, with commodity-related revenues plummeting 60 percent. MS has held discussions to sell part of its commodities business. GS's management allegedly discussed doing the same, although the company has denied that it ever was serious about splitting off the commodity business, according to Sheppard.

Story stocks today had to include Dell (DELL, 14.37, up 0.21 or 1.48 percent). The company and Icahn Enterprises (IEP) have inked a confidentiality agreement, investors learned this morning. In this weekend's Wrap, Jim Brown detailed parries back and forth between Icahn, who opposes a leveraged buyout at the price currently being discussed and wants a hefty dividend, and board members. The confidentiality agreement allows Icahn to have access to the company's financial records.

Blackberry (BBRY, 14.90, up 1.84 or 14.09 percent) announced a release date for its Z10 smartphone. That date is March 22.

Dick's Sporting Goods (DKS, 45.11, down 5.49 or 10.85 percent) tumbled after its earnings report failed to excite investors and traders. Earnings were $1.03/share, with prior guidance at $1.03-1.05/share. Analysts had set higher sights, at $1.06/share. Guidance for the first quarter and full-year 2013 were also below expectations.

PDL BioPharma (PDLI, 7.05, down 0.01 or 0.14 percent) forecast higher-than-anticipated growth in royalty revenues for QI, also raising guidance for that quarter. The company forecast royalties of about $92 million from drugs such as Avastin, Herceptin, Lucentis and Tysabri, while analysts had previously expected $86 million for the quarter.

Barron's spoke highly of recently reorganized Genworth Financial Inc.'s (GNW, 10.50, up 0.66 or 6.71 percent) potential growth in stock price. The stock posted gains on volume that had already more than doubled average daily volume by early afternoon and had tripled average daily volume by the close. All the gains were made at the open, however.

Apple (AAPL, 437.87, up 6.15 or 1.42 percent) did its best to help indices post afternoon gains. Beginning about ninety minutes before the close, AAPL suddenly spiked higher on strong volume. Rumor mills were rife with explanations, none of which I'll repeat here since they couldn't be verified. It was curious that the ramping up of the shares appeared to come right after an analyst reported that sales of Chinese and Taiwanese suppliers to AAPL had declined. The report, by Brian White at Topeka Capital Markets and reported on by AP, would seem to have been a negative, not a positive, so perhaps the two had no correlation or the news was just deemed old news. AAPL should certainly be watched tomorrow, as gains in the stock could bring provide a lift under some indices.

After-hours, VeriFone Systems Inc. (PAY, 20.46, up 0.30 or 1.49) gained after announcing that Chairman Richard McGinn would serve as interim chief executive until a replacement for the former CEO could be found. This action came after Q1 earnings disappointed when announced in February, and PAY cratered. In afterhours trading, PAY was last at $21.85, up 1.39 or 6.79 percent from the closing price.

Urban Outfitters (URBN, 41.50, up 0.19 or 0.46 percent) reported after hours. Analysts expected $0.57/share and revenues of $846 million. After reporting $0.56/share on revenue of $857 million, UBBN was last at $41.40, down 0.40 or 0.96 percent from the close.

YUM (67.84, up 0.12 or 0.18 percent) reported that same-store sales, expected to drop 8.7 percent in February, instead rose 2 percent. As this report was prepared, YUM was last at $71.90, up 4.06 or 5.98 percent from the close.

After the market close, Illinois and the Securities and Exchange Commission announced the settlement of federal securities fraud charges. SEC had charged that the state misled municipal bond investors about the manner in which it funded its pension funds in a case that began in 2009 but involved municipal bonds sold from 2005 to early 2009. The state had already instituted a number of changes and settled the case without admitting or denying the fraud. The state was not required to pay a penalty.

Let's look at daily charts. What we'll see is indices that mostly posted sideways to sideways-up relatively small-bodied candles, in keeping with the rally pattern that's been prevalent for so long.


