Market Internals


Across the globe, market participants proved risk-averse in Monday's trading. The geopolitical tensions played out across multiple media outlets today. Traders and investors across the globe also confronted a confusion of economic reports. Here in the U.S., those reports hinted that the economy might be rebounding--raising worries about the taper again--while some global reports suggested that emerging economies struggled. Barclays raised its forecast for the U.S. GDP for the first quarter to 2.0 percent from the firm's prior 1.8-percent estimate.

President Obama accused Russia of breaking international law. Germany's foreign minister, Frank-Walter Steinmeier, joined President Obama, EU foreign ministers and other voices in warning that Russia was taking a dangerous path by posting Russian soldiers at airports and other positions on Crimean soil.

Foreign ministers in Europe pushed for mediation but did not rule out economic actions if mediation failed. Europe receives about 1.2 million barrels of Russian oil each day via the southern branch of the Druzhba pipeline that passes through Ukraine. Europe also receives almost a third of its natural gas via the Ukraine, too.

The next G8 meeting was scheduled to take place in Russia, and seven of those eight G8 powers have announced that they are stopping preparations for that next summit. Instead, those seven began discussing tougher punishments for Russia. Some politicians, including U.S. Secretary of State John Kerry, said that Russia may not be allowed to remain in the G8, and he plans a trip to Kiev tomorrow. House Majority Leader Boehner weighed in, too, saying it was time for sanctions. The European Council called an extraordinary meeting for Thursday to discuss the crisis.

However, the efficacy of any of these measures remains uncertain. Russia responded by saying such threats were unacceptable. By early afternoon, Russia had also denied that it had insisted that Ukrainian forces in Crimea or on Ukrainian warships surrender by 5:00 a.m. tomorrow morning or face an assault, as some rumors had suggested. I guess we'll see who was telling the truth by the open tomorrow.

Pro-Russian demonstrators occupied some buildings in the east of Ukraine. Ukraine claims those protests are led from Russia. Besieged lawmakers in the Donetsk region voted to support popular initiatives but did not meet all the protesters' demands.

Russia's placement of troops in the Crimea wasn't the only Russian-related decision that might have unsettled investors this weekend. Russia's central bank raised rates, perhaps in response to the ruble's tumble after the crisis heightened. That action hinted to some market pundits that Russia was indeed vulnerable to the insistence of nations across the globe, but that's something that again remains to be seen.

The SPX dropped 0.74 percent; the Dow, 0.94 percent; and the NDX, 0.75 percent. The RUT fell 0.56 percent, and the SOX, 0.64 percent. The Dow Jones Transportation Index (DJT) dropped 0.62 percent. Financials, as represented by the BKX, the KBW Bank Index, dropped 1.07 percent.

Many commodities rose. Energy, corn, and wheat supplies might be impacted by the crisis in the Ukraine. Light sweet crude futures (/CL) for April delivery settled at 104.92, up 2.33. Gold futures (/GC) for April delivery settled at 1350.30, up 28.7 as traders sought a safe-haven trade. Silver futures(/SI) for May delivery settled at 21.448, up 0.244. Copper futures (/GC) for May delivery settled at 3.1720, down 0.0185. Strength in copper depends on strength in the globe's economies, and China's results likely did not inspire that confidence.

Monday's Developments

Asian bourses turned in mixed performances overnight. The Nikkei 225 lost 1.27 percent, but closed at 14,652.23, more than 200 points above off its 14,443.10 low of the day. The Hang Seng dropped 1.47 percent, and the Straits Times, 0.75 percent.

Reacting to the geopolitical tension and its own economic reports, China's Shanghai Composite gained 0.92 percent. This weekend, the official manufacturing PMI had dropped to 50.2, followed by the Markit manufacturing PMI reported last night at 48.5, in contraction level. Experts caution, however, that the long holidays fall during this reporting period, and that it's difficult to make appropriate seasonal adjustments.

China had some good news. Also last night, China's official non-manufacturing PMI rose to 55.0, a three-month high. Services are contributing a bigger percentage of GDP than they did in the past.

Europe's Manufacturing PMI met expectations this morning, but both the Spanish and Italian numbers disappointed. European bourses were likely more focused on the situation in the Crimea and on the ECB's Mario Draghi's statement warning that the longer the European inflation level stayed down, the greater the risk that it would not rise back to the target two percent.

The FTSE 100 lost 1.49 percent; the DAX, a scary 3.44 percent; and the CAC 40, 2.66 percent. Spain's IBEX 35 dropped 2.33 percent, and Italy's FTSE MIB, 3.34 percent.

