Market Internals


Hold on!

A tide of non-manufacturing or services PMI numbers started off a day that already had featured volatility, beginning in Asia last night. New revelations about recent banking constraints in China also added to uncertainty. Reuters revealed the measures reportedly meant to constrain debt risk and curtail shadow banking, not yet officially confirmed. Those measures reportedly call for stricter regulation of off-balance-sheet lending.

China's December HSBC/Markit Services PMI measured 51.2, easing slightly from November's 52.3. Although anything above 50 still indicates expansion, Markit commented that the rate of expansion in China is now the weakest it's been since August 2011.

In addition, the Thai baht ended at a near four-year low amid ongoing political uncertainty, reminding market participants of the role currencies can play in market performances. As if those developments wouldn't be enough to draw attention, Congress returned to work this week. Politicians are sure to jog our memory of the important political matters that could derail markets.

This weekend, Philadelphia Fed President Charles Plosser did his best to remind market participants of another issue. He followed up Friday's statements, reported by Jim Brown this weekend, with a speech on Saturday. He reiterated Friday's skepticism about pinning monetary policy on specific mathematical models that predict unemployment and economic growth. For example, he mentioned that the Great Recession may result in a permanent hit to output in the U.S. If that is true, the Fed's intention to keep rates at or near current low levels until employment returns to some prior level may be a faulty model, he opined.

Plosser wasn't the only Federal Reserve President to speak this weekend. The Federal Reserve Bank of Boston's Eric Rosengren did not agree with the FOMC's decision to taper last month. He believes inflation remains too low and unemployment too high. He will not be a voting member this year, however.

Federal Reserve Bank of New York President William C. Dudley spoke this weekend on the unique position that the New York Fed holds, speaking of the number of economists and not just theoreticians employed by Federal Reserve Bank of New York. In this context, he said we need a better understanding of how asset purchases function in easing financial market conditions. He mentioned, as an example, that unemployment appears to be easing more than the growth of the economy warrants. He will be a voting member next year.

Perhaps we shouldn't be so focused on the economy, if we believe the prognosis of the Eurasia Group. This group advises businesses about economic and political concerns. Its analysts have concluded that we shouldn't worry too much about the taper. The U.S. economy's growth should accelerate this year even if the Federal Reserve pulls back on its asset purchases, this group said. China's government is acting to reduce risk. Japan may be pulling out of stagnation. Europe is no longer in recession. To sum up, the risk of the collapse of the financial system has ended for now, Eurasia's economists say. Does that suggest that all is hunky dory? No, geopolitical risks will rise to the forefront, Eurasia predicts, and it will be incumbent upon the U.S. to maintain its relationships with its allies.

How is the U.S. economy performing, after all? By late last week, Intuit's small business employment numbers were showing an uptick in November's jobs in the small business sector, to the tune of 10,000 jobs. Their December stats revealed a 0.09 percent employment increase. Some commenters noted that increase might have been due to holiday hiring, hiring that might not persist.

We'll see other, more widely watched employment numbers later this week. Arguably, the most volatility today came from gold, experiencing what was being termed a "flash crash" this morning on the Comex. At about 10:14 am ET, gold futures fell $30 on heavy volume before a 10-second trading halt was triggered. A trade of about 4,200 contracts precipitated the move, but some are calling the move a probable fat-finger trade. Bloomberg noted today that this week, analysts are the most bullish they've been on gold since December, 2012.

On the Comex, gold futures (/GC) for February delivery settled at 1238.0, down 0.6 and far above the 1212.60 low of the day during the so-called flash crash. Today's 145,907 volume on that contract was also well above Friday's 114,982. Silver (/SI) for March delivery settled at 20.097, down 0.105. Copper futures (/HG) for March delivery settled at 3.3595, up 0.0045. On the Nymex, light sweet crude (/CL) for February delivery settled at 93.43, down 0.53.

The SPX fell 0.25 percent; the Dow, 0.27 percent; and the NDX, 0.33 percent. The RUT declined 0.77 percent, and the SOX, 0.55 percent. The Dow Jones Transportation Index fell 1.27 percent. However, financials, as represented by the KBW Bank Index, gained 0.35 percent, although they trended down from the 10:00-10:30 am high all the rest of the day.

