The bulls appeared to be on the ropes by Tuesday and it appeared opex week might struggle to be its normal bullish time. But Tuesday afternoon's sharp reversal got some follow through today and the holiday-shortened week looks like it will finish positive.
Wednesday's Market Stats
This morning started with the usual gap up following an overnight rally in the futures, stalled after the open and ran flat for most of the day before pushing a little higher in the afternoon. Indexes finished at the day's highs, which may or may not be bullish for Thursday but we're clearly seeing the usual effort to rally the market during opex week. SPX options look like they'll settle close to the big number 1850 tomorrow morning (a day earlier than normal because Friday is closed for Good Friday).
The table above shows today's volume was mostly to the upside, which supports the bullish day we had, but total volume was lower than average, something we've seen for each rally attempt (although Tuesday's volume was good, especially with the help of the last 15 minutes of buying). Lower volume on rallies and stronger volume on declines will be something the bulls will need to turn around if they hope to make something of this week's bounce.
Tuesday saw some volatile price action, finishing with an afternoon reversal that drove the market back up to its morning highs, holding onto its title as "Turnaround Tuesday." This is a catch phrase that's got some meaning now, as shown by the chart below. If it wasn't for Tuesday's this market would be having a much worse year than the numbers in the table above show.
DOW's Daily Average for 2014, chart courtesy zerohedge.com
A week ago, with SPX trading near 1850, I was thinking SPX would make a big move in the coming week and settle opex near either 1800 or 1900. We did get a decent move, with SPX dropping to 1814 by Friday and then consolidated on Monday, giving the appearance that it would drop lower. But I forgot about Turnaround Tuesday and that drove SPX back above 1840. The morning gap up, thanks once again to the manipulation, I mean buying in the overnight futures, led to SPX trading just 1850 today and it would appear the 1800 vs. 1900 settlement price in the options market is going to be split down the middle with a settlement near 1850 (ES is trading near 1850 at the end of the day).
This morning's economic reports included some more housing data, industrial production and capacity utilization and then the Fed's Beige Book in the afternoon. The housing data was OK but not great and not as good as had been expected. Housing Starts in March were better than February, coming in at 946K vs. 920K, which was revised up from the originally reported 907K. But it was a little less than the expected 955K (many economists were expecting 970K) and the better weather didn't help as much as expected. Building Permits were 990K and also less than the expected 1033K and it was less than February's 1014K (revised down from 1018K).
The multi-family homes were weaker than expected, dragging the construction numbers lower. Single-family homes have been flat for the past 18 months, as can be seen on the chart below (blue line), while multi-family construction has seen most of the activity since 2009. While both can still be considered in an uptrend, both are threatening to roll over at the moment. The sharp spike down in multi-family homes since late 2013 is looking like it could continue lower from here.
Housing Starts, 2005-present
I'm reading more stories about the increasing vacancies in apartment buildings as construction outpaced demand. I'm also seeing it in Seattle at the moment. With building permits rolling over I suspect we're going to see the 5-year recovery in housing start to sputter. With apartment vacancy rates heading higher and home buyers having difficulties finding mortgages (or not bothering to look), both ends of the housing sector look to be in trouble in the coming year. If you've got rental properties it might be a good idea to get tenants in, with a 1-year lease, reducing the monthly rental if required.
I looked at several charts of data showing home mortgage originations and it's not a pretty picture for the home builders. The chart below, which shows mortgage originations since December 2011, is representative of what I see for most of the banks -- it shows the significant decline that Wells Fargo is experiencing in new home mortgages. The current numbers are the lowest they've been since 2008. Is it because the banks have tightened their lending standards so much or is it because of lack of demand for home mortgages? It's a combination of both but I think it's the lack of demand that's most worrisome. This is an example of where the Fed is pushing on a string in trying to get more loans out there through rock-bottom rates but they can't do anything to make buyers borrow (you can lead a horse to water but you can't make him drink).