Today's list of economic reports is extensive. Discussion will be kept as short as possible to avoid lengthening what will already be a long Wrap.

The Bureau of Economic Analysis released January's Personal Spending and Personal Income, both expected to rise 0.2 percent for the month, and the Core PCE Price Index, expected to rise 0.1 percent. Prior gains had been 0.4, 0.0 percent, and 0.1 percent, respectively.

Core PCE is an important inflation measure, believed by some to the FOMC's favorite measure. It met expectations. Personal spending measured a 0.4-percent gain, a higher-than-expected gain, and personal income rose 0.3 percent, also more than expected. The Bureau of Economic Analysis said that real personal income increased 0.3 percent and real PCE gained 0.3 percent, both contrasting with drops in December.

The Bureau's summary noted that "[p]ersonal income . . . was boosted by several provisions of the Affordable Care Act (ACA)" and also mentioned cost-of-living adjustments and other factors. Working against the gains, the expiration of the Emergency Unemployment Compensation programs and other factors decreased personal income. Personal saving decreased.

For all of 2013, personal income rose 2.8 percent, less than 2012's 4.1 percent. Disposable personal income rose 1.9 percent, less than the prior 3.9 percent. Real PCE increased 2.0 percent, roughly the same as the prior year's 2.2 percent. Inside this report, the Bureau also detailed revisions to the population estimates as well as other revisions.

Moody's weekly Business Confidence measured the same as last week's 37.0. The summary that accompanies the report also proved little changed from last week's. Mark Zandi, the analyst in charge of the report, still believes that the continued high confidence expressed by respondents signals that recent softer results are believed to be due to the punishing winter conditions. Moody's again reported that sentiment was "consistent with an economy . . . expanding well above its potential."

Markit released a number of reports today, including the U.S. February Final Manufacturing PMI. This follows up last week's Flash Manufacturing PMI. Markit's version had been expected to measure 56.7, as it did last week, but it jumped to 57.1 in what Markit termed the "[s]harpest improvement in manufacturing business conditions since May 2010." Markit pointed to an eleven-month high in job creation and faster output and new order growth for the improvement.

The ISM's February Manufacturing PMI always draws more attention than Markit's, and it was due an hour later. The ISM's Manufacturing PMI and Manufacturing Prices measured 53.2 and 60.0. They were expected to measure 52.3 and 57.2, respectively, so this report beat on both measures. Prior numbers had been 51.3 and 60.5, respectively.

Digging beneath the headline number unveiled at least one troubling point. The Institute for Supply Management's assessment differed from Markit's. The ISM noted that while new orders, employment and inventories were growing, production was contracting. The production category was reported at 48.2, down from January's 54.8 and below the 50.0 benchmark. New orders and employment categories were growing at a faster rate, however, somewhat countering the negative news.

While still below the benchmark 50 and considered "too low" by ISM, customers' inventories rose to 46.5 from the prior 44.0. Are customers beginning or needing to restock? The backlog of orders moved from below the benchmark 50, at 48.0, to above that benchmark, at 52.0.

The Department of Commerce released its January Construction Spending today, too. Analysts had predicted a 0.0 percent headline number, down from the prior 0.1 percent, but construction spending rose 0.1 percent. In addition, the prior number was revised higher to 1.5 percent. That brought January's construction spending 9.3 percent above the year-ago number.

In private construction, January's residential construction rose 1.1 percent above December's, but nonresidential dropped 0.2 percent from December's. In public construction, spending dropped 0.80 percent from the revised December number. Educational construction dropped 1.8 percent from December's, but highway construction climbed 3.7 percent above December's.

Experts had predicted that February's Total Vehicle Sales would measure 15.3 million, up slightly from the prior 15.2 million. That prediction proved correct.

Chrysler reported sales up 11 percent, saying that the cold temperatures boosted sales of trucks, especially its Jeep brand. Nissan also saw a higher demand for trucks, with Nissan sales rising 16 percent. GM reported sales that dropped one percent, but that result was better than analysts had predicted. Ford sales dropped six percent, but the company reported surging sales the last week of February. Ford believed it had good momentum going into March.

Toyota, one of the three top automakers in the country, said sales declined 4 percent. Automakers were offering more discounts to move inventory, experts commented, and those incentives are likely to carry over into March. In addition, inventories were at about 80 days at current rates of sales, with that number higher than the more optimum two months of inventories.

In addition to these most-watched reports, J.P. Morgan released its J.P. Morgan Global Manufacturing PMI. J.P. Morgan surveys more than 10,000 purchasing managers from 32 global economies. February's result of 53.3 was a 34-month high, the release noted.