Yields fell while treasuries gained. Yields on the ten-year closed the day at 2.9610 percent, down 0.0340. Yields on the thirty-year closed the day at 3.8980, down 0.0320.

Monday's Developments

Asian bourses turned lower last night and stayed lower. During last night's trading, the yen climbed against the dollar. That's not the direction that Japan wants the yen to go. That currency pair has been volatile today, too. The Nikkei 225 lost 2.35 percent; the Hang Seng, 0.58 percent, and the Straits Times, 0.24 percent. China's Shanghai Composite lost 1.80 percent.

In Europe this morning, services PMI numbers pointed to disparity in the health of Germany's economy, with its 53.5 reading, when compared to France's 47.8. France's result represented a six-month low. That disparity also showed up when comparing Spain's 54.2 to Italy's 47.9. Italy's number moved deeper into the contraction zone. Other than Spain's upside surprise, all these numbers disappointed.

U.S. Treasury Secretary Jacob Lew heads to Germany later this week. His goal is to persuade Germany's new coalition government to take measures to even out Europe's recovery by helping the weaker countries. Germans believe their country's performance during the downturn showed the wisdom of their way of doing things, and they're disinclined to help out those who did not display the same discipline prior to the downturn.

European bourses traded both sides of the flat-line level today and ended up with mixed results. The FTSE 100 closed at the flat-line level, up 0.06 or 0.00 percent. The DAX lost 0.08 percent, and the CAC 40, 0.47 percent. Spain's IBEX 35, however, gained 0.92 percent, and Italy's FTSE MIB, 0.63 percent.

Today's slate of U.S. economic releases included the Gallup U.S. Consumer Spending Measure, an index derived from self-reported spending habits of a random sampling of people in the U.S. Monthly bills and big purchases are not included in this daily sampling as it's intended to measure discretionary spending habits. The report shows Americans spending $96 per day, an amount that Gallup termed the highest seen since September, 2008. Gallup also noted that it was the highest spending seen in any December in six years.

Moody's weekly Business Confidence rose again, to 38.8 from last week's 38.4. This week is the third in the row when Moody's summary pointed out that business sentiment was reaching record highs for the history of this survey.

Markit released its December Final Services PMI at 9:00 am ET, an hour ahead of the more familiar ISM report. Markit pegged December's Services PMI at 55.7, easing slightly from December's first flash reading of 56.0 and November's 55.9. The readjustment in the services components inched the Composite (manufacturing and services) Index down to 56.1 from November's 56.2, but Markit noted that new order growth in both services and manufacturing was the fastest seen since April, 2012. New businesses rose the most in 20 months in both manufacturing and services. Positive sentiment was sharply higher than November's, with new product launches planned and improving economic conditions expected. Business expectations jumped to 78.7 from the prior 72.4. All components rose. Markit believes these results point to record economic growth.

At 10:00 am EST, the Institute for Supply Management (ISM) released its assessment of December's Non-Manufacturing PMI. The headline 53.0 percent was below the 54.6 percent forecast and the prior 53.9 percent. However, the index remained above 50 percent and indicated expansion for the 48th consecutive month, the ISM noted.

Why was the number below the forecast and prior numbers? The new orders, inventories, and backlog of orders components all slipped, and each was in contraction territory. New orders slipped to 49.4 percent from November's 56.4 percent. Its trajectory was markedly different from Markit's results. Backlog of orders slipped to 46.0 percent from 49.0 percent. Inventories slipped to 48.0 percent from 54.0 percent. Eight industries reported growth, and eight reported contraction. While most respondents reported steady or improving business, some businesses noted that the early and severe weather had hurt their businesses. Some respondents worried about the impact of the ACA.

The Census Bureau also detailed November's final Factory Orders. The headline 1.8 percent growth matched expectations, but it was better than a match when the prior number was considered. The prior flash result was revised higher from a drop of 0.9 percent to a drop of only 0.5 percent.