Residential Mortgage Originations, represented by Wells Fargo
The other economic morning reports had to do with industrial production and capacity. Industrial production was 0.7%, roughly where it was expected, and was lower than February's 1.2%, which had been revised higher from the originally reported 0.6%. Capacity utilization surprised to the upside, coming in at 79.2% vs. expectations for 78.8% and better than February's 78.4%. Typically higher capacity utilization is a good sign for the economy since it means companies will soon be looking to expand capacity.
Before the afternoon's release of the Fed's Beige Book we got to hear some more soothing words from Gramma Yellen, who spoke at The Economic Club of New York today. There was nothing new and the market barely budged during or after what many consider her first monetary policy speech. It was the same old "the Fed is committed to accommodating the stock market, I mean economy...guidance is dependent on a wide range of economic data...policy will be dependent and change based on the economy's 'twist and turns'...the jobs and inflation goals could be achieved by the end of 2016..." What she did not acknowledge, and I'd be shocked if she ever did, was that their QE program has not worked and will not work and that the economy is slowing down. They feel they must extricate themselves from buying up more debt and yet feel they can't pull the excess reserves out of the banks for fear of what it will do to the economy. What's a Fed to do?
Most of the money that the Fed has created over the past few years has gone into the banks' reserve accounts and not out into the economy through loans, much to the consternation of the Fed. It's a big reason why their QE programs have not helped the economy. Long ago (think "It's a Wonderful Life" with James Stewart as George Bailey), banks received deposits from savers (that's a bad word in the Fed's lexicon) and that money was made available to borrowers, with the banks typically holding back about 10% in their reserve account for bad loans. This is the fractional reserve banking system.
But since getting off the gold standard back in 1971 the way banks create loans now is simply with the push of a button on the computer -- instant deposit on one side of the ledger and a loan and reserves on the other side to offset it. Credit is created with the push of a button since banks no longer need depositors' money. So it is loan demand that creates money and our economy has been built on credit for the past 40 years. And there's nothing supporting that credit except the creation of more credit. Starting to sound like a Ponzi scheme? This is the system the Fed built and they're trying to prop it up with more credit but the consumer is not participating enough. Bad consumer.
The problem now is that the credit is being created but the loan demand is not there. So the money ends up in the banks' reserve accounts collecting interest (this is how the brainiacs in the banks are making money and paying themselves huge bonuses). If consumers don't start doing their civic duty and start borrowing more, well, "Houston, we have a problem." The chart below shows the huge expansion in the banks' reserves, climbing rapidly from around a billion to well over a trillion. It means most of the $1.3T that the Fed has created, or whatever the Fed's QE efforts have amounted to at this point, has gone into the reserve accounts and not out into the economy.
Excess Bank Reserves, 1997-2013, chart courtesy scottgrannis.blogspot.com
So we have two problems with this: one, QE is not working; two, there's a lot of money sitting in the banks' reserve accounts and unless it's withdrawn by the Fed it could be unleashed into the economy (if and when loan demand picks up) and spark a huge inflation problem. This is of course the gold bug's argument for why gold is important to have in your portfolio. No argument from me there, but as a matter of timing I think we have a bigger problem with deflation before we get to inflation.
The bottom line though is that there's a huge problem the Fed has created and now must deal with. Simply tapering QE is not the solution but nor is withdrawing money that could spark a collapse in the economy. Have I mentioned before that I thought the Fed was painting itself into a corner? They've got enough space for both feet but soon they'll be standing on one foot and trying to balance.
Following Yellen's speech we got to see the Fed's Beige Book report on the economy. It was released at 14:00 and there was barely a ripple in the stock market. Traders just weren't interested since all the economic news is basically already known and priced into the market. Weather got most of the blame for the economy's lethargic performance and the hope is that the economy could do some catching up in the 2nd quarter as consumer demand and businesses rebound. There's some evidence of that happening since mid-March.