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:

By last Monday, the SPX and many other indices had scrambled back above the red 9-ema and had been maintaining daily closes above it. The SPX and some of the others had not been able to pull free of that moving average, however, and they needed to soon complete the rest of the rally pattern. That included a strong bounce from the 9-ema and then a sideways to sideways-up drift with small-bodied candles while the 9-ema pulled up underneath it again. The final step would be a quick drop back to the 9-ema and then a rinse and repeat.

If that pattern didn't soon reassert itself, the commentary concluded last week, weak bulls were going to begin selling. Fortunately for those in bullish positions and to the chagrin of those waiting for a deeper pullback, the rally pattern was reinstituted. As this commentary has noted many times, the 9-ema is not a foolproof benchmark for determining rally, not-trending or declining behavior, but that moving average proves at least as useful as many more esoteric measures.

So far, nothing at all has changed, yet, despite some storm clouds gathering on the horizon. Whether you have access to Keltner channels or want to bother with them, you can certainly put a 9-ema, 10-ema or 10-sma on your chart and watch how the index behaves with respect to them. The behavior should be similar among all three.

By today, that pattern suggested that it was time for the SPX to either level off while the red 9-ema pulled up underneath it or to actually dip down to retest its support. That siren call of prior all-time highs was calling too strongly for either to happen. The SPX gained.

Still, bulls should factor in the possibility that the SPX may be due for a dip to its red 9-ema sometime this week. It's time. Those who want to see the SPX maintain its strongest rally pattern will want to see several sideways days first while the red 9-ema rises closer underneath and then a quick dip with firm daily support demonstrated on the 9-ema on daily closes.

There's no guarantee that there will be a 9-ema test this week. Bears should be alert to the possibility that the SPX could instead rise higher into the upside target it's testing now, marked on the chart by the upper rectangle. We all know that those previous all-time intraday and closing highs, 1576.09 and 1565.15, respectively, are singing that siren song.

If the 9-ema support is broken on daily closes, lower potential downside targets are marked on the chart. If the SPX breaks through all the next potential resistance levels on daily closes, it's going to be even more extended and on a momentum run. We would use its behavior on daily closes with respect to the 9-ema to determine when its behavior is changing and it's weakening. Follow bullish SPX-related trades higher with your stops to protect them in case of a reversal.

Annotated Daily Chart of the Dow:

The cautions about the Dow last week were similar to that for the SPX, and the Dow also fulfilled bullish hopes. In doing so and doing so with such fervor, the Dow pulled far away from its 9-ema. Usually when it pulls this far away, instead of trending sideways while the 9-ema catches up, it tends to drop down to the 9-ema within two to three days.

Today, however, it climbed, continuing its momentum run. The momentum run is visibly demonstrated by its move outside its widest Keltner channel's upper boundary. Bulls should be aware that the Dow is subject to a drop to the rising red 9-ema, probably within this week. That doesn't mean that this dip will definitely occur, but that's the type of behavior seen even in strongly trending indices. When they're on momentum runs, in breakout runs with reference to their Keltner channels, moves can extend beyond what is the norm, so nothing is promised. Prepare trades to weather a further climb or a 9-ema test.

Bears should be aware that even if the Dow is to dip to the red 9-ema this week, that moving average is rising strongly and may be higher than its now-current level when tested. We know round-number 14,400 support might hold the Dow up now on any retreat. Also, we haven't yet seen a buying crescendo of the type that sometimes end strong runs, and there's no guarantee that buying won't continue before there's a dip.

If a 9-ema test does occur and that support does not hold on daily closes, potential further-out downside targets are marked.

Annotated Daily Chart of the NDX:

The NDX has been underperforming the other mentioned indices by many respects, particularly when we examine its behavior with regard to the Keltner channels. Prices remain contained with the middle-sized purple Keltner channel while other indices have broken out of that channel. In addition, although the NDX last week moved to higher recent highs, those higher highs must be examined in the context of a broadening formation on the daily chart. Was that a true breakout last week or just a test of the upper boundary? Closes last week were all above the red 9-ema but we can see periods over the last month when such closes were quickly followed by closes back below it.