Durable orders rose 3.5 percent. Transportation orders drove the increase, rising 8.4 percent. Breaking down the transportation orders, the biggest driver was in nondefense aircraft and parts. Those big-ticket items render the transportation orders volatile. Excluding those transportation orders, new orders still increased, but by a more modest 1.2 percent. Excluding defense orders, new orders increased 3.5 percent.

The Census Bureau reported that shipments of manufactured durable goods rose 1.8 percent; unfilled orders, 1.0 percent; inventories, 0.3 percent, nondefense new orders for capital goods, 9.4 percent; and defense new orders for capital goods, 9.6 percent. However, unfilled orders for defense declined 0.9 percent and inventories, 2.1 percent.

After the close, the U.S. Senate was scheduled to vote on the nomination of Janet Yellen as Federal Reserve Chairperson. As this report was prepared, the Senate was apparently ready to confirm Ms. Yellen. Her nomination had been expected to be confirmed. If all goes as expected, she will be the first woman to head the Federal Reserve.

Story stocks today included Boeing (BA, 138.41, up 0.79 or 0.57 percent). The International Association of Machinists and Aerospace Workers District 751 approved the company's eight-year contract extension offer. This contract includes BA employees building the 777X and its component wing in the Puget Sound area. In addition, the company reported that in 2013 it set company records for the most commercial airplanes delivered in a year and the most unfilled commercial orders at the end of the year.

Rambus (RMBS, 9.20, down 0.40 or 4.17 percent) and Samsung have inked a 10-year license agreement that extends their relationship and clears the way to the inclusion of technologies, including security technologies, from Rambus in Samsung phones. RMBS will receive an upfront payment of $22 million and then $15 million per quarter for the first half of the agreement. The last five years of the agreement, the payments will be variable.

Best Buy (BBY, 39.41, down 1.27 or 3.13 percent) perhaps suffered by association. A regional electronics retailer, Hhgregg (HGG, 12.93, down 0.67 or 4.93 percent), that operates 228 stores in 20 states disappointed when it released its earnings report.

T-Mobile U.S. (TMUS, 33.48, up 1.20 or 3.72 percent) will buy 700MHz A-Block spectrum licenses from Verizon Wireless(VZ, 48.69, up 0.27 or 0.56 percent) for $2.365 billion in cash and the transfer of other licenses with an estimated value of about $950 million. The purchase is subject to approval by the FCC and Department of Justice. When TMUS combines these licenses with existing ones, it will have important low-band spectrum in 21 of the top 30 markets across the U.S. and in nine of the top ten. It will have low-band spectrum that will cover about 158 million people.

Pandora (P, 31.49, up 3.90 or 14.14 percent) benefited when it released data showing that it had captured an 8.6 percent share of the radio-listening market, up from 2012's 7.58 percent. P will now include targeted ads to in-car systems that have Pandora.

Network security company Palo Alto Networks, Inc. (PANW, 57.84, up 0.40 or 0.70 percent) has acquired Morta Security, the company announced after the close. The stock was last up 59.58, or 1.74 points from the day's close, as this report was prepared.

Fox Business News said it was AOL (44.65, up 0.25 or 0.56 percent) that tried to buy BusinessInsider dot com, but they could not agree on a final price.

SolarCity Corporation (SCTY, 63.61, up 4.34 or 7.32 percent) soared today. Goldman Sachs upgraded the company and added it to their "Conviction Buy" list.

No such luck for First Solar (FSLR, 51.26, down 5.48 or 9.66 percent). Goldman Sachs downgraded the company and set a price target of $45, saying the company wasn't positioned well for changes in the industry.

Many companies received downgrades. Apple (AAPL, 543.93, up 2.95, 0.55), eBay (EBAY, 51.78, down 1.48 or 2.78 percent), and Celgene (CELG, 162.62, down 7.19 or 4.23 percent) all received downgrades, with AAPL falling low enough to test its 50-sma and the flat-line level at one point in intraday trading.