Moving over to the stock market, we've seen quite a reversal off Tuesday's low and the blue chips in particular, and most especially the DOW, have retraced most of their declines from last week. The price pattern is actually constructive for the bulls at this point and I see the potential for the market to push higher in the near future. At least that's the potential and at this point I think bears need to back off until we see what the bulls put together in the coming days, especially after opex week.
I'm going to start with the Nasdaq Comp tonight because of its turnaround pattern. The techs and small caps have been the weaker indexes since March but the oversold bounce (so far) has the potential for at least a higher bounce. Yesterday the NAZ broke below its February low at 3698 and this had many suggesting that's proof the trend has reversed to the downside. I was feeling the same way but as I've been suggesting for weeks, the choppy price pattern for the decline from March is either very bearish or it's corrective and will be followed by a new high. Tuesday's turnaround just gave a bullish signal that can't be ignored by the bulls. I'll spend a little extra time on the Nasdaq weekly and daily charts because of its message for both sides at the moment.
The weekly chart below shows a possible bullish wave count that calls for one more leg up to complete the rally. If the move up from November 2012 is a 5-wave move then I wouldn't have a problem calling it a larger-degree 3rd wave in the move up from June 2012, which makes the pullback from the high in March a 4th wave correction that will be followed by a rally to a new high this summer to complete the 5th wave. I'm not quite ready to believe in the bullish wave count, yet, because of other technical indicators but nor will I ignore the possibility.
The first move up from October 2011 (bold black wave-X on the weekly chart below) is a 3-wave move and I have it labeled as wave-a (red) in what is the 2nd a-b-c of a double zigzag wave count up from 2009 (a-b-c-x-a-b-c). The pullback into the June 2012 low is wave-b and it's been an extended wave-c since June 2012, which needs to be a 5-wave move. The green wave count shows wave-(i) up to September 2012, wave-(ii) pullback into November 2012, wave-(iii) up in a messy but strong move up to March 2014, wave-(iv) pullback into today's low and now we need wave-(v) to complete wave-c and thereby complete the a-b-c up from October 2011 and in turn the double zigzag up from 2009.
Nasdaq Composite index, COMPQ, Weekly chart
Note on the chart above the parallel up-channel for the move up from October 2012 (green wave-(ii)). The channel uses the EW technique of starting with a trend line from wave-(i) to wave-(iii), which is September 2012 to March 2013, and then attaching a parallel to the bottom of wave-(ii), which is the November 2012 low. Notice that Tuesday's low tagged the bottom of this up-channel, which is typically where the 4th wave correction will finish. It's also finding support at the trend line along the highs from April 2010 - February 2011, which it had broken above in October 2013, tested it twice (November 2013 and February 2014) and now is back down to it. It will be interesting to see if that longer-term trend line holds as support or resistance on a weekly closing basis, currently near 4040.
If we do get another rally to complete the 5th wave in the move up from June 2012, it would equal the 1st wave at 4416 and that crosses the mid-line of the up-channel in July. Wave-(i) took 15 weeks and if wave-(v) takes the same 15 weeks it puts us out at the end of July. Your mission, if you decide to accept it, is to get long now and just hang on for the ride (stop belong below Tuesday's low).
The daily chart below shows a parallel down-channel for the decline, top of which is currently near 4160 and has not been tested yet. In fact a steeper downtrend line from April 3rd is just now being tested and if it holds as resistance we won't know yet if we've got just another high bounce to a lower low and if that will mean new lows are coming. If that happens (further decline next week) I think it would be another notch in the bear's gun but right here we're at an important inflection point. The bullish wave count (green) says Tuesday's low completed a corrective wave count and another rally leg is coming. The bearish wave count (red) says we have nested 3rd waves about to unfold to the downside (calling for a mini-crash leg down next week). Above 4185 would be bullish and below 3940 would be bearish; mind the chop in between.
