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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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  • BOJ May Double Inflation Target, U.S. Futures Subdued After Yesterday's Gains 0 comments
    Dec 18, 2012 9:37 AM | about stocks: DFS

    This morning. U.S. equity markets confirmed an uptrend on November 23rd. Futures are modestly higher.

    Monday, markets posted their best gain since November 23rd, as more optimistic assessments on fiscal cliff developments and global growth pushed markets higher, with most indexes ending at or just short of their intraday highs. At mid-session, AAPL reversed morning losses and ended with a gain of 0.10%, helping the Nasdaq to a +1.32% gain, followed by the SPX, NYSE composite, and DJI, which closed up +1.19%, +0.88%, and +0.76%, respectively. The DJ Transports outperformed, up +0.77% on the day and -2.65% below its February 3rd high.

    In December, the NYSE composite, DJI, SPX, and Nasdaq are up +1.71%, +1.61, +1.00%, and +0.01%, respectively. In November, the Nasdaq, NYSE composite, and SPX closed up +1.11%, +0.28%, and +0.47%, while the DJI closed down -2.10%. In October, the SPX, DJI, Nasdaq, and NYSE composite closed off -1.98%, -2.54%, -4.46%, and -0.36%, respectively. In September, the SPX and DJI indexes closed +2.42% and +2.65% higher, respectively, while the Nasdaq and NYSE composite rose +1.61% and +2.95%, respectively. All the major equity indexes also closed higher in August, July, and June. All are at least +8.34% higher in 2012.

    Fundamentals are mixed, as SPX 20- and 50-day moving averages have regained a positive slope. On Monday, the SPX recaptured its 50- and 100-day moving averages. The Nasdaq closed above its 20-, 50-, and 200-day moving averages. The DJI recaptured its 100-day moving average. The SPX and NYSE composite closed above their respective 20-, 50-, 100-, and 200-day moving averages. Today, Asian equities closed mixed, but strength in Tokyo on reports that the BOJ will double its inflation target to 2%, following parliamentary elections. In Europe, the major equity indexes are moderately higher.

    This morning, U.S. equity futures are modestly higher. U.S. Treasury yields are higher, with the 10-year at 1.789%, up from 1.772% Monday. U.S. repo rates are at 24 bps, up from 23 bps the prior day. Spanish and Italian 10-year debt yields are at 5.35% and 4.47%, respectively, compared to 5.43% and 4.57% the prior day. The dollar is modestly lower. U.S. options markets suggest a bullish short-term outlook. The CBOE skew fell -0.72% to 118.06, from 118.92 the prior day. Commodities prices are mixed.

    In pre-market futures trading, December SPX equity futures are modestly higher, but well off the top of their 1428-1434 range. SPX equity futures are at 1428.30, up +1.30 points. The SPX opens at 1430.36, off -2.42% from September 14th's 1465.77 multi-year closing high, and +1.38%, +1.11%, +0.99%, and +3.07% above its respective 20-, 50-, 100-, and 200-day moving averages. The SPX is up +13.7% in 2012. On November 5th, the 20-day moving average crossed below its 50-day moving average, then fell below the 100-day moving average on November 16th. The 50-day moving average crossed above its 100-day moving average on August 17th. The SPX is +33.1% above the 1074.77 October 4, 2011 intraday low. Next resistance is at 1436.17. First support is at 1419.04.

    Until yesterday, financial stocks have recently underperformed the broader market, but the BKX is now down -1.98% from its September 14th high, better than the SPX's -2.42% drop. Monday, the BKX surged +2.76%, extending its monthly gain to +4.24%. The BKX closed down -2.10% in November, following losses of -5.85% in October and -1.08% in September.

    Monday. Futures suggested a moderately strong open, and equities rallied steadily through the day to end at their daily highs with the largest single-day advance since November 23rd. Market breadth was strongly positive. NYSE volume rose +4.15% to 701.92 million shares, 1.02x the 15-day moving average. At the close, the Nasdaq rose +1.32%, followed by the SPX, NYSE composite, and DJI, which gained +1.19%, +0.88%, and +0.76%, respectively. All SPX market segments closed at least +0.34% higher. Leaders were financials, consumer services, and utilities, which rose at least +1.49%. Laggards were basic materials, consumer goods, and telecommunications.

    From its 1413.58 prior close, the SPX opened at 1417, and rose by mid-session to 1425, then traded narrowly until a renewed surge in the final hour to end at 1430.36, just shy of its late 1430.67 intraday high. Market volatility fell. From 17.00 at the prior close, the VIX set a 17.20 intraday high at the open, then moved narrowly through the session, until falling sharply to a late session 16.21 intraday low. The VIX closed at 16.34, down -3.88%.

    On +8.89% increased volume, the DJ transports outperformed, up +0.77% compared to the DJI's +0.76% gain. The index closed at 5,226.71, up from 5,186.95 the prior day, and above 5,000 since November 23rd. After also rose at the open but largely gave up its gains as other indexes strengthened in the morning session. The index rallied to 5,225 by early afternoon, dropped back to test support at 5,200 by mid-afternoon, then rallied strongly to end just short of its late session 5,228.13 intraday high. The index closed +2.28%, +2.92%, +3.15%, and +2.26% above its respective 20-, 50-, 100-, and 200-day moving averages. The TRAN closed -2.65% below its 5,368.93 February 3rd closing high. The TRAN has not confirmed multiple DJI new highs (the most recent September 14th) subsequent to February 3rd.

    Technical factors improved as the SPX closed back above its 50- and 100-day moving averages. The CBOE put/call skew fell -0.72% to 118.06, from 118.92 the prior day. U.S. Treasury bond prices fell sharply.

    Despite the strength, trading desks reported a quiet but steady day, one that evidenced real buy demand. Fiscal cliff talks appear to have progressed.

    Immediate SPX support is 1407 (the 20-day moving average), and 1387 (the 200-day moving average). Resistance is 1415 (the 50- and 100-day moving averages), 1430, and 1466 (the September 14th closing high).

    Distribution day count. Since the uptrend confirmation on November 23rd, the Nasdaq and NYSE composite have distribution counts of 3, while the SPX has a distribution count of two.

    In Asia, equity markets ended mixed, with Tokyo providing the best result on speculation that the BOJ will announce a 2% inflation target, twice the current target. The NKY rose +0.96%, on a +21.9% volume increase. The HSI closed down -0.08%, on a +121.7% volume increase. In Shanghai, the SHCOMP rose +0.10% on a -12.6% volume decrease. The HSI fell from a 16-month high, set December 14th. SHCOMP closed at 2,160.34, above 2,000 for a 9th consecutive session and compares to the December 3rd 1949.46 intraday and post-2009 low. The NKY and HSI closed above their respective 20-, 50-, 100-, and 200-day moving averages. The SHCOMP closed above its 20-, 50-, and 100-day moving averages, but below its 200-day moving average.

    Economic releases were light. Commentary focused on Chinese stimulus prospects, U.S. fiscal cliff negotiations, AAPL's weakness and lower property shares in Hong Kong.

    Compared to last week's close, the NKY is up +1.90%, the HSI is down -0.49%, and the SHCOMP is up +0.55%. Last week, the NKY rose +2.21%, the HSI rose +1.87%, and the SHCOMP rose +4.31%. In December, the NKY is up +5.05%, the HSI up +2.11%, and the SHCOMP up +9.21%. In November, the NKY closed up +5.80%, while the HSI and SHCOMP closed +0.73% higher and -4.12% lower, respectively.

    In Japan, the NKY closed at 9,923.01, up from 9,828.88 at Monday's close, and above 9,000 since November 16th. The index closed down -3.24% from its March 27th high, but +16.2% higher in 2012. The index gapped higher to open at 9,855.00, and rallied to a mid-session 9,967.24 intraday high. The index traded narrowly, but lower through the afternoon. The NKY closed +4.88%, +9.12%, +10.3%, and +9.13% above their respective 20-, 50-, 100-, and 200-day moving averages. Most market segments closed higher. Leaders were telecommunications, financials, and oil and gas, which rose at least +1.21%. Laggards were technology, industrials, and utilities.

    In China, the Hang Seng closed at 22,494.73, down from 22,513.61 at the prior close. The index is +22.0% higher for the year. The index has closed above 20,000 since September 12th. The index opened modestly higher and traded to a late morning 22,588.48 intraday high before reversing lower in the afternoon, when it fell to the day's 22,449.74 low. A late rally narrowed the loss. The HSI closed +2.08% and +3.73% above its respective 20- and 50-day moving averages. Most market segments closed higher. Leaders were telecommunications, oil and gas, and technology, which rose at least +0.32%. Financials fell -0.32%. Laggards were consumer services, consumer goods, and basic materials, which closed at least -0.36% lower.