Twitter (TWTR, 66.29, down 2.71 or 3.93 percent) had no luck, either. Morgan Stanley cut the firm's rating of the company and said that investments in GOOG (1,117.32, up 12.32 or 1.11 percent) and FB (57.20, up 2.64 or 4.84 percent) had a better risk/reward setup.

Perhaps all of us who haven't yet done so are going to have to wrap our heads around the concept behind bitcoins. Another company, online-games company Zynga Inc. (ZNGA, 4.04, up 0.07 or 1.76 percent), has announced that it will accept bitcoins for some products.

Plum Creek Timber Co. (PCL, 44.75, down 1.59 or 3.43 percent) tumbled but then stabilized at $43-44 support. Barron's this weekend included an article that said bearish investors speculated that the stock's price could drop 20 percent or more.

Men's Wearhouse Inc. (MW, 51.68, up 1.09 or 2.15 percent) and Jos A. Bank Clothiers Inc. (JOSB, 56.87, up 2.46 or 4.52 percent) are at it again, jostling to see which of these firms is going to buy the other. This time, it's MW offering about $1.6 billion to buy JOSB shares for $57.50.

Let's look at daily charts. We'll find that most indices fell back to retest their rising red 9-ema's last week. What happened next?


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:

What happened since the SPX dipped to the red 9-ema last week? Not much. More importantly, what hasn't happened? The SPX has not quickly rebounded from its 9-ema test, as it often does when it's in a strong rally mode. When the SPX fails to rebound from a 9-ema test, the SPX is often setting up for a retest of the lower boundary of its smallest Keltner channel. That boundary would likely be crossing somewhere between 1,808-1,820 if it's retested soon. There's also potentially strong historical support from some of November and December's swing highs waiting in that zone, so it's possible that such a support test would result in a bounce back up toward the 9-ema. However, if the SPX fails to sustain support on daily closes at or above about 1,808, the Keltner setup suggests it's vulnerable to a drop to 1,789-1,800.

The Keltner setup suggests other potential downside targets in case successive potential support levels should fail. What the Keltner setup doesn't suggest, at least not yet, is potential support at December's swing low. It's possible that the SPX will never drop that far, of course, or that the Keltner setup will have shifted by then, but if not, also be aware of that potential historical support from about 1,767-1,776. I've seen prices barrel right through historical support to land where the Keltner targets were projecting they would land, and I've seen it work the other way, too.

What if the SPX gaps higher or sustains daily closes back above the red 9-ema? The SPX doesn't have a firm Keltner target in that case although we can presume that a retest of the top boundary of its smallest Keltner channel, likely to be pushed up toward last week's high on any rally, might be the next target. Resistance there held last week, but any move up there again this week is likely to be driven by a news-based move. The Keltner setup doesn't give any outlook as to what would happen next.

Annotated Daily Chart of the Dow:

The Dow has held up fairly well on its retest of the 9-ema's potential support, but the Dow also hasn't rebounded as yet. If it does rebound, a retest of last week's high might be the logical next potential target. The Keltner setup offers no prediction as to whether such a test would successfully break through the resistance near 16,588-16,600. Have profit-protecting plans in place if that level is tested, just in case.

As long as the Dow maintains daily closes above about 16,324, another push higher must be considered at least as likely as a deeper drop. Sustained daily closes beneath about 16,324, however, set up a new potential downside target near 16,150-16,295. Keltner and historical potential support levels converge throughout that zone, so it's difficult to narrow that zone and predict whether or when a drop might stop within that range.

However, sustained daily closes beneath about 16,150 set up a potential Keltner target of 15,945-16,060. Other potential downside targets are marked on the chart, too, if needed.

Annotated Daily Chart of the NDX:

The NDX is crawling along the top of that former automatically-drawn regression channel. When viewing Jim Brown's weekend Wraps, you can see that the NDX is also crawling underneath a manually drawn long-term trendline. Whichever channel or trendline you prefer, the NDX either is weighed down by overhead resistance or keeps returning to stronger support when bears overrun bulls' attempts to push its component stocks higher.