Nasdaq Composite index, COMPQ, Daily chart
Key Levels for COMPQ:
- bullish above 4185
- bearish below 3940
The 60-min chart below shows the increasing steepness of the downtrend lines following its March high. This was giving it the appearance of a waterfall decline and has it looking very bearish. With the series of 1st and 2nd waves to the downside the bulls will be in very bad shape if this drops from here and takes out Tuesday's low. The unwinding of nested 3rd waves to the downside would be a sight to behold -- take a break below 3946 very seriously and I'd almost recommend jumping in short with both feet, eyes closed and hold on for the ride down. Today's rally took it right up to its steepest downtrend line, the one from April 3rd and the first thing the bulls need to do is crack above that line. The next step is to take out the April 9th high (which the DOW is close to doing after today's rally) and then the bearish wave count would be negated. This is a very important point here for both sides.
Nasdaq Composite index, COMPQ, 60-min chart
The blue chips made higher highs in April than did the techs and small caps and therefore the decline for them into yesterday's low is just a 3-wave pullback (instead of the choppier pattern shown above for the Nasdaq). It could be just an a-b-c pullback correction to its rally and higher highs will be next. Or it could be a 1-2, 1-2 wave count to the downside and the next leg down will be a very strong 3rd of a 3rd wave down. If it rallies above its April 9th high at 1872.43 it will negate the bearish wave count and be further support for the bulls, suggesting new highs are coming. One other alternative will be a large choppy consolidation/pullback pattern that would play havoc on traders so I'm hoping that scenario is not the one we're going to get.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 1873
- bearish below 1812
As mentioned earlier, the DOW is the closest to exceeding its April 10th high at 16456, which would then leave a 3-wave pullback and support the bullish pattern that calls for one more final new high, which could be as early as the end of the month. I'm showing on its daily chart below a rally up to 16735, which is a projection for the 2nd leg of the rally from February where it would be 62% of the 1st leg (February-March). This would produce the same pattern as the 3-wave move up for the October-December 2013 rally (actually the 2nd leg of that rally stopped 15 points shy of the 62% projection at 16603 with a high at 16588. The same kind of failure for the 2nd leg of the rally from February would target 16720 but what's 15 points among friends.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 16,456
- bearish below 16,015
The DOW's bullish projection above is using the cross of the broken uptrend line from February through the March 27th low through the 16735 price projection to show a high on April 28th. This broken uptrend line was back-tested on April 10th so it might get back-tested again. That's the bullish potential here and the way to void it is for the bears to jump back in now and prevent the DOW from getting above its April 10th high at 16456. There are some other corrective wave possibilities that are neither bullish nor bearish but I'd only be guessing at this point what they could be so we'll have to wait for more price action.
The RUT has the same pattern as the tech indexes and the pullback from March is either a bullish correction that finished Tuesday or it's building a very bearish wave count that suggests the next leg down is going to be very strong and one that would likely have very few bounces along the way and will slice through support like it wasn't even there. The RUT continues to be the weak sister and while it's bullish getting back above price-level S/R near 1120, it needs to get back above its broken uptrend line from November 2012 - February 2014, near 1135 on Thursday. A bounce back up to the broken trend line followed by a selloff would be a classic back test and kiss goodbye and one worthy or a big short play. If the other indexes are acting bullishly I wouldn't get aggressive about the short side on the RUT but if they're all rolling over and the RUT drops back below its 200-dma, nearing 1108, I'd be looking to get a little more bearish. But at the moment this one has bullish potential if the market will support it.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 1150
- bearish below 1095
The bond market might be close to giving us a signal but after dropping to the bottom of a bear flag pattern last week it's been consolidating and while it looks like it should drop lower I can't yet rule out a bounce back up to its clustering 20-, 50- and 200-dma's, at 2.70%-2.72%, before heading lower, or even a rally leg from here. The pattern suggests lower but waiting for the proof here. If TNX heads lower from here, which means bond prices rallying, it's going to make it difficult for stock market bulls.