Lately, we can't use the NDX's performance with respect to the red 9-ema in the same way as we can with other indices. Its behavior with respect to that moving average has mostly told us that this wasn't a strong trending pattern but more of an unstable broadening pattern. If a strong and trustworthy rising trend is to be established, bulls want to see more consistent closes above a rising red 9-ema, not chopping back and forth across it. Today, a 9-ema test looks as almost as likely a next move as a rise to test resistance inside that yellow-orange rectangle. Further-out potential targets are marked in case the NDX breaks up through resistance or down through support on consistent daily closes.

Annotated Daily Chart of the RUT:

By last week, the RUT had begun producing closes at or above the 9-em, but it had not pulled convincingly free of that moving average. It did so, in spades, by the end of the week. It was in full-out breakout mode, breaking above the supposed resistance of its widest Keltner channel and dragging the top boundary of its grey channel outside those boundaries, too.

Securities in breakout mode are dangerous to bears, obviously, because bears don't know how long the breakout will continue before the momentum fades. It's dangerous for short-term bulls, too, because saner conditions will eventually prevail. We can see that the last such momentum run went on quite a while, from 1/22 to 2/20, when prices suddenly dropped quite quickly.

Will there be another month-long run outside the boundaries of the widest channel? Don't bet on it with your profits. It's time to keep moving stops higher on short-term bullish trades.

As with the other indices, the RUT is due for a 9-ema support retest, probably sometime this week. The RUT tends to overrun everything, to the upside and the downside, however, and its momentum run can continue longer than it supposedly should. Bulls should prepare for the possibility of a 9-ema retest, perhaps quite soon. Bears should prepare for the possibility that such a test will not occur soon. If the RUT pulls back and support does not hold on daily closes, further potential downside targets are marked.

Since the RUT has broken through all upside targets on the daily chart, watch its behavior with respect to the 9-ema to gauge strength or weakness, looking for changes in pattern. The RUT shouldn't dip to the bottom of its smallest grey channel again anytime soon, so if it does, the rally pattern would require that it quickly scramble back above the 9-ema.

Annotated Daily Chart of the Dow Jones Transports:

The Dow Jones Transports performed differently last week than its sister index, the Dow Jones Industrials. While the Industrials, what we typically call "the Dow," climbed throughout last week, the Transports had pulled back Wednesday and Thursday. This went against the common observation that the Dow, SPX and OEX don't tend to move too far any one direction if the Transports are going the other direction. Skepticism of Dow, SPX, and OEX gains proved unfounded, however, as they kept moving up and pulled the Transports up with them, too, on Friday. They did not, however, pull it up to new highs or even new recent highs. This divergence still bore watching as we moved into today's trading.

Today's trading produced a small-bodied candle that did not reclaim the recent high and was indicative of indecision more than renewed fervor. A dip to the 9-ema looks possible this week, although not guaranteed. Like the RUT, the Transports tend to move fast when they're moving and, often, to defy gravity when they're moving uphill. Despite last week's divergence, I still recommend watching this index and, particularly, its behavior on daily closes with respect to its 9-ema, for guidance. This is not an optionable index, so we're not watching it with the goal to trade it but just to gain more perspective on the markets.

Annotated Daily Chart of the Dollar:

If the Transports bore watching because of divergences from typical behaviors last week, so did the dollar/equity behavior. Although inter-market relationships shift and can't be used for market-timing even when they're holding steady, the relationship over the last year or two has mostly been dollar up/U.S. equities and dollar-priced commodities down. Of course, that relationship might change. Last week that relationship continued to unlink, with the dollar and equities both gaining. Is the relationship shifting or is something else at work? Is the dollar's behavior offering an early warning that the equity climb might not continue? If so, it's an awfully early warning, because the dollar first started bouncing off its low on 1/28, and equities haven't had a meaningful pullback during that period.