If the NDX should head higher, this chart suggests that it might encounter resistance on daily closes near 3,565, if not sooner. If the NDX is able to break through that resistance on daily closes or even intraday, it might be headed up to a retest of last week's high. The likely success or failure of such a retest is not suggested on this chart. Bulls should have profit-protecting plans in place, just in case of another rollover, if last week's high is retested.

The current chart setup suggests that sustained daily closes beneath about 3,500-3,510 would set a new potential downside target from about 3,427-3,472. Other, lower potential downside targets are marked in case the NDX should not be able to sustain daily closes at the higher potential support zones.

Annotated Daily Chart of the RUT:

The RUT has spent the last week producing daily closes beneath about 1,169 and above about 1,147. If the RUT bounces, it will again be bumping up against potentially significant resistance on daily closes up near 1,169. If it can sustain daily closes above that resistance, it's possible that it would encounter resistance again from about 1,175-1,180. The Keltner setup on this chart suggests no further upside targets. Nor is there one if we were to look at a weekly chart, so the RUT would appear to be in runaway mode if it runs much past 1,180.

Sustained daily closes beneath about 1,147 suggest a next downside target of 1,120-1,131. Other lower targets are also marked in case the RUT should sustain daily closes below about 1,120, but that's an important level to hold. A trendline that crosses the swing lows since August is not shown but now crosses at about 1,120.

Annotated Daily Chart of the Dow Jones Transports:

Although this index is not optionable and therefore is not one we employ in our options trades, it can be an important indicator index. It can signal something about the health of the economy and sometimes moves ahead of other indices. We see that it's underperforming its sister index, the Dow Jones Industrials, and that's a worrisome trend for bulls if it continues. This index can move big when it moves, so it should perhaps go back on the radar screen if you don't already watch it.

This index, unlike the others, has nearly touched the bottom of its smallest Keltner channel. It would have done so today except the downturn was so pronounced that the falling prices nudged that lower channel boundary lower, too. Don't believe too strongly in a Dow or even SPX or OEX move in any direction if the ^DJT is moving in the opposite direction.

Tomorrow's Economic and Earnings Releases

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

Tomorrow's U.S. calendar is light, but Wednesday's offers at least two opportunities for increased volatility. We also don't know what we'll hear as the Senate and House gather again. I know what the women of the Senate and the House intend: their stated intention is to take a leadership role in finding compromise that avoid impasses such as those we've had over recent months. Whether they're successful or not remains to be seen.

What about Tomorrow?

Annotated 30-Minute Chart of the SPX:

For several days, the SPX has been churning back and forth through the boundaries of its declining smallest Keltner channel. When an index declines, it tends to churn all the way back and forth through Keltner channels more often than it does when rallying. When rallying, it's more often stopped by the red 9-ema and bounces back. Because the 30-minute red 9-ema hasn't been stopping the SPX's move, I haven't marked it as potential support and resistance on 30-minute closes. However, you might keep it up on your chart so you can tell when it again becomes an important benchmark, as it may have been doing in the last couple of hours today before the last-minute drop.

By late this afternoon, we could see that nothing would have changed in the SPX's (short-term bearish) tenor as long as the SPX produced 30-minute closes below about 1,835 and above about 1,820. Such moves just preserve the downward projection through its declining smallest (grey) Keltner channel and keep that channel pointing lower, too.

Sustained 30-minute closes beneath about 1,829 keep the SPX in the lower or bearish half of the nested Keltner channel system. Sustained 30-minute closes beneath about 1,820 set up a new potential downside target now near 1,812-1,815, although the lower boundary could get pushed to and slightly lower than 1,810 on a strong downside move.

Sustained 30-minute closes above about 1,835 set up a potential upside target near 1,842-1,846, where historical resistance begins to kick in, too. We can see various swing highs and last week's 1,840-ish level, too, that could now serve as resistance, but the Keltner setup suggests that once those 30-minute closes are occurring above about 1,835, the SPX could drive all the way up to that highest orange rectangle without stopping at those other levels. An even higher drive all the way up to last week's high couldn't be precluded once the SPX gets as far as that highest orange rectangle.