    In Shanghai, the SHCOMP closed at 2,162.46, up from 2,160.34 the prior day. The index closed -12.6% below its 2,474.07 March 14th high, and down -1.68% in 2012. The index opened slightly lower, trading to an early 2,144.73 intraday low, but reversed higher moving into the afternoon session to a 2,183.43 intraday high. The index reversed lower by mid-afternoon, rallying modestly into the close to preserve a modest daily gain. Most market segments closed lower. Leaders were consumer goods, financials, and basic materials, which climbed at least +0.16%. Laggards were health care, consumer services, and telecommunications, which fell at least -0.38%.

    In Europe, the majorequity indexes are modestly higher. The Euro Stoxx50, FTSE 100, and DAX are up +0.36%, +0.39%, and +0.46%, respectively, while the CAC 40 is unchanged. The Euro Stoxx50, FTSE 100, CAC 40, and DAX are above their respective 20-, 50-, 100- and 200 day moving averages. On the day, the Spanish IBEX 35 is up +0.93%, while the Italian FTSE MIB is up +0.46%.

    From its prior 2,628.01 close, the Euro Stoxx50 gapped higher to open above 2,636 and traded to a mid-morning 2,644.83 intraday high. The index dropped back by mid-session to the 2,632.51 intraday low, but has recovered to 2638.04 at present. Most market segments are higher. Leaders are consumer services, consumer goods, and financials, which are up at least +0.54%. Laggards are health care and telecommunications, which up at least +0.01%, and oil and gas, which is down at least -0.13%.

    For the week, the Euro Stoxx50, FTSE 100, and DAX are up +0.24%, +0.20%, and +0.52%, while the CAC 40 is down -0.16%, respectively. Last week, the Euro Stoxx50, FTSE 100, CAC 40, and DAX closed up +1.12%, +0.12%, +1.04%, and +1.05%, respectively. For the month, the Euro Stoxx50, FTSE 100, CAC 40, and DAX are up +2.39%, +1.14%, +2.26%, and +3.11%, respectively. In November, the Euro Stoxx50, FTSE 100, CAC 40, and DAX closed up +2.86%, +1.45%, +3.73%, and +2.00%, respectively. In 2012, the indexes are up +13.2%, +5.76%, +14.9%, and +28.8%, respectively.

    Libor, LOIS, Currencies, Treasuries, Commodities:

    • USD LIBOR is 0.16350%, down from 0.16400% the prior day. USD 3-month LIBOR is 0.30900%, unchanged from 0.30900% the prior day, and compares to the January 4th peak of 0.58250%.
    • The US Libor-OIS (LOIS) spread is 16.40 bps, compared to 16.80 bps the prior day, and compares to the January 6th high of 50.05 bps. Euribor-OIS is 12.20 bps, up from 12.20 bps the prior day, and down from the December 27th high of 98.80 bps. Moves in the LOIS indicate changes in intra-bank lending risk premiums.
    • The 3-month Euro basis swap is -22.686 bps, compared to -22.894 bps the prior day, and up from a trough of -147.00 bps on December 14th and within a normal -10 bps and -40 bps range.
    • Spanish 10-year debt yields are 5.35%, compared to 5.43% the prior day. Italian 10-year debt yields are at 4.48%, compared to 4.57% the prior day. German 10-year debt yields are 1.38%, compared to +1.37% the prior day.
    • The U.S. government overnight repo rate is 24 bps, compared to 23 bps the prior day.
    • U.S. Treasury yields are mostly higher, with 2- and 10-year maturities yielding 0.258% and 1.768%, respectively, compared to 0.250% and 1.772% Monday. The yield curve narrowed, with the 2 to 10 year spread +1.510%, compared to 1.522% the prior day. In the past year, the 2- and 10-year spread varied from a low of +1.174% on July 24, 2012, to a high of +1.998% on March 19, 2012.
    • The U.S. dollar is weaker compared to the euro, British pound, and Japanese yen. The dollar trades at US$79.482, compared to a US$79.432 intraday low and US$79.568 the prior day, and worse compared to its US$80.201 50-day, US$80.550 100-day, and US$80.865 200-day averages. The euro trades at US$1.3186, compared to a US$1.3189 intraday high and US$1.3164 the prior day. The euro trades better compared to its US$1.2937 50-day and US$1.2802 100-day averages, and compares to a multi-year low of US$1.1877 on June 7, 2010. In Japan, the dollar trades at ¥83.87, compared to ¥83.89 the prior day. The yen trades worse than its 50-day moving average ¥80.93.
    • Citigroup Economic Surprise Index fell to 47.40, from 50.60 the prior day, but down from a recent peak of 60.70 on November 13th. The index turned positive on September 5th. The index is better compared to its respective 49.68 5-day and 43.75 10-day moving averages. The index has improved significantly from a recent July 19th -65.30 low, but the trend was lower until December 7th's bullish reversal from the prior day's 35.50 close. After a lag, a rising CESIUSD correlates with stabilizing EPS revisions.
    • Commodities prices are mostly higher, with higher energy, higher precious metals, lower aluminum and copper, and higher agriculture prices.

    Volatility, Skew:

    • The VIX fell -3.88% to end at 16.34, down from 17.00 at the prior close. The VIX is +2.51% above its 15.94 20-day moving average. The VIX set a recent closing low of 13.45 on August 17. Its 30-day high is 19.40.
    • At mid-session, the Euro Stoxx 50 volatility index (V2X) is down -3.03% to 15.96, from 16.46 at the prior day's close. The V2X index trades -7.69% below its 17.29 20-day moving average, -35.5% below the 24.77 30-day high, and +1.90% above the 15.67 30-day low. On December 17th, the index fell to a 5-year closing low of 16.46.
    • The Hang Seng volatility index (VHSI) closed at 15.68, up +0.19% from 15.65 the prior day. The VHSI index trades +0.80% above its 15.56 20-day moving average. On December 17th, the VHSI closed at 15.14, a 5-year low.
    • CBOE skew fell to 118.06, down -0.72% from 118.92 at the prior day's close, but within a neutral (115-120) range. Spikes in excess of 130 (as last on September 21, but also on March 12, 15, and 16) correlate well with short-term market tops. The recent high close was 130.60 on September 21st; the recent low was 113.23 on November 14th. The index rarely falls below 110, last on July 31, 2009. The index tracks market tail risks, the cost of buying out-of-the-money, long-dated options, i.e., options not affected by expirations. A rise suggests that investors are buying more puts than calls, a bearish signal.

    U.S. news and economic reporting:

    • Focus is clearly on fiscal cliff negotiations between the White House and Speaker Boehner. Concessions have been made on both sides, but their sufficiency from a standpoint of passage through the Congress remains doubtful. Boehner meets with the House Republican caucus today to discuss the outlines of a possible deal.
    • At 8:30, December NAHB housing market index, with 47 survey and 46 prior.

    Overseas News:

    • Australia - Conference Board October leading index rose +0.2%, compared to -0.4% revised prior.
    • China - November FDI (YOY) (foreign capital actually utilized) fell -5.4%, compared to -3.1% survey and -0.2% prior.
    • Hong Kong - November unemployment was unchanged at 3.4%.
    • Japan - BOJ may adopt a 2% inflation target as early as Thursday, with the London Telegraph stating that the BOJ was prepared to "print money for the whole world." November department store sales rose +2.22%, compared to -2.4% prior.

    Company Ratings/News:

    • DFS - Reports earnings this week. JPM analyst predicts a miss.

    Price and Selling Exhaustion/Trend Reversal:

    • SPX - On a monthly basis,the SPX signaled selling exhaustion in February 2009 when it perfected sell setup at 735.09. The index recorded a bullish price flip in May 2009, when the index closed at 919.14, above the prior month 872.81 close and above the January 825.88 close 4 months prior. The index perfected the sell setup in January 2010. A bullish price flip in May 2009 initiated a sell setup, which perfected in January 2010. A sell countdown began in March 2010. In September 2010, the index initiated a follow-on sell setup, which perfected in May 2011. The sell countdown completed in January 2012. The index initiated a new countdown in August 2012, which progressed to 4 in November, when the index closed at 1416.18, compared to 1412.16 the prior month and 1379.32 four months prior. Resistance is 1429.36. On a weekly basis, the SPX signaled selling exhaustion the week ended June 8th, during which the SPX traded to an intraday low 1266.74 on June 4th, when it perfected a weekly buy setup on the June 8th. The next week's bullish price flip initiated a sell setup that perfected on August 10th at 1405.87. In the week ending December 14th, the index closed down -0.32% at 1413.58, compared to 1418.07, but well above the 1379.85 close four weeks prior. The sell setup extended to 3. The sell countdown was unchanged at 8. The SPX closed -1.59% below its 1436.40 price exhaustion target. On a daily basis, the SPX perfected an upward setup on August 15th at 1405.53, but didn't show much subsequent trend until November 19th, when a bullish price flip initiated a sell setup with a close at 1386.89. The index perfected the setup on November 30th with its 1416.18 close and initiating a sell countdown. Monday, the SPX closed at 1430.36, compared to 1413.58 the prior day and 1427.84 four days prior. The bullish price flip initiated a sell setup. The sell countdown was unchanged at 6.
    • BKX - On a monthly basis, the BKX perfected a buy setup in December 2007 and completed its buy countdown in February 2009. recorded a completed downward countdown in February 2009. The BKX reached an unperfected buy setup in December 2011. In September 2012, it initiated a sell setup, which rose to 3 in November. In November, the BKX fell -2.10% to end at 48.56, compared to 49.60 at the end of October, but above 45.52 four months prior. On a weekly basis, the BKX recorded a completed buy countdown November 25, 2011. A bullish price flip in the week ending December 16th initiated a sell setup which perfected the week of February 10th, when the index closed at 44.53. A bearish price flip ensued the week of April 13th, and a buy setup perfected the week of June 8th, when the index closed at 40.86. A bullish price flip occurred on July 27th, and the sell setup perfected on September 21st. Subsequent trends have been weak, though on December 7, the index initiated a new sell setup. On December 14th, the BKX closed at 49.26, compared to 49.33 the prior week and 47.15 four days prior. The sell setup rose to 2. The sell countdown rose to 34. On a daily basis, the BKX signaled selling exhaustion on June 4th, then rallied to 44.65 on June 19th, when it perfected a sell setup. The index completed a sell countdown on August 8th, and on August 15th, perfected a daily follow-on sell setup. On September 6th, the BKX initiated a new setup with its +2.93% gain, which broke through resistance at 47.75. On September 14th, the index completed a sell countdown, followed on September 19th, with an unperfected sell setup. A sell countdown began on September 28th. A bullish price flip on December 6th, was followed on December 14th by a bearish price flip, initiating a buy setup. The index closed Monday at 50.62, compared to 49.26 at the prior close and 49.51 four days prior. The close above the November 1st 50.45 close and above the prior two days' close completed a sell countdown, but initiated a sell setup.
    • VIX - On a monthly basis, the VIX perfected an upward setup on January 31, 2008, and reached an upward setup of 7 on October 31, 2008. In November, the VIX fell -14.7%, after rising +0.89% in October, and falling 16.2% in September. The VIX ended November at 15.87, compared to 18.60 at the end of October and 17.47 at the end of The month's decline initiated a downward setup but without a countdown. On a weekly basis, the VIX perfected a buy setup on January 27th, and a sell setup on June 8th, followed by another perfected buy setup on August 10th. Last week, the VIX rose +6.92% to end at 17.00, compared to 15.90 the prior week, and the 16.41 close 4 weeks prior. The positive price flip initiated a sell setup. The buy countdown was unchanged at 6. On a daily basis, the VIX reached an sell countdown of 11 on June 4th, and subsequently exhibited a more distinct downward trend with a perfected setup on August 17th, followed by a perfected sell setup on August 31st. Subsequently, the VIX exhibited little in the way of a distinct trend. On November 23rd, the index perfected a sell setup. A bearish price flip on December 7th initiated a new sell setup. Monday, the VIX fell -3.88% to 16.34, from 17.00 at the prior close and 15.57 at the 4 days' prior close. The sell setup rose to 3. The buy countdown stemming from the November 23rd perfection was unchanged at 4. The VIX closed +16.6% above the 14.02 support level and -12.3% below the 18.64 exhaustion level.
    • DXY, EUR Cross - On a monthly basis, Euro Dollar cross perfected a downward setup on May 30, 2008, at 1.554. Subsequent monthly trends were weak until December 31, 2009, with a monthly decline of -4.56% that brought the index to 1.4321. The downward move continued until July 2010, when from 1.2238, the index rose +7.10%, with an unperfected downward setup in August 2010. The index failed to establish much strong upward momentum, however, peaking at the end of April 2011 at 1.4807, but then trending lower to test the July 2010 lows, when in August 2012, the index completed a buy countdown. In recent months, the trend has been higher, with an upward setup of 3. The cross ended November at 1.2986, compared to 1.2960 the prior month and 1.2667 4 months prior. The sell setup is 3 with a countdown of 1. On a weekly basis, the cross perfected a buy setup on January 6th, followed by another buy setup and completed countdown on June 1, 2012, when the cross closed at 1.2434. After several weeks without much trend, the index initiated an sell setup the week ended August 3rd, when it closed at 1.2387, and the setup perfected on September 28, with a 1.2860 close. The week of December 14th, the index ended at 1.3163, compared to 1.2927 the prior week and 1.2743 4 weeks prior. The weekly sell setup rose to 5, while the sell countdown rose to 4. On a daily basis, the EURUSD cross perfected a sell setup on September 12th. The subsequent trend was lower, with a buy setup initiated on November 2nd and perfected on November 14th with a 1.2736 close. The index initiated an buy setup the following day and perfected the setup on November 27th at 1.2943. With Monday's +0.08% increase, the EURUSD cross closed at 1.3174, compared to 1.3164 the prior day and 1.3005 four days prior. The sell setup rose to 4. The sell countdown rose to 8.
    • USGG10YR - On a monthly basis, the USGG10YR perfected a buy countdown on February 29th, and a buy setup on May 31st. The subsequent trend has been weak. The rate ended November at 1.6156%, compared to 1.6901% the prior month and 1.6449% 4 months prior. The upward setup of 3 with a countdown of 1. On a weekly basis, the index perfected a buy setup on June 8th, but subsequent trends have been weak, with a sell countdown of 8, unchanged since November 16th. The rate ended the most recent week at 1.7015%, up from 1.6215% the prior Friday and 1.5800% four weeks prior. The sell setup rose to 2. On a daily basis, the USGG10YR completed a downward setup on May 8th, followed by two downward countdowns on May 17th and June 4th. Subsequent trends were weak until August 3rd, when the rate rose nearly 9 bps to end at 1.5905%, initiating a new upward setup. This setup perfected on August 15th, when the rate ended at 1.8155%. A new downward setup commenced on August 21st, when the rate rose to 1.8610% before ending at 1.7984%, below the prior 4 day's close of 1.8155%. The downward setup perfected on August 31st, when the rate ended at 1.5484%. The trend reversed upward on September 3rd, and the upward setup reached an unperfected 9 on September 18th. After a late October intraday spike to 1.861%, the trend was lower until November 16th, when the rate closed at 1.580%. A bullish price flip on December 7th initiated a sell setup. On December 12th, the rate completed a sell countdown. On Monday, the rate ended at 1.7717%, up from 1.7015% the prior day and 1.6541% four days prior. The sell setup rose to 7.
    • NKY - On a monthly basis, the NKY perfected a buy setup on April 30, 2009, and subsequently has traded narrowly. In November, the index rose +5.80%, following an increase of +1.50% in October. On November 30th, a bullish price flip initiated a sell setup. The index closed at 9,446.01, compared to 8,928.29 the prior month and 9,006.78 four months prior. On a weekly basis, the NKY perfected a sell setup on March 9th, and a subsequent buy setup on June 1st with a countdown of 8. For the week ended December 14th, the NKY rose +2.14% to 9,737.56, compared to 9,527.39 the prior week and 9,024.16 4 weeks prior. On December 14th, the sell setup perfected, initiating a sell countdown. The index closed -8.91% below its 10,190.35 trend. On a daily basis, the NKY perfected an upward setup on March 27th, and two consecutive downward setups on April 12th, and May 14th, with completed downward countdowns on May 16th and June 4th. The index rallied through August 21st, but then strung together multiple lower closes, perfecting a downward setup on September 5th. The index subsequently rallied, initiating a sell setup on September 7th, which it perfected on September 20th. A buy setup commenced on September 21st, which was perfected on October 3rd. Subsequent trend and momentum were weak until November 15th, when a bullish price flip initiated a sell setup and countdown. The sell setup perfected on November 30th. Tuesday, the index closed up +0.96% at 9,923.01, compared to 9,828.88 the prior day and 9,581.46 four days prior. The sell countdown rose to 8.
    • HSI - On a monthly basis, the HSI perfected a downward countdown on March 31, 2009, and two subsequent perfected upward setups on December 31, 2009 and May 31, 2011. The index has yet to reach its 24,923.28 price exhaustion target. The index has risen in each of the past three months and ended November at 22,030.39, compared to 21,641.82 the prior month and 19,441.46 four months prior. The sell setup rose to 3, with a countdown of 11. On a weekly basis, the HSI perfected an upward setup on March 2nd, and subsequently traded to a low close of 18,185.59 on June 4th. After a period of weak trend, the index established a new sell setup and countdown in the week ending September 14th. The index perfected the setup on November 9th, and initiated a new sell setup on December 7th. On December 14th, the index closed at 22,605.98, compared to 22,191.17 the prior week and 21,159.01 four weeks prior. The sell setup rose to 2. The sell countdown rose to 3. On a daily basis, the HSI perfected a sell setup and completed an upward countdown on August 8th. After September 5th's lower close, the index perfected a buy setup. An sell setup commenced on September 9th, followed by a completed countdown on October 24th, with a trend of 22071.74, and another perfected setup on October 25th. It completed another sell countdown on December 6th, with a trend of 22,465.97. On December 14th, the HSI closed at a 5-year high and above the December 6th trend at 22,605.98 and perfected its sell setup. Tuesday, the index closed at 22,494.73, compared to 22,513.61 the prior day and 22,503.35 four days prior. The bearish price flip initiated a buy countdown. The sell countdown was unchanged at 1.
    • SHCOMP - On a monthly basis, the SHCOMP perfected a buy setup on September 30, 2008, and subsequently rallied to an August 31, 2009, high, but without perfecting a subsequent sell setup. Since then, the SHCOMP resumed a downward trend perfecting another buy setup on January 31, 2012. The index ended November at 1,980.12, below trend exhaustion of 1,987.13, and compared to 2,068.88 the prior month and 2,225.43 four months prior. The current monthly buy countdown is 6. On a weekly basis, the SHCOMP last perfected a buy setup on April 8, 2011. The index has subsequently trended lower, with a downward perfected setup on September 23, 2011, and January 6, 2012 countdown completion, when it closed at 2,163.40. The index rallied to a high of 2,476.22 during the week ending March 16th, but without perfecting an upward setup. On July 13th, the index perfected a buy setup. In subsequent weeks, it traded below the sales exhaustion target of 2148.45 to a 1980.12 close on November 30th, when the buy countdown reached 11. On December 14th, the index closed the week up +4.31% at 2,150.63, compared to 2,061.79 the prior week and 2,014.73 four weeks prior. The sell setup rose to 2. The buy countdown was unchanged at 11. On a daily basis, the SHCOMP perfected a buy setup and a completed a downward countdown on June 28th, but sold through the 2,170.95 exhaustion target on July 23rd to the September 5th 2037.68 closing low. On August 20th, the index perfected a buy setup carryover from August 2nd, and the index perfected another buy setup on August 27th, with completed buy countdowns September 5th and 24th. On September 25th, the index perfected another buy setup. The buy countdown was completed on November 19th. On November 8th, when the index initiated a buy setup at 2,091.25. The index perfected that buy setup on November 20th at 2,004.17. On December 4th, a bullish price flip initiated a sell setup. Tuesday, the index closed up +0.10% at 2,162.46, compared to 2,160.34 at the prior close and 2,082.73 4 days prior. The sell setup rose to 3.
    • SX5E - On a monthly basis, the Euro Stoxx50 last perfected an sell setup on May 31, 2007. It perfected a buy setup on September 30, 2008. The buy countdown completed in May 2012. A bullish price flip in August initiated a sell setup, which ended November at 4. The index closed at 2,575.25, compared to 2,503.64 the prior month and 2,479.82 four weeks prior. On a weekly basis, the index trends are more pronounced, having perfected an sell setup on March 9th, followed by a buy setup on May 25th, followed by a weekly close 2119.19, below the sales exhaustion target. The index subsequently rallied to perfect a sell setup on August 10th. The upward countdown reached 10 on September 14th. A bullish price flip the week of November 23rd initiated a sell setup that closed the following week at 2,575.25, above the price exhaustion target of 2,563.46. In the week ended December 14th, the index rose +1.12% to close at 2,630.54, compared to 2,601.37 the prior week and 2,427.32 at the 4 weeks' prior close. The sell setup rose to 4. The sell countdown rose to 9. On a daily basis, the index perfected a downward setup on May 14th, when it closed at 2,201.95. The index subsequently rallied through a perfected sell setup on June 18th and completed its sell countdown on July 24th. On September 13th, the index perfected an upward setup. Daily trends were weak through November 16th, without sustained upward or downward setups and countdowns. Strong gains on November 19th initiated an upward setup. On November 29th, the index perfected an upward setup. Monday, the index fell -0.10% to 2,628.01, compared to 2,630.54 the prior day and 2,624.03 at the prior 4 days' close. The sell countdown was unchanged at 7. The index closed -1.06% below the 2,666.32 trend.

    3Q2012 Earnings. The 3rd quarter's earnings reports were mixed, beating on EPS, but falling short on sales/revenues. Of 494 reporting companies, 336 or 71.5% surprised positively on earnings, beating by an average +3.12%. Sales and revenues fell short, however, with only 204 or 41.4% surprising positively.

    Valuation. The SPX trades at 13.6x estimated 2012 earnings ($103.95), 12.3x estimated 2013 earnings ($114.90), and 11.1x estimated 2014 earnings ($127.84). The 10-year average median price/earnings multiple is 15.9x. Since the beginning of 2012, analysts changed 2012 and 2013 earnings estimates by -7.14%, and -3.60%, respectively. Analysts expect 2012 and 2013 earnings to exceed actual 2011 earnings ($96.94) by +4.12% and +18.0%, respectively.

    Options. Options markets are bullish. Composite options are bullish, index options are bullish, and equity options markets are bullish. The composite put/call ratio is 0.70, compared to 0.89 the prior day, and better compared to its 5- and 10-period moving averages of 0.83 and 0.86, respectively. The index put/call ratio fell to 0.77, from 1.01 the prior day, and better than its 5- and 10-period moving averages of 0.95 and 0.99, respectively. The equity put/call ratio closed the day at 0.67 compared to 0.82 the prior day, and better than its 5- and 10-period moving averages of 0.77 and 0.82, respectively.

    NYSE Indicators. Volume rose +4.15% to 701.92 million shares, compared to 673.92 million shares the prior day, +2.00x the 15-day moving average. Market breadth was positive, and up volume led down volume, both by large margins. Advancing stocks led decliners by +1,014 (compared to -226 the prior day), or 2.00:1. Up volume led down volume by 4.19:1.

    BKX. Volume rose +49.8%, and the KBW bank index closed at 50.62, up +2.76% from 49.26 at the prior close. Volume rose to 66.170 million shares, from 44.179 million shares the prior day, or 1.12:1x the 57.133 million share 15-day moving average. The index gapped higher to open above 49.50 and rallied through 50.0 before 10:00 to 50.40 by mid-session. After some afternoon profit taking, the BKX strengthened in the final hour to end just short of its 50.64 late session high. Large cap banks outperformed the regional banks, as the KRX rose +2.11%.

    On the week, the BKX is up +2.76%. Last week, the BKX fell -0.14%. In December, the BKX is up +4.24%. In November, the index closed off -2.10%. The index rose +0.04% in October, and +5.06% and +3.67% in September and August, respectively.

    The BKX had closed below 50 since November 6th. It closed -1.98% below its recent September 14th peak. It has closed above 40 since January 3rd. The BKX closed -12.7% below its April 23, 2010 close (the post-2008 high point), but +55.5% above the 32.56 low on October 4, 2011. Large-cap bank stocks have outperformed the broader market's rebound, which is up +33.1% in the same period. The BKX is up +28.4% in 2012, compared to a +13.7% rise in the SPX.

    Technical indicators improved as the index easily recaptured its 50-day moving average. The 20-, 50-, 100-, and 200-day moving averages now have a positive slope. The index closed +3.52%, +2.54%, +4.07%, and +6.75% above its respective 20-, 50-, 100-, and 200-day moving averages. The 20-day moving average crossed below its 50-day moving average on November 13th. The index has closed above its 100-day moving average since August 7th. The 20-day moving average rose +18 bps. The 50-day moving average rose 1 bp. Its 100-day moving average rose +6 bps and the 200-day moving average rose +2 bps. The 20-day closed (by -0.47 points) below the 50-day. The 50-day moving average has closed (by +1.95 points) above the 200-day moving average since February 22nd. The 100-day moving average closed (by +1.22 points) above the 200-day moving average since March 19th, and the gap expanded +2 bps.

    The directional movement indicator is positive, and widened to 14.858 from 3.72 the prior day. Relative strength fell to 64.14 from 53.48 the prior day, above the middle of a neutral range. Next resistance is 51.04; next support at 49.80.

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