I've been monitoring forex chats, too, and I don't hear a lot of conviction about what's happening or what to expect next with these inter-market relationships. People offer their opinions, but those opinions are mixed. In my opinion, the dollar's rise suggests either 1) strength in the U.S. with respect to a weakening Europe, 2) currency manipulations by Japan, and 3) early signs that forex traders believe QE may go away sooner rather than later. Climbing ten-year and thirty-year bond yields seems to hint that 3) may be at least a part of what's going on despite the assurances offered by some FOMC members. We'll see. I can't guide you because I don't fully understand what's happening, but even the threat of removal of QE isn't usually met with joy among equity traders. Be alert that something unusual is going on.

Today, of course, the usual dollar up/equities down or dollar down/equities up pattern reasserted itself, now that I've spent all that time questioning the divergence from the usual pattern of late.

Tomorrow's Economic and Earnings Releases

I have carried forward Jim Brown's chart from the weekend Wrap.

What about Tomorrow?

Annotated 30-Minute Chart of the SPX:

From last Monday afternoon, all the way through last week, the SPX produced 30-minute closes at or above a rising red 9-ema with few exceptions. Going into today's trading, we had our benchmark to watch for the first sign of any change in tenor: consistent 30-minute closes below that average, long enough to turn the average lower. A minor dip down to the lower boundary of the smallest grey channel, if prices soon reversed back above the red 9-ema, would not constitute such a change in tenor.

Those words were written Sunday night, and the SPX indeed did dip almost to the bottom of its smallest grey channel in early trading, producing one 30-minute close below its red 9-ema, but by the second hour of trading, it was again producing consistent 30-minute closes back above that average. The quick dip hadn't done any damage and the potential upside target remained in place.

However, that long period above the 9-ema without any appreciable pullback grew long in the tooth.

Annotated 30-Minute Chart of the Dow:

Going into today's trading, we had the same benchmark for any change in tenor in the Dow as we did for the SPX: consistent 30-minute closes back below the red 9-ema, long enough to turn that moving average down again. The Dow outperformed the SPX in early trading, not even deigning to dip down to test the lower boundary of its smaller grey channel. If the SPX's long period above the 30-minute 9-ema grew long in the tooth, the Dow's grew extended even longer.

Annotated 30-Minute Chart of the NDX:

Although the NDX's behavior last week with respect to the 9-ema and 30-minute closes wasn't quite as clean as seen on the other indices, that pattern was clean enough to use as a benchmark for the NDX, too. Today, the NDX underperformed the previous two indices by dropping more heavily into the next support and producing more 30-minute closes beneath the 9-ema.

Annotated 30-Minute Chart of the Russell 2000:

As was true of the other indices, the RUT spent all last week since last Monday afternoon producing 30-minute closes at or above a red 9-ema. It should be no surprise that the RUT also broke out of its widest Keltner channel on this chart, dragging its smallest grey channel out, too, in a momentum run. We have our benchmark for determining when there has been even the slightest change in the RUT's tenor: sustained 30-minute closes back below the red 9-ema. Moreover, we could add another one for the RUT: thirty-minute closes back below about 938-940, bringing it back inside its widest Keltner channel on this chart.

After an initial couple of 30-minute closes at or below its red 9-ema, the RUT scrambled higher again, charging up toward Friday's high.

Most indices are due pullbacks into 9-ema tests this week. The Dow has gained nine days out of the last ten, and so has the SPX. The KBW Bank Index has gained 10 out of the last 10 days, and so has the RUT. Absolutely nothing prevents further gains, even a buying crescendo. However, if we're thinking about probabilities, we should be thinking in terms of protecting our trades against pullbacks to the rising 9-ema's, at least.

I'm a little afraid of that buying crescendo. The SPX's all-time high sings its siren song, and it's options expiration week with its often-seen bullish underpinning, while everyone believes that the markets should pull back. However, if I pull back and think about probabilities and likely behavior, it's time, don't you think for those 9-ema tests? Even if such tests occur, they can be accomplished via sideways trending into a rising 9-ema, so bears remain at risk that such a test could be accomplished without any actual pullback. If indices should pop higher tomorrow morning, with the SPX popping up toward that all-time high, watch out for the possibility of a pop-and-drop, but if prices don't pull back, we could see shorts forced to cover and more gains.