Annotated 30-Minute Chart of the Dow:

The Dow's setup is similar: 30-minute closes beneath about 16,513 and above about 16,362 suggest that the Dow is still stuck in congestion. Rather than declining, the Dow's smallest channel moves mostly sideways, however. In the last few days, the Dow also churns back and forth at will across the red 9-ema, although the 9-ema may have begun taking a stronger role again in the last couple of hours today until the last-minute drop near the close. Watch to see if that moving average reasserts itself as a benchmark of near-term bullish/bearish action.

Sustained 30-minute closes above about 16,513 suggest another run at gathering resistance from about 16,550-16,600, with resistance composed of both Keltner and historical potential resistance levels. Sustained 30-minute closes above 16,600 would be needed before we consider the Dow breaking out to the upside again.

Sustained 30-minute closes below about 16,362 suggest the Dow may be vulnerable to a drop to 16,205-16,243 before next short-term support is found.

Annotated 30-Minute Chart of the NDX:

Like the SPX, the NDX has also been trending lower the last few trading days, with most 30-minute closes within the boundaries of its smallest, grey Keltner channel. That channel definitely trends lower on the NDX's chart. That channel pointed toward the lower boundary of the widest of the nested channels on this 30-minute chart, and the NDX fell into that target zone today before bouncing.

The upper boundary of the smallest grey Keltner channel is likely to be pushed up into the potential resistance from about 3,542-3,552 on any further gains, so the NDX needs to sustain 30-minute closes above about 3,352 before it sets a new tentative upside target. That new target would be at about 3,563-3,571, with a higher target also marked in case the NDX can sustain 30-minute closes above about 3,571.

If the NDX rolls over again through its smallest Keltner channel, those who want prices to steady would like to see support firm near 3,520-3,527. Otherwise, the NDX would be vulnerable to a retest of today's low and perhaps to lower prices, too, if that support should fail on a retest. The Keltner setup suggests a target of 3,502-3,510. Look back at the daily chart for deeper potential downside targets if support near 3,500-3,502 fails.

Annotated 30-Minute Chart of the Russell 2000:

A cursory glance at the RUT's 30-minute chart reveals that the RUT is the most volatile of the indices checked in today's 30-minute charts, if you measure volatility by the way it breaks through Keltner boundaries. The setup now indices that 30-minute closes above about 1,145 and below about 1,156 mean that the RUT is just churning sideways. However, as was made evident late Friday and early this morning, the RUT can break out and hit the next target in one quick move before reversing again. Take any chart setup here with a grain of salt.

If the RUT either gaps above 1,156 and holds above it tomorrow morning or else sustains 30-minute closes above it in a more measured move, it sets a tentative new short-term upside target from about 1,160-1,165. If the RUT gaps below about 1,145 and doesn't quickly bounce or if it sustains 30-minute closes below it on a more measured move, it sets a potential downside target near 1,138-1,141. Anything in the wide swath between 1,145-1,156 is, unfortunately, noise.

Look to the daily charts to find new lower targets if the RUT drops and fails to hold 30-minute closes above about 1,138. If the RUT breaks sustains 30-minute closes above about 1,165, it perhaps sets a potential next short-term upside target near 1,175, but that's speculation based on the daily chart.

Were developments in China and Europe last night as well as our own economic releases the reason our markets saw weakness today? Did developments last night precipitate the moves in our markets, starting us off on a somber mood? It's not that simple. China's Composite Index tumbled most of December, and our markets didn't pay much attention. It's simply time for reassessment and repositioning for a new year, particularly before the next set of political wrangling and before this week's economic news. Now we find out how it all works out. Deeper drops are indeed possible, as are further rallies, and those possibilities have been marked on the charts. Have your just-in-case plans made and manage your risk.

Linda Piazza

Annual End of Year Renewal Special

It is that time of year again when we offer the best prices of the year on a package of our top newsletters. If you have been a subscriber for several years you know this is the best price and best deal of the year.

Please follow the link below to see for yourself the EOY subscription special for 2014. You will not be disappointed!