10-year Yield, TNX, Daily chart
If I were bullish (feeling somewhat neutral at the moment) the chart of BKX would make me very nervous. Its bounce pattern off last Friday's low looks very corrective and more like a bearish pendant that has brought it back up to its broken uptrend line from June 2012 - February 2014. It looks like a bearish bounce pattern waiting for a failure, in which case we could see BKX stair-step lower into May before setting up a larger bounce in a new downtrend. A rally in the broader market without the banks is something I would not trust, especially without the semiconductors as well and both the BKX and SOX were MIA in today's rally -- a warning sign.
KBW Bank index, BKX, Daily chart
The U.S. Dollar was a little volatile today but is holding the gains from its bounce off last week's low. As long as the dollar continues to whack around inside the 79.25-81.50 trading range there's not much to do but watch and wait for the breakout of the range, which should set the next directional move from there. I continue to favor the upside for the dollar but from a technical perspective the sideways consolidation following the October 2013 low does favor another leg down.
U.S. Dollar contract, DX, Weekly chart
The dollar hasn't moved much so that can't be blamed for gold's big move yesterday during the overnight hours and into the morning. The blame goes to China (if something bad happens to the market, blame it on China). Yesterday's decline, dropping gold from Monday's high at 1331.40 to Tuesday morning's low at 1284.40 (-48) was its biggest decline since the Fed announced their taper program last December. From an EW perspective it might have been the kickoff to a 3rd wave down in its decline from March 17th at 1392.60. China announced there would be less demand from them for the shiny metal this coming year and this follows increasing demand every year since 2002. So that was a punch to the bull's solar plexus. Some are guessing the lower demand has to do with slower money growth for China in 2014. Money growth is only slowing but it's all part of the news stream about how much things are slowing down for China.
Gold continuous contract, GC, Daily chart
Oil has become a little more volatile since last Wednesday's rally up to the 103 area. Each day since then has seen more or less a long-legged doji each day as price probes highs and lows within a trading range at roughly 103-104.50 and then settles somewhere near the middle. Today was no different with a new high at 104.99, a low at 103.12 and a close at 103.80. It looks like topping action around the price projection at 103.73 for two equal legs up from March 17th and should be followed by another leg down for a stronger decline. But so far the bullish path up to test its August 2013 high near 112 can't be ruled out.
Oil continuous contract, CL, Daily chart
Other than the usual unemployment claims numbers tomorrow morning we'll get the Philly Fed report at 10:00 AM which is expected to be near the same level as reported in March. It shouldn't move the market. In fact probably not much will move the market tomorrow since we'll likely see opex pinning.
Economic reports and Summary
The one risk I see for Thursday is the high close today. We've seen many times where a market closes at its high/low of the day as the last of the short-term traders throw in the towel and capitulate into the close. That leaves nothing for follow through the following morning and we get immediate reversals. That remains a possibility but it being opex week there's also a good possibility that whatever happens in the first 30-60 minutes of trading will be all we'll see. Stocks and indexes (those that don't settle tomorrow morning) tend to get pinned around high-OI strike positions and the last day of opex tends to get very quiet and not worth trying to trade.
As noted on the tonight's charts, especially for the Nasdaq Composite, the market has reached an important point and the bounce off Tuesday's low has a good chance of continuing and thwarting the bear's plans once again. The dip buyer could once again be rewarded, which would further convince the majority that the market only knows one direction -- up. The pullback corrections are getting smaller and smaller but the new highs have been showing longer-term bearish divergence. Any new highs over the next month or two would likely continue to show negative divergences and when this thing cracks it's probably going to be a very swift ride back down the hill.
But the shorter-term pattern supports the bulls if they don't let the bears back in here. It's so close to giving us a buy signal and all the bulls need to do is allow only a small choppy pullback at the most and follow it with another push higher. That would give us a bullish signal and I strongly suspect we'll have our answer by this time next week. In the meantime, be careful out there.
Good luck and I'll be back with you on Monday (filling in for Linda) and next Wednesday.
Keene H. Little, CMT
In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying