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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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  • Futures Edge Lower After Friday's Positive Reversal 0 comments
    Feb 14, 2011 8:36 AM | about stocks: RF, STI, KEY
    This morning.  Equity futures are modestly lower, but improving from earlier levels. Asian markets advanced, with particular strength in China, but European markets are mixed.  In Europe, sovereign debt spreads have widened considerably in the past week.  The SPX opens at 1329.15.  March SPX futures are at 1326.10, down -0.65 points after fair value adjustment.  Next SPX resistance is at 1334.60.  Next support is at 1319.89.  Markets are in a confirmed uptrend.
     
    As on Thursday, Friday’s U.S. equity markets staged a positive reversal, opening lower, but ending moderately higher, on lower volume. The Nasdaq, SPX, and DJI closed at their best levels since June 2008. The NYSE composite closed up, but off last Tuesday’s closing high. Intraday, the SPX tested 1330, but couldn’t hold that level at the close. Market breadth was positive. Volatility declined to its lowest level since January 14th. For the week, all major indexes closed higher, led by a gain of +1.50% on the DJI. The DJI, SPX, and Nasdaq posted gains in each of the past 3 weeks. The NYSE has closed higher in each of the past four weeks.
     
    On the SPX, the January 6th distribution day grew stale and dropped from the count. Distribution days number 3 on the NYSE and Nasdaq, 2 on the SPX, and one on the DJI.  On the SPX, the next key resistance point is 1333, double the March 2008 low.  Distribution days track index declines of more than -0.25% on increased volume, in the past 25 trading days. 
     
    In world equity markets, Asian equity markets closed higher, with the Nikkei, Hang Seng, and Shanghai composite ending +1.13%, +1.28%, and +2.54%, respectively.  Chinese equity markets improved on views that January’s inflation data will be lower than estimates and as export growth exceeded survey. The SHCOMP’s strong gain was especially noteworthy, given a +43.2% increase in volume from Friday. It was also the index’s 3rd consecutive gain, following last Thursday’s positive reversal, and Friday’s confirmation of a new uptrend.  The SHCOMP improved its retreat since its November 8th high to -8.24%, out of correction territory.  In Europe, the Eurostoxx50, FTSE, and DAX are mixed, +0.02%, +0.19%, and +0.38%, respectively.  Sovereign debt spreads continued to widen. On the EuroStoxx, financials are the 9th worst performing market segment, down -0.58%. 
     
    LIBOR trends remain unremarkable.  Overnight USD LIBOR declined to 0.23300% from 0.23400% and compares to 0.25188% at year-end.  USD 3-month LIBOR rose to 0.31400% from 0.31300%, and compares to 0.30281% at year-end.  In early trading, the dollar is better against the euro, yen, and pound.  The euro trades at US$1.3443, compared to US$1.3554 Friday, and US$1.3603 the prior day.  For the 2nd consecutive day, the euro closed below its 100-day moving average, though it remains above its 50- and 200-day moving averages.  The dollar trades at ¥83.43, unchanged from ¥83.23 Friday and ¥83.23 the prior day.  Treasury yields are higher, with 2- and 10-year maturities yielding 0.835% and 3.640%, respectively, compared to 0.834% and 3.629% Friday.  The yield curve spread widened slightly to +2.805% compared to +2.795% the prior day.  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 +2.89% on February 17, 2010.  Commodities are generally higher, with slightly higher petroleum and lower natural gas, higher precious metals, lower aluminum and higher copper, and mixed agricultural prices.
     
    U.S. news and economic reporting.  Economic reporting is light today, but will heavy up on Tuesday and through the week’s remainder. 
     
    Overseas news.  Following last week’s tour through Greece, the EU and IMF said the country must speed up reforms and sell more public assets.  This morning’s U.K. press reports speculate that tomorrow’s inflation reading will register at double the country’s target rate.  Today’s press also predicts Anglo Irish and Irish Nationwide senior bondholders will face “significant” losses on their investments following deposit auctions.  Today, Reuters reported that German Chancellor Merkel may need a two-thirds Parliamentary majority to pass any EU bailout restructuring proposal, thereby requiring support of opposition parties and decreasing the odds of success.  Japan’s real fourth quarter GDP fell -1.1% over the third quarter, in-line with estimates.  Today’s Chinese press reports speculated that tonight’s inflation reading could print lower than expected and may even come in below 5.0%.  Today, opposition protesters rallied in Tehran against the Iranian regime. 
     
    Company news/research:
     
    ·         Four banks failed on Friday, one each in CA, WI, MI, and FL; total assets were $811 billion with the largest  at $391 million (Peoples State Bank, MI). 
     
    4Q2010 Earnings.  The fourth quarter’s earnings results have so far exceeded EPS and revenue expectations.  Of the 348 S&P500 companies that reported earnings to date, 74% (256 of the 348) beat operating EPS estimates, versus the historical average of 62%.  Companies beat by an average of +6.9% (versus a historical average of +2%).  EPS is up +36.6% over the prior year.  Though challenged in the current operating environment, 271 companies (78%) reported increased revenues and 243 companies (70%) beat revenue estimates. 
     
    With all 24 BKX members reporting, 75% (18 out of 24) beat operating EPS estimates.  Bank revenues disappointed slightly, missing estimates by -0.59% on average.  Fifteen banks (63%) reported increased revenues over the prior year’s quarter and 17 banks (71%) beat revenue estimates.
     
    Friday’s equity markets.  On lower volume, equity markets erased early losses, reversed and closed moderately higher. The Nasdaq, SPX, and DJI closed up +0.68%, +0.55%, and +0.36%, respectively, and closed at their best levels since June 2008. The NYSE composite closed up +0.45%, but off last Tuesday’s closing high. The DJI, SPX, NYA  both closed at multi-year highs, up +0.36% and +0.551% respectively. Intraday, the SPX tested 1330, but couldn’t hold that level, closing at 1329.15, compared to an intraday low of 1316.08 a quarter hour after the open. Market breadth was positive. Volatility declined to its lowest level since January 14th. For the week, all major indexes closed higher, led by a gain of +1.50% on the DJI. The DJI, SPX, and Nasdaq posted gains in each of the past 3 weeks. The NYSE has closed higher in each of the past four weeks.
     
    The SPX found resistance at 1330, just short of 1333, double its March 2009 low. The broad market themes were again evident. Trading desks reported a lack of sellers and a strong underlying bid on most pullbacks.  Economic news was in line with expectations. Only 3 companies reported earnings. The VIX closed at 15.69, off -2.49% on the day.
     
    For the week, the major indices extended gains by ~1.5%.  Since early December, markets have been extremely resilient, generally ignoring bad news (China rate hikes, food inflation in the U.K., and regime change in Egypt), while embracing positive news, particularly a strong 4Q2010 earnings season. Some trading desks seem to anticipate still higher prices, characterizing the trade as a “melt up” and citing “capitulation” buying.
     
    Technical indicators are positive.  The DJI and SPX both set multi-year highs.  All of the major indexes closed above their respective 200-week and 20-,50-, 100-, and 200-day moving averages. Markets are in a bullish configuration, with the 50-day moving averages above their respective 200-day moving averages.  NYSE 10- and 20-day moving averages are very positively sloped. The NYSE 52-week net highs were +156, below its 10-day moving average of 205.40.  The relative strength indicator closed the week at 67.70, up from its Thursday close of 65.46 and at the top of a neutral range.
     
    The most recent AAII bullish sentiment index (February 10th) fell slightly to 49.40, from 51.54 on February 3rd,  and below the December 23rd high of 63.60.  Sentiment indexes are highly variable and often best regarded from a contrarian perspective.
     
    Financials were the best performing segment, followed by consumer services, and industrials. Health care, oil and gas, and utilities were the worst performers. 
     
    Financials were the best performing market segment, far outpacing the broader indexes, with regional banks outpacing the larger money center and super-regional banks. The XLF, BKX, and KRX all closed higher, up +1.37%, +1.83%, and +2.37%, respectively. 0.37%, and -1.15%, respectively, but well above intraday lows.  On the BKX, RF, STI, and KEY were the best performers, up +3.75%, 2.98%, and +2.28%, respectively. STT was the index’s only loser, down -1.67% on the day WFC rebounded +0.76% from the prior day’s loss after the resignation of its long-time CFO.  While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -4.12% below its April 2010 highs and -32.7% below its best level of 82.55 in September 2008.
     