The results noted continuing disparities between developed and emerging markets. China, South Korea, and Russia contracted, and the results of several other emerging markets were below global averages. The conclusion was that the manufacturing sector had been showing very rapid growth late last year but that, excluding the U.S., global PMI was trending lower off that very rapid growth rate. The prediction was that the pattern would become more visible in March's reading.

Gallup also released February's U.S. Consumer Spending Measure. Results are tallied from self-reported consumer discretionary spending reports from a random sampling of U.S. consumers. Those reports include online spending. The daily average rose to $87 from January's $78. Gallup called that a "solid recovery," especially since that's the strongest February number since 2008.

Story stocks included 3D Printer Maker Stratasys (SSYS, 123.99, -3.14 or 2.47 percent), reporting earnings. Excluding non-recurring items, earnings of $0.50 per share beat expectations of $0.49 per share. Revenues were $155.1 million, also beating expectations of $151.64 million. The company reaffirmed its guidance for the full year. The company predicted an EPS range of $2.15-2.25, with the current consensus at $2.21, and a revenue range of $660-680 million, with a current consensus of $672.14 million. It should be noted that the average of each of those ranges is below the prior consensus. The company's report mentioned strong demand in all its product lines. The company bounced in after-hours trading and was last at 124.75 as this report was prepared.

Apple (AAPL, 527.76, up 1.52 or 0.29 percent) wants to enable you to more easily make calls, access messages and listen to music in your cars. Today it unveiled a new technology, CarPlay, designed to do just that. The stock declined in after-hours trading, last at 526.89 as this report was prepared.

This weekend, Jim Brown detailed some of the latest back and forth between Mens Wearhouse and Jos. A. Banks Clothiers Inc. (JOSB, 62.31, up 0.23 or 0.37 percent), so there's no need to go into detail again about various negotiations. Men's Wearhouse has now announced a Non-Disclosure Agreement with JOSB. Perhaps soon, we can stop writing about these two companies.

Nu Skin Enterprises (NUS, 74.61, down 8.91 or 10.67 percent) guided estimates for first-quarter profit lower today. NUS blamed the ongoing investigation by China's government as to whether the company operates on a pyramid scheme. The company's CEO denies that the company is a pyramid scheme. The profit range was guided to $0.90-0.94 per share on revenue of $650-$670 million. Consensus had been for $1.20 a share on revenue of $732.3 million.

During an interview for CNBC, Warren Buffet offered hints as to the next successor in Berkshire-Hathaway, saying that the successors would be chosen from within the company. He agreed with the interviewer that Todd Combs and Ted Wechsler are people who view investments the way he does. He admitted that the company had so much talent that there could even be a third candidate, although he wasn't actively looking for a third candidate. None of the top candidates is a woman, he said. The list of top candidates doesn't change much and should be slow to change, he said.

When I was looking at a heat map this afternoon, I saw only tiny islands of green. One of those was produced by Lorillard (LO, 53.61, up 4.55 or 9.27 percent), gaining on rumors of a possible deal with Reynolds American (RAI, 53.29, up 2.46 or 4.84 percent). RAI dropped back in after-hours trading, and was last at 52.78 as this report was prepared.

Darden Restaurants (DRI, 48.47, up 0.14 or 0.29 percent) blamed bad weather when it said third-quarter earnings would be $0.82 per share rather than the prior expected $0.93. The company expects its Red Lobster restaurants' same-store sales to decline 8.8 percent, and its Olive Garden restaurants, 5.5 percent. The company also detailed its progress on spin-off plans for Red Lobster.

Tyco (TYC, 43.02, up 0.84 or 1.99 percent) benefited from news it will sell a Korean unit to Carlyle Group.

Bitcoin was again in the news after the bankruptcy of the Mt. Gox exchange last week. The U.K. reportedly plans to issue taxation rules that would treat bitcoins like other currencies, perhaps exempting purchases and trading commissions from value-added taxes. Oh, and Warren Buffett weighed in on bitcoin. It's not a currency, he said.

After the close, engineering, procurement, construction and installation company McDermott International Inc. (MDR, 8.11, -0.22 or 2.64 percent) announced disappointing earnings for the fourth quarter and full year 2013. MDR said it would not offer an outlook for the foreseeable future as its newly robed President and Chief Executive Officer was working "through a number of legacy issues." The company reported a Q4 net loss of $1.37 per fully diluted share on revenues of $517 million, a 48-percent decrease when compared to the year-ago $996 million. Thomson Reuters had gathered consensus estimates of profits of $0.15 a share on revenue of $825.61 million in revenues. Full-year comparisons were just as disappointing. Figures for 2013 were a loss of $2.19 per share on revenues of $2.8 billion when the expectation was a loss of $0.67 per share on revenues of $2.96 billion. As this report was prepared, the stock traded at 7.40, down 0.71 or 8.75 percent from the close.

Late-breaking news just as this report was submitted showed Ascena Retail Group (18.87, up 0.58 or 3.17 percent) dropping in after-hours trading, after reporting earnings. It was at 17.91 as this report was submitted. Sales at its Justice brand stores dropped steeply. The company lowered the full-year guidance to $1.00-1.05 from the prior $1.10-1.15.

Krispy Kreme Donuts (KKD, 18.56, -0.46 or 2.42 percent) reported earnings of $0.16 per share on revenue of $114.2 million against expectations of $0.15 per share and revenue of $114.1 million. The company said adjusted earnings for 2015 would be $0.71-0.76, lower than the previously expected $0.77 per share.

Let's look at daily 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.

Legend for Keltner Channels and Moving Averages:

Although this legend features the SPX, the setup and colors of the various moving averages and Keltner channels is consistent across all the charts and so can be referenced for them all.

Annotated Daily Chart of the SPX:

As long as the SPX maintains daily closes at or above a rising red 9-ema, as it did today, it's maintaining its strongest rally pattern. It didn't feel that way, did it?

Consistent daily closes below about 1,836, however, signal that the 9-ema's support is being lost and set a potential downside target of about 1,808-1,825. Such a drop would not undo all bullish potential if the SPX then bounced from that support and soon reclaimed the support of the 9-ema.

However, sustained daily closes beneath about 1,808 set a potential target at about 1,760-1,782. I would not ignore the potential interim round-number support at 1,800, however, no matter what Keltner targets suggest.

What if the SPX bounces? Both recent experience and Keltner evidence suggest that the SPX encounters potentially strong resistance on daily closes at about 1,860-1,872. If the SPX can break through that resistance on consistent daily closes, the next target is about 1,880-1,894. I would not rule out a push up to 1,900, however, if the SPX gets close to 1,894 and isn't immediately knocked back.

Annotated Daily Chart of the Dow:

The Dow also maintains its strongest rally pattern when this index is forming daily closes at or along a rising 9-ema. The Dow didn't quite form a daily close at or above the 9-ema. It's easier to push these 30 stocks outside boundaries, however, and that goes for all the Keltner boundaries, too. Today, the Dow plumbed a potential support zone that extends from about 16,000-16,188, with numerous types and levels of potential support scattered throughout that zone. It's difficult to list one as being more important than the others.

If the Dow should drop as low as 16,000 and then bounce quickly above the 9-ema again, the short-term bullish tenor is not undone. However, sustained daily closes beneath about 16,000 set a potential target of 15,775-15,870. Sustained closes beneath 15,775 would target 15,000-15,637 and maybe even the February low.

What if the Dow bounces instead of declines? The next potential upside target is about 16,455-16,600, with an additional potential target also marked on the chart. It's not until the Dow can sustain daily closes above about 16,600 before that additional target would be set, however.

Annotated Daily Chart of the NDX:
[Insert Chart 030314ndx05]

Despite the higher highs produced last week, did the NDX ever break to the upside out of the broadening formation? Not in my opinion. Currently, the NDX would need sustained daily closes above about 3,730 before I would consider it breaking free of the gravity imposed by that broadening formation. If it does so, it's in a momentum run, with no reliable upside targets.

The NDX zooms from one side to the other of its smallest Keltner channels, the grey one, more often than the other indices. Sustained daily closes beneath about 3,663 suggest NDX vulnerability down to about 3,575-3,610, where the NDX would again test the bottom of that smallest Keltner channel.

If the NDX can't sustain daily closes above about 3,575, Keltner channels suggest a potential downside target of 3,415-3,477. A failure to sustain 3,415 or perhaps 3,400 on daily closes would set the lowest marked Keltner target, although I would not ignore potentially strong support from about 3,300-3,330.

Annotated Daily Chart of the RUT:

Near-term support for the RUT might be found on daily closes at about 1,169 and near-term resistance on daily closes at about 1,188. Between those two numbers, the RUT is caught between support and resistance without strong predictions for next direction. However, some bullish weight would need to be given to daily closes above a rising 9-ema.

That 9-ema is not as predictive for the RUT as it is for some other indices, but sustained daily closes beneath about 1,169 would set a potential downside target of about 1,143-1,160. Keltner evidence suggests that if the RUT sustains daily closes beneath about 1,143, it sets another downside target at about 1,098-1,118. However, I would not ignore potential support in 20-point intervals for the RUT.

What if the RUT can make it past the nearest Keltner resistance on daily closes, at about 1,188? Keltner evidence and the lure of round numbers would suggest a move toward 1,200, with resistance likely to kick in anywhere from about 1,196-1,212. Be careful, however, as the RUT has a history of overrunning targets a bit, and price action has certainly proven difficult to predict in any geopolitical upheaval. This one is no different.

Annotated Daily Chart of the VIX:

The VIX jumped higher today, reflecting the increased fear due to this week's developments. Those include the geopolitical crisis, but it also includes this week's upcoming ADP and non-farm payrolls. Implied volatilities often rise in anticipation of a market-moving economic development even when equity prices might climb and especially when they don't. What does that mean for options' traders? First, rising implied volatility functions like adding more time before expiration. Your options positions might not decay as you expect them to decay, particularly for those of you in complex options positions such as butterflies or iron condors. Losses may mount even if the day is quiet. Today wasn't a quiet day! The option buyer should exercise caution, too, though, because once the number is released, the implied volatilities deflate and that decay rolls out quickly. That may or may not be true this Friday, depending on what's happening with the crisis over the Ukraine.

Tomorrow's Economic and Earnings Releases

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

What about Tomorrow on the Intraday Charts?

The big recent moves render the 60-minute charts more reliable than the 30-minute ones typically employed in this Wrap.

Annotated 60-Minute Chart of the SPX:

The SPX dipped to supposed strong support on 60-minute closes, found support there and bounced up to retest the 60-minute 9-ema. So far, the zone from about 1,845-1,851 appears to be resistance on 60-minute closes. The daily chart gave us a possible bullish view, but as long as this nearby zone remains resistance on 60-minute closes, the SPX is vulnerable to a drop to retest today's low. Support on 60-minute closes looks strongest from about 1,828-1,835, and that zone encompasses today's low. If the SPX cannot sustain 60-minute closes above about 1,828, the 60-minute chart suggests it's vulnerable to a drop to 1,794-1,800. The daily chart, however, suggests that there's interim support near 1,820.

If the SPX can sustain 60-minute closes above about 1,851, it sets up the potential to retest 1,860 or maybe even target last week's high. Once above 1,860, resistance on 60-minute closes might be incurred from about 1,864-1,875.

Annotated 60-Minute Chart of the Dow:

The Dow's actions today validated potential support on 60-minute closes from about 16,041-16,116 and potential resistance on 60-minute closes from about 16,182-16,232. If the Dow cannot sustain 60-minute closes at or above about 16,041, this Keltner chart suggests a target at 15,750-15,810, although the daily chart suggests an interim support level near 16,000, of course.

If the Dow can manage sustained 60-minute closes above 16,232, this chart suggests that it is vulnerable to a move up to test 16,300 resistance or maybe to a retest of last week's high. Once the Dow's price is above 16,300, resistance on 60-minute closes might be incurred at about 16,356-16,473.

Annotated 60-Minute Chart of the NDX:

Today's action on the NDX affirmed potentially strong support on 60-minute closes at 3,635-3,652 and potentially strong resistance on 60-minute closes from about 3,670-3,684. If the NDX sustains 60-minute closes below about 3,635, this chart suggests a downside target from about 3,550-3,566, but remember that the daily chart shows potential support a few points either side of 3,600.

If the NDX can sustain 60-minute closes above about 3,684, this chart suggests that it may move up to test 3,700 resistance or even up to retest last week's high. If the NDX can sustain values above 3,700, resistance on 60-minute closes might kick in around 3,720-3,737.

Annotated 60-Minute Chart of the Russell 2000:

The RUT's action today affirmed potentially strong support on 60-minute closes from about 1,160-1,165 and potentially strong resistance on 60-minute closes from about 1,175-1,180. If the RUT cannot sustain 60-minute closes above about 1,160, this chart suggests a potential downside target of about 1,130-1,135. Remember, however, that the daily chart suggests potential support down to about 1,144.

If the RUT can maintain 60-minute closes above about 1,180, the chart suggests that a retest of last week's high might be possible. Resistance on 60-minute closes could kick in from about 1,185-1,192.

What's going to happen tomorrow? President Vladimir Putin wouldn't answer the phone when I called and asked if Russia was going to back off. The 60-minute chart shows how prices were contained after the initial decline and bounce today. We have some short-term levels to watch, then, to help guide our what-if scenarios for tomorrow. Good luck with your trading. Keep risk moderate. Don't expect option decay to function normally this week. If there's any turmoil, do expect worsening PnL from the widening of bid/ask spreads, a lack of appetite to take your orders anywhere near the mid or mark (meaning you'll pay more in slippage) and other factors.

Linda Piazza