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Gary Townsend - Founding member and Chairman, GBT Capital Management, LLC, a macro long/short fund based in Chevy Chase, Maryland. Also, 2007-2013, a founding partner, CEO and Portfolio Manager of Hill-Townsend Capital LLC, a long/short equity financial sector fund. Mr. Townsend has 35 years... More
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GBT Capital Management LLC
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Listening to Markets
  • Equities Rebound from Oversold Levels, Correction Continues 0 comments
    Nov 19, 2010 9:11 AM | about stocks: KEY, RBS
    This morning.  After Thursday’s strong equity moves, futures are lower on eurozone concerns and China’s increase of its benchmark interest rate for the 2nd time this month.  Despite yesterday’s encouraging action, equity markets are in correction.  The dollar and commodities are weaker.  December SPX futures are at 1192.50, down -2.29 points after fair value adjustment.  Next resistance is at 1203.40; next support is at 1186.86.
    Thursday’s strength coincided with the GM IPO, which was well received, gapped higher in early trading, but closed near the day’s low.  U.S. employment news was positive, with initial jobless claims at 4-month lows.  Mostly, the move seemed a response to oversold conditions. 
    Technical indicators are mixed.  All major indexes are higher on the year, but closed below their April highs.  The SPX and NYSE are below their respective 200-week moving averages.  Only the NYSE closed above its 20-day moving average.  Directional movement indicators are negative, with weak trend strength.  On the other hand, all major indexes closed above their 50-, 100-, and 200-day moving averages.  Also, their respective 50-day moving averages are above 200-day moving averages.  Relative strength indicators suggest that markets are back in a neutral range.
    Asian equity markets closed mixed, with the Nikkei and Hang Seng +0.09 and -0.13%, respectively.  European equity markets are lower, with the Eurostoxx50 -0.79%, FTSE -1.08%, and DAX -0.14%.  On the EuroStoxx, financials are down -1.89%, the worst performing market segment.  Eurozone sovereign CDS spreads are slightly narrower today, as Ireland resists pressure from the ECB to raise its “predatory” corporate tax rate.
    Despite the ongoing sovereign drama, LIBOR trends remain unremarkable.  Overnight USD LIBOR is 0.22938%, unchanged from the prior day.  USD 3-month LIBOR is 0.28438%, unchanged since November 11th.  In currency markets, the dollar is weaker against the euro, pound, and yen.  The euro trades at US$1.3696, compared to US$1.3643 the prior day.  The dollar trades at ¥83.38, compared to ¥83.52 yesterday.  U.S. Treasuries are little changed compared to Tuesday (bond markets were closed yesterday), with 2- and 10-year maturities yielding 0.497% and 2.888%. respectively, compared to 0.496% and 2.895% Thursday.  The yield curve spread narrowed to +2.391% compared to +2.399% Friday.  In the past year, the 2- and 10-year spread has varied from a low of +1.959% on August 26, 2010, and a high of +2.90% on January 11, 2010.  Despite the dollar strength, commodities are mixed, with lower petroleum and precious metals, higher aluminum and copper, and mixed agricultural prices.
    3Q2010 Earnings.  Earnings results have generally exceeded EPS and revenue expectations.  Of the 456 S&P500 companies that reported earnings to date, 76% (345 of 456) beat operating EPS estimates, versus the historical average of 62%.  Companies beat by an average of +6.6% (versus a historical average of +2%).  EPS is up +31.7% over the prior year.  Though challenged in the current operating environment, 363 companies (80%) reported increased revenues and 280 companies (61%) beat revenue estimates.  With all 24 BKX members reporting, 79% (19 out of 24) beat operating EPS estimates, with a +25.3% average operating EPS surprise.  Bank revenues have disappointed slightly, missing expectations by -0.30% on average.
    U.S. news.  Economic releases are light today, and resume next Monday with the release of the Chicago Fed national activity index, followed by revised 3Q10 GDP on Tuesday.  The GM IPO was well received, closing up more than 3%, but near the day’s lows.  In Frankfurt, Fed chairman Bernanke delivered a “major” policy speech, calling for renewed economic stimulus and aggressively defending its expansionist monetary policy.  In his remarks, he never mentioned China.  President Obama will travel to Portugal for a NATO chiefs meeting.
    Overseas news.  For the fifth time this year and the second time in November, China raised its bank reserve requirement by +50 basis points to fight off inflation.  Early next week, Ireland will publish its four-year budget plan, which will include €15 billion of spending cuts.  It remains unclear whether expected bailout loans with require changes to the country’s “almost predatory” corporate tax rate.  Greece’s budget cuts are coming under pressure due to problems with fighting tax evasion and healthcare spending cuts. 
    Company news/research:
    ·         KEY - KeyCorp Announces CEO Succession Plan. Chairman and CEO Henry L. Meyer III to retire May 2011, and Beth E. Mooney to become Chairman and CEO
    ·         RBS – cut to neutral at Macquarie
    Thursday’s equity markets.  Responding to positive U.S. economic news (initial jobless claims below 440K for the first time since July), eurozone news (progress toward an Irish solution), a wildly successful GM IPO, and generally oversold market conditions, equity markets gapped up more than 1% in early trading and held on to most gains through the close.  Volume was heavy.  All major indices closed at least +1.5%, with the NYSE composite performing best, closing up +1.75%.  Market breadth was positive, and up volume led down volume, both by large margins.  All market segments closed lower.  Basic materials, oil and gas, and technology were the best performers, up more than +1.80%.  Consumer goods, consumer services, and utilities were the worst performers. 
    Market sentiment is mixed, as markets moved into a corrective phase on November 16th, as markets proved unable to hold above their April 2010 highs.  Still, the major indexes are at least +6.05% higher in 2010, but the SPX closed -1.69% below its April 23rd close, the high point prior to the May-August correction.  While the broader indices have recovered most of their correction losses, financial stocks have not, closing -20.4% below their April highs and mired well into bear market territory.
    The latest week’s (November 18th) AAII Investor Bullish Sentiment index fell -30.5% to 40.00 from 57.56 on November 11th.  This is a neutral reading, but also the lowest since September 2nd, just after the commencement of the latest confirmed uptrend.  Sentiment indicators are highly variable, but this reading is probably best read as bullish.
    Technical indicators are mixed.  Despite yesterday’s gains, most major indices closed below their respective 20-day moving averages (the NYSE composite excepted).  All closed above their respective 50-, and 100-, 200-day averages.  The SPX and NYSE composite closed below its 200-week moving average.  Markets are in a generally bullish configuration, with 50-day moving averages above respective 200-day moving averages.  Directional movement indicators are negative, with a weak trend.  Short-term relative strength indicators moved up, but remain in a neutral range.  Market volatility moved down.  The VIX closed down -13.8% to 18.75 from 21.76 at Wednesday’s close, below 20.0 for the 1st time since November 12th.
    Financials underperformed the SPX.  The XLF, BKX, and KRX closed up +1.40%, +0.74%, and +1.12%, respectively.
    NYSE Indicators.  Volume rose +27.1% to 1.199 billion shares, from 943.0 million shares the prior day, and compares to the 1.049 billion share 50-day moving average.  Market breadth was positive, and up volume led down volume.  Advancing stocks exceeded decliners by +1894( compared to +611 Wednesday), or 4.30:1.  Up volume lagged down volume by 7.31:1.
    ValuationThe SPX trades at 14.1x estimated 2010 earnings ($85.06) and 12.4x estimated 2011 earnings ($96.37), compared to 13.9x and 12.2x respective 2010-11 earnings yesterday.  The 10-year average median Price/Earnings multiple is 20.0x.  Since the beginning of the year, analysts increased 2010, 2011, and 2012 earnings estimates by +11.6%, +4.1%, and +4.7%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings by +13.2% and +28.1%, respectively.
    Large-cap banks trade at a median 1.43x tangible book value and 12.3x 2011 earnings, compared to 1.42x tangible book value and 12.1x 2011 earnings yesterday.  These compare to the 10-year average median multiples of 3.08x tangible book value and 15.9x earnings.  Analysts expect 2011 large-cap bank earnings to exceed 2010 earnings by +34.3%.  In 3Q2009, large-cap banks earned a combined $5.91 per share while the BKX Index earned -$1.24 per share.  In 3Q2010, large-cap banks earned $13.78 and the BKX earned $0.71 per share.
    SPX.  On increased volume, the SPX rose +18.10 points, or +1.54% to end at 1196.69.  Volume rose +10.2% to 862.54 million shares, from 782.84 million shares the prior day and above the 860.4 million share 50-day moving average.  For the 21st consecutive day, its 50-day moving average closed above its 200-day moving average (1168.79 versus 1129.61, respectively).  The SPX closed above its 200-week moving average (1190.98), after two consecutive daily closes below that level.
    The SPX gapped more than 1.1% higher to 1191 and traded to an intraday high of 1200.29 shortly after 11:00.  Markets tested the 1200 level several times, at noon and again at 1:00, but couldn’t press the gains, with markets trending mildly lower into the close.  The SPX closed +5.94% above its 50-day moving average (1168.79), closing above that average for the 54th consecutive day, and +5.94% above its 200-day moving average (1129.61), which trended higher on the day.  The SPX closed -1.69% below its April 23rd closing high of 1217.28.  The 20-, 50-, 100-, and 200-day moving averages rose.
    Technical indicators are mixed as the SPX closed below its April highs for the 6th consecutive day.  The directional momentum indicator is slightly negative, but trend strength is weak.  Relative strength rose to 54.27 from 45.05, moving to the middle of a neutral range, from moderately oversold.  Next resistance is at 1203.40; next support is at 1186.86.
    BKX.  On increased volume, the KBW bank index closed at 46.12, up 0.34 points, or +0.74%.  The index closed +7.31% above its August 30 closing low of 42.98, the trough of the recent correction, but -20.4% below its April 23rd closing high, well into bear market territory. 
    Financial stocks underperformed the broader indexes.  The BKX gapped higher to an intraday high of 46.62, but lost ground through the afternoon.  Volume was 155.02 million shares, up +15.0% compared to 134.83 million shares the prior day, and compares to 151.6 million share 50-day average.
    Technical indicators are mixed, but generally negative.  The BKX closed below its 20-, 50-, 100-, and 200-day moving averages (46.57, 46.71, 46.82, and 48.86, respectively).  The 20- and 200-day moving averages trended higher.  The 50- and 100-day averages trended lower.  The 50-day moving average closed (by -2.15 points) below the 200-day moving average, as it has since August 16.  The directional movement indicator is positive, with a stable trend.  Relative strength rose to 46.201 from 43.90, still in a moderately oversold range.  Next resistance is 46.57; next support at 45.73.

    Disclosure: No positiions
    Themes: Financials Stocks: KEY, RBS
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