Market Internals


Today, FOMC Chair Janet Yellen employed terms such as "slack" when describing the U.S. economy and "some time to come" when describing the length of the FOMC's accommodative policies. Combining the two meant happy days to those who hope for less tapering.

Reading between the lines, the FOMC chair never said that the FOMC would discontinue the taper, but market participants heard what they wanted to hear. At least she didn't hint that the taper would be revved up and the asset buying program ended sooner than expected.

Hearing that assessment was all markets needed to capitalize on the buoyancy provided to futures overnight and send cash markets higher at the open. Tension over the Ukraine had eased this morning amid ongoing talks with U.S. Secretary of State John Kerry and Russian Foreign Minister Sergei Lavrov. That relief also came after evidence of a reduction in Russian troop numbers along the East Ukraine border. The Russian defense ministry had announced that one battalion was withdrawing from the border, and the German Foreign Minister affirmed the lessening of tension due to that withdrawal.

Europe had gotten off to a positive--if somewhat tenuous--start due to these developments and increasing signs of possible easing efforts in Europe. The ECB has reportedly received the approval of Germany's Bundesbank to go ahead with QE measures. Our futures had responded with gains during the pre-market session, but Europe wasn't to end on quite as positive a note as it had begun. That didn't matter. In often-seen behavior lately, the majority of our gains were made by late morning, and then it was just a matter of holding onto those gains into the close.

Holding on was just what they did. The SPX gained 0.79 percent; the Dow, 0.82 percent; and the NDX, 0.68 percent. The RUT zoomed up 1.84 percent, and the SOX, 1.60 percent. The Dow Jones Transports (DJT) rose 1.66 percent.

A search of a heat map this morning showed that Micron (MU, 23.66, up 1.75 or 7.99 percent) and Microsoft (MSFT, 40.99, up 0.69 or 1.71 percent) were lighting up that map with dark green as tech companies rebounded after last week's outsized Nasdaq declines. MU is due to report earnings on Thursday. Not all techs benefited: Blackberry's (BBRY) disappointing sales figures last week hindered that company.

Biotechs rebounded. The NBI, the Nasdaq Biotechnology index, gained 72.53 points or 3.03 percent today, but that index has a lot of lost ground to make up from its 2,872.29 intraday high in February to Friday's 2,390.68 low.

We should acknowledge then that the indices with the strongest gains today were those recently punished the most and due for relief rallies. Or was this end-of-quarter buying?

The Dow lost 0.7 percent for the quarter, although both the SPX and NDX made small gains for the quarter. Utilities and healthcare gained, with utilities usually considered a defensive trade. However, tech, financials and materials all also gained. Consumer discretionary stocks declined this quarter. Despite the recent volatility in metals, gold finished the quarter up 7 percent.

Today, gold did not finish higher, however. Gold futures (/GC)for June delivery settled at 1283.80, down 10.5 points. Silver futures (/SI) for May delivery settled at 19.752, down 0.38 points. Copper futures (/HG) for May delivery settled at 3.0255, down 0160. Light sweet crude futures (/CL) for May delivery settled at 101.58, down 0.09.

Monday's Developments

What happened overnight in Asian markets? Despite a barrage of artillery shells fired by North Korea and South Korea into each other's waters in the Yellow Sea this weekend, many Asian markets produced gains. Departing from its usual practice, North Korea pre-announced that it would test-fire missiles and artillery, but about 100 somehow fell south of the nebulous boundary of each country's waters. South Korea responded by firing into North Korean waters.

North Korea's act was interpreted as a response to frustration with the lack of progress toward better relationships with South Korea and the U.S. Studying the front page of the Nikkei Asian Review, I couldn't find a single reference to the fire-fight, so it didn't appear to figure highly in overnight trading.

That same news source pointed to a softer yen as one force behind the Nikkei's overnight gain, with end-of-month window dressing also playing a part. The Nikkei's gains came despite disappointments last night in Japan's Manufacturing PMI and Preliminary Industrial Production numbers. Both disappointments were blamed on the weather. The Nikkei 225 gained 0.90 percent; the Hang Seng, 0.39 percent, and the Straits Times, 0.52 percent. China's Shanghai Composite dropped 0.41 percent, however.

In the wee hours of the morning, the important Eurozone Flash CPI Estimate came in below expectations. European bourses started off positive, but indices ended the day with mixed results. Several had wobbled all day and ended at or near their lows of the day, while Italy's FTSE MIB ended nearer the high of the day. The U.K.'s FTSE 100 gained 0.15 percent, the DAX lost 0.33 percent, and the CAC 40 dropped 0.45 percent. Spain's IBEX 35 gained percent, and Italy's FTSE MIB gained 0.73 percent.

In the U.S., the ISM's Chicago PMI (MNI Report) measured a disappointing 55.9. New orders and employment fell sharply, leading to the disappointment. The forecasts had averaged 59.2, according to some sources, and the prior month's report had measured 59.8. The unexpected drop drove the first quarter's average down to 58.4, well below the last quarter's 63.3. However, the average remains well above the benchmark 50.0.

ISM commented on the volatility in employment figures. Employment figures had been up sharply in February, but those gains were nearly erased in the March report. ISM said that volatility probably indicated that companies were increasingly relying on temporary workers. In addition to employment and new orders, order backlogs, inventories of finished goods, and prices paid all fell.

Good news could be found, however. Production jumped to the highest level since November, ISM said. ISM's Philip Uglow, Chief Economist of the MNI indicators, also noted the optimism about the future expressed by panelists. Still, Uglow thought that March's figures pointed to a "significant" weakening in activity. He cautioned that the result could still be "just a blip," and that it was too early to tell if it were signs of anything more.

The Federal Reserve Bank of Dallas released the Dallas Fed Manufacturing Survey for March, with the 4.9 result jumping well above the expected 3.0 and the previous 0.3. The production component jumped to 17.1 from the prior 10.8, with the Dallas Fed crowing, "Manufacturing has been soft in some regions of the U.S., but not in Texas." The evident pride was tempered by the explanation that Texas' economy is heavily influenced by the energy sector, perhaps leading to its exceptional results.

New orders, shipments, capacity utilization, company outlook, and labor market indicators all increased. Stronger employment growth and longer workweeks translated into upward pressure on wages, and prices also saw that upward pressure. Almost as many respondents expect to be able to charge higher prices for finished goods as the number who expect to pay higher prices for their raw materials, so manufacturers may be able to pass those higher costs on to consumers. Respondents were also optimistic about future business conditions.

Moody's weekly Business Confidence inched lower to 35.6 from last week's 36.4. Moody's still characterizes the sentiment as being consistent with an economy growing above its potential but now notes sentiment about current conditions isn't quite as optimistic as it was previously. Moody's said that results still suggest that the slowing seen earlier in the year was temporary and probably could be blamed on the brutal weather conditions.

The big driver for today's action was probably not any of those reports, but rather was FOMC Chair Janet Yellen's speech this morning. She spoke in Chicago at the National Interagency Community Reinvestment Conference. Many wondered if she would attempt to clarify or even walk back her "six months" statement from earlier this month. Spending some time elucidating the reasons she believes there is still weakness in the jobs market, she noted that 7 million people now working part time would prefer to be working full time. She said that sign of slackness and other concerns such as low wages indicate that an "extraordinary commitment" to accommodative policies is still needed for "some time to come." She believes that others on the FOMC share her view, although most of us could name an FOMC committee member or two who don't appear to share that view.

The unemployment rate may not be as clear an indication of employment conditions as it might have been in other recoveries, Yellen affirmed. She does not believe that the aging of the population accounts for that lack of participation in employment and asserted that not all retirements are voluntary. She still believes that there has been progress in the labor market.

FOMC Chair Yellen claimed that the taper did not constitute a reduction in the FOMC's commitment. All that meant, she said, was that recent economic results had indicated that the Fed's recovery aids didn't need to grow as quickly as they had been growing. She reaffirmed that the FOMC takes the 2 percent inflation goal seriously. She believes that the recession would have been worse and the recovery even slower without the Fed's efforts.

Equity markets seemed to read something more into her statement than I did. Perhaps all big money wanted to hear was that the taper would not be too abrupt or tightening too early in comparison to prior expectations.

Story stocks today included Caterpillar (CAT, 99.37, down 0.02 or 0.02 percent), due to appear before the Senate's Permanent Subcommittee on Investigations this week. This committee has been investigating tactics companies used to reduce their U.S. tax bills. Those tactics included restructuring so that sales are counted as foreign sales rather than domestic sales. Some experts point out that the tax code was written at a time when most companies' income was domestic. The current code requires U.S. corporations to pay taxes no matter where they're earned, so why does it matter whether sales are counted as domestic or foreign? That tax code provided an "out" that some companies have used to advantage. Companies can defer tax payments from foreign sales indefinitely as long as they don't repatriate the monies from those sales. Companies have restructured to divert income to countries with low income taxes, and then deferred their U.S. taxes indefinitely as long as they don't bring the income back to the U.S. Or, rather, they defer those taxes at least until they don't bring those monies back in any straight-forward way. Some companies have developed tactics to repatriate the monies without paying those deferred taxes. Some experts claim that measures to wrest more taxes out of corporations have little chances of succeeding in our current political climate, at least any time soon, and some argue that it's the tax code at fault, not the individual companies being grilled.

Fannie Mae (FNMA, 3.90, up 0.33 or 9.24 percent) and Freddie Mac (FMCC, 3.86, up 0.31 or 8.73 percent) had been in the news last week with predictions of their demise. Today came news that Bill Ackman's Pershing Square Capital was boosting his position in both companies.

After the close, General Motors (GM, 34.42, down 0.31 or 0.89 percent) disclosed that it would be taking a $750 million charge for the recalls made during the first quarter.

Arotech Tech (ARTX, 6.22, up 0.40 or 6.87 percent), characterized by some as a "lithium battery stock," dropped heavily after reporting earnings after the close. It was last down to 5.29 as this report was prepared, almost 15 percent below the day's close.

Keurig Green Mountain, Inc. (GMCR, 105.59, down 2.56 or 2.37 percent) dropped after an unfavorable profile. The drop was on only a little more than half the average daily volume, however.

Cigna Corp. (CI, 83.73, up 4.32 or 5.44 percent) rebounded. JP Morgan raised the company's price target, but it's debatable whether such analysts' actions are responsible on a day when healthcare stocks are in the news anyway.

Johnson and Johnson (JNJ, 98.23, up 0.79 or 0.81 percent) will sell its Ortho-Clinical Diagnostics unit. The Carlyle Group will buy it for $4 billion. This offer was made a couple of months ago.

Jim Brown reported this weekend on some of last week's IPO's. Today, Ares Management, L.P. announced that it was moving forward with an IPO. It reportedly had $74 billion under management at the end of 2013.

We have another big story going on. Midnight tonight was the original end date for ACA signups for this calendar year. Those who begin the process by midnight tonight but don't complete it now have an extension to complete the process.

The original goal was 7 million enrollments, with that goal later lowered to 6 million. I've seen projections all over the place today, but a surprising number of them are projecting that the original 7 million goal will be hit--or were, until some glitches appeared today. Avalere Health was not one of those companies projecting that the goal would be hit. Avalere projected in the middle of March that the enrollment would total 5.4M, saying enrollments were trending below projections, and their site still seems to list that as the latest projection.

Charles Gaba, a volunteer data cruncher who has been credited with aptly forecasting several interim numbers and approached by news outlets across the country, has a current projection of 6.9 to 7.0 million for his Exchange Qualified Health Plans (QHP) projection, although the period overnight when the .gov site was down for several hours and then this afternoon when it was again down or slowed by heavy traffic may force a recalculation. The government has its own projection that matched Gaba's. Yesterday, President Obama's administration noted that the .gov site had supported more than 8.7 million visits since the previous Sunday and thought it likely that enrollees could total 7 million.

Gaba projected on 12/25 that private QHP enrollments through December would total 2,100,00, and they totaled 2,137.680, with that number released on 1/13. He projected on 1/21 that Medicaid/CHIP enrollments through the end of December would total 6,320,000, and the actual figure released the next day was "more than 6.3M." Most more recent projections have been accurate, too.

Gaba admits, however, that, although he was "quite confident of . . . projections through the 5 million and 6 million milestones," projections for the last few days have been less solid and more anecdotal and due to his gathered experience crunching the numbers. His current assumption is that the impact of several-hour shutdown of the site this morning may have been minimal since it happened in the wee hours of the morning, but I would imagine that this afternoon's problems were more serious and would knock back the numbers some. We will see, won't we?

Let's look at daily charts. We'll find that indices are beginning to bifurcate, with the riskier small caps and tech stocks showing more troublesome patterns than the SPX and Dow.


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:

This legend applies to the SPX chart, but the Keltner and moving average setup is consistent across all charts. It can be referenced for all those charts.

Annotated Daily Chart of the SPX:

The SPX continued chopping through a consolidation zone last week. Right now, it looks as if daily closes between about 1,831 and 1,875 won't tell us much about next direction. Such closes would be closes inside that chop zone. However, the Keltner setup suggests that sustained daily closes above about 1,875 would set a potential new upside target at about 1,897-1,902 or perhaps as high as 1,911-1,917, with resistance on daily closes likely to be strong at either of those two edges of the next Keltner target. On intraday trading, of course watch the SPX's behavior if the March 1,883.97 intraday high is approached on the way to those potential upside targets. An intraday pop above 1,880 could easily be knocked back beneath 1,875 before the close.

The Keltner setup and March's behavior, too, suggest potential Keltner and historical support on daily closes from about 1,831-1,846. However, that Keltner setup suggests that if 1,831 is lost as support on daily closes, the next target is 1,784-1,803, although we can all see the potential historical support at 1,820 and then again at 1,810.

A loss of 1,784 on consistent daily closes would mark a change in long-term tenor for the SPX. That would set up a potential Keltner downside target near 1,690, with interim support near 1,740 that should be acknowledged.

The SPX's close left us with questions. Does this close mean anything more than the 3/18 and 3/20 closes near this level did?

Annotated Daily Chart of the Dow:

The Dow needs to sustain daily closes above about 16,450 before it sets its next potential upside target. Today's close, of course, was a few points above that 16,450 marker, but since the Dow tends to overrun boundaries a bit lately and this is a single close above it, I would consider today's close atresistance rather than above it. Clearly, of course, this is a more bullish close than if the Dow had pulled back sharply from this test, as it did on 3/21 and 3/26.

That next upside target--perhaps set and perhaps not--is currently at about 16,582-16,700, with resistance at daily closes possible anywhere in that zone. A breakout above 16,700 on sustained daily closes sets a potential Keltner target near 17,000, with that target marked on the chart.

What if the Dow drops? The Keltner setup and recent action has shown that there is potential support on daily closes from about 16,120-16,210. Sustained daily closes beneath about 16,120 target historical, round-number and Keltner potential support on daily closes that extends from about 15,890-16,000. Beneath that, support is layered in 100-point increments down to about 15,600, where it then jumps 200 points to 15,400. A lower potential Keltner target is also marked, if needed.

The Dow's close today was only a few points above the 3/7 high. Annotated Daily Chart of the NDX:

By the end of last week, the NDX had established a pattern of daily closes beneath a descending red 9-ema. That pattern confirmed that this was a decline and not a choppy consolidation or even a bull-flag pullback. When declining, prices tend to be more volatile, however, than when rallying. They zoom from one side of the smallest (grey) Keltner channel to the other, crossing the red 9-ema on the way, more often than they do during rallies. Therefore, a zoom up to 3,679-3,718 does not undo the short-term bearish setup as long as daily closes remain below the top of that range and the NDX then starts down again. However, sustained daily closes above 3,718 undo any bearish interpretation and set a potential upside Keltner target at 3,741-3,788.

Sustained daily closes beneath 3,640 and particularly beneath 3,590, however, suggest that the NDX could still drop down to the Keltner configuration now at 3,471-3,512. Support was found on daily closes at this configuration in the past.

A failure to sustain daily closes above about 3,471 would mark a change in the NDX's long-term tenor. That would set a potential Keltner downside target near 3,200-3,242. However, historical price action and behavior near round-number support levels suggest that support might also be found in the zones marked near and just above 3,400 and 3,300. I've seen indices fall straight though supposed historical support levels to hit Keltner targets I thought impossible, and I've seen them bounce from historical support levels before they ever approached the Keltner target.

Annotated Daily Chart of the RUT:

Coming into this week, the RUT had also established a pattern of daily closes beneath a descending red 9-ema. That's a pattern of an index in decline. When indices are declining, they tend to zoom from one boundary of the smallest (grey) Keltner channel to the other more often than they do during rallies. That means that relief rallies up to about 1,202 on daily closes are still consistent with a decline as long as the RUT encounters resistance on daily closes at or below that level and then starts down again.

However, sustained daily closes above about 1,202 would hint that something more positive was going on. Those higher closes would set a potential upside target of about 1,218 or perhaps as high as 1,230-1,235 where resistance on daily closes is likely to be strong.

As long as the RUT sustains most daily closes beneath about 1,175 and particularly if it were to sustain daily closes below about 1,165, however, it sets a potential downside target of about 1,119-1,135. According to Keltner and other evidence, this is a key support configuration, with a loss of that support on consistent daily closes marking a change in long-term tenor for the RUT. The Keltner setup suggests a potential decline toward the support zone either side of 1,040 if that support near 1,119 is lost on consistent daily closes, but we know that the RUT chopped out potential support zones in 20-point intervals on the way up. I've marked them on the chart, but be aware of the potential for a steeper decline toward the Keltner target, too, if support near 1,119 is lost.

Annotated Daily Chart of the Dow Jones Transports:

The DJT is not optionable, so options traders don't trade it. However, it can provide us with information about the economy. In our current case, sustained daily closes outside the short-term descending channel--either direction--might lead or at least confirm the behavior in the other indices. Airlines were responsible for some of the major lifting in the transports today.

Tomorrow's Economic and Earnings Releases

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

Tonight's events will include China's official Manufacturing PMI as well as the HSBC Final Manufacturing PMI. Both will be closely watched, although the HSBC Final number should not veer too much from the prior 48.5. As Jim Brown mentioned in this weekend's Wrap, China's official number does not garner a lot of trust as many worry that it might be manipulated. Market watchers expected it to measure just over the benchmark 50, at 50.1.

In addition, Japan's Tankan Manufacturing and Non-Manufacturing numbers will be released. Asian trading patterns could impact U.S. futures, too.

What about Tomorrow Morning?

Annotated 30-Minute Chart of the SPX:

On the daily chart, the SPX continues to carve out a chop zone, and that's reflected in the 30-minute chart. The SPX has been zigzagging from one side to the other of its flattening purple Keltner channel. Sustained 30-minute closes outside that purple channel would then be significant on a short-term basis, while closes within it don't tell much about next direction or how low or high the SPX might travel within that channel.

Therefore, short-term bulls would like to see the SPX produce sustained 30-minute closes above the resistance that now ranges up to about 1,880, setting a potential upside target of about 1,893-1,897. Bears would like to see sustained 30-minute closes beneath about 1,846, setting a potential short-term target at about 1,829-1,835.

Annotated 30-Minute Chart of the Dow:

The Dow, too, has been zigzagging within the confines of a flattening purple Keltner channel, confirming its recent choppy nature. Thirty-minute closes within that channel do not predict how far the Dow might travel through the channel in either direction. Nearest resistance on 30-minute closes is strongest up to about 16,515. The Dow would have to sustain 30-minute closes above that level before it set a new short-term potential upside target, now at about 16,600-16,640. If the Dow were to instead sustain 30-minute closes below about 16,210, it would set a short-term downside target of about 16,020-16,060.

Annotated 30-Minute Chart of the NDX:

The NDX's chart's Keltner setup looks different than the SPX's and Dow's, illustrating the recent relative weakness of the Nasdaq in comparison with those indices. The NDX has been pushing through the bottom of its purple Keltner channel, pushing that channel lower, too. The Keltner setup suggests that the NDX would need to sustain 30-minute closes above about 3,642 before it would set the next upside potential target, with that target at about 3,715-3,725. Sustained closes below the potential support zone at 3,554-3,566 set a short-term potential target at about 3,525-3,535.

Annotated 30-Minute Chart of the Russell 2000:

The RUT's 30-minute Keltner chart also displays its relative weakness with respect to the SPX and Dow. The RUT has also been breaking through the bottom of its purple channel and even the wider pink channel. That action has been pushing the purple channel lower, so that it's not flattened but instead corroborates the recent RUT downtrend. The RUT needs sustained 30-minute closes above about 1,180 to set a next short-term potential upside target, with that target at about 1,198-1,202.

Although the bears would rather see the RUT sustaining 30-minute closes beneath a descending red 9-ema, such action with respect to the 9-ema isn't a given with the RUT. If the RUT turns lower, short-term bears would like for it to soon be driven below about 1,163 on 30-minute closes as that's perhaps a more important Keltner configuration for the RUT. The next potential downside target is at about 1,148-1,155. Short-term bears should watch out for possible on 30-minute closes in that zone.

We've looked at all this, daily charts and 30-minute charts. What's going on when we step back? The SPX and Dow are consolidating, chopping back and forth between support and resistance. Despite their gains today, the NDX and RUT are in short-term downtrends on the daily charts, with neither able to convincingly break up through those downtrends despite their strong performances. Price action today drove all these indices up to, just beneath or perhaps a hair above (the Dow) significant breakout levels. It was as if they were being positioned there to wait out tomorrow morning's developments or tonight's actions on the futures markets, but none could quite break through on a daily close. Is big money waiting for the new quarter, tonight's manufacturing PMI numbers from China or tomorrow's from us? Or will big money wait until there's more insight into what Friday's employment numbers will be? We'll begin finding out tomorrow, but something put buyers on hold when they reached those important breakout levels. It was as if buyers wanted to send prices higher but just didn't dare. Volume appeared to be decent, but not spectacular.

I don't dare make a prediction of whether the push up toward today meant anything. Did today's strong candle on the SPX, for example, meant anything more than it did when the same push up to similar closes in this zone occurred on 3/18 and 3/20. Those closes looked just as hopeful as this one did today. Be ready for anything.

Linda Piazza