    NYSE Indicators.  Volume declined -5.34% to 972.0 million shares, from 1.027 billion shares Thursday, and below the 990.2 million share 50-day moving average.  Market breadth was slightly positive, though up volume lagged down volume.  Advancing stocks led decliners by +1453 (compared to +93 Thursday), or 2.87:1.  Up volume led down volume by 2.67:1.
     
    Valuation.  The SPX trades at 13.8x estimated 2011 earnings ($95.98) and 12.2x estimated 2012 earnings ($108.97), compared to 13.8x and 12.1x respective 2011-12 earnings Friday.  The 10-year average median Price/Earnings multiple is 20.0x.  Since the beginning of 2010, analysts increased 2011 and 2012 earnings estimates by +3.8%, and +4.7%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($83.81) by +14.5% and +30.0%, respectively.
     
    Large-cap banks trade at a median 1.62x tangible book value and 14.6x 2011 consensus earnings, compared to 1.58 tangible book value and 14.3x 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 operating earnings by +29.7%.  In 4Q2010, large-cap banks earned $17.92 (the sum of 31 banks’ operating EPS), compared to $16.21 in 3Q2010.  In 4Q2010, the BKX earned $2.99 per share, compared to $1.42 per share in 3Q2010. 
     
    SPX.  On lower volume, the SPX rose +7.28 points, or +0.55%, to 1329.15.  The index set a new multi-year high.  Volume fell -15.5% to 770.05 million share, down from 911.13 million shares Thursday, and above the 775.00 million share 50-day moving average.  For the 80th consecutive day, its 50-day moving average closed above its 200-day moving average (1272.10 versus 1161.36, respectively).  The SPX closed above its 200-week moving average (1181.15). 
     
    The SPX gapped lower at the open.  Finding support at 1316, the index rallied at 9:45, crossing 1322 and into positive territory by 10:40, and spiking to 1329 by 11:05 on news of Egyptian President Mubarak’s resignation.  The SPX retraced to 1326 and traded sideways through noon.  A small sell-off at 12:30 to the 1324-level brought out buyers, and the index began a methodical rally through the afternoon that reached 1330 by 2:40.  The index traded mostly sideways through 3:30, with the intra-day high of 1330.79 coming at 3:22.  The SPX faded slightly into the close, falling just below the 1330-level.  The index closed +4.48% above its 50-day moving average, closing above that average for the 111th consecutive day, and +14.45% above its 200-day moving average.  The 20-, 50-, 100-, and 200-day moving averages rose.
     
    Technical indicators are positive.  The SPX set a new multi-year high, closed above 1300 for the ninth consecutive day, and closed above its April highs for the 50th straight session.  The directional momentum indicator is positive, with a stable trend.  Relative strength rose to 71.32 from 68.66, moving into the lower end of an overbought range.  Next resistance is at 1334.60; next support is at 1319.89. 
     
    BKX.  On higher volume, the KBW bank index closed at 55.56, up +1.00 points or +1.83%.  The index closed +29.27% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -4.12% below its April 23rd closing high. 
     
    Financials led the market, and regionals outperformed large-cap banks.  The BKX opened lower and set the intra-day low of 54.13 at 9:35.  A rally began at 9:40, and the index reclaimed its break-even by 10:05.  The rally gathered strength, lifting financials through both 54.80-level and 55.00-level resistance at 10:30 and through 55.50 by 11:30.  Like the broader markets, a 12:30 dip brought out buyers, and the BKX rose from 55.25 to the intra-day high of 55.81 at 2:43.  Between 3:00 and 3:30, financials gave up some ground from their highs, but the index traded relatively sideways into the close and finished above 55.50.  Volume rose +16.2% to 138.16 million shares, up from 118.93 million shares Thursday, but below the 158.00 million share 50-day average.
     
    Technical indicators are positive.  The index closed above 50 for the 38th straight day.  The BKX closed above its 20-, 50-, 100-, and 200-day moving averages (53.85, 52.31, 49.34, and 48.93, respectively), closing above the 200-day average for the 45th straight session.  The 20-, 50-, and 100-day moving averages increased, while the 200-day moving average declined.  The 50-day moving average closed (by +3.38 points) above the 200-day moving average, closing above it for the 22nd straight day.  The 100-day moving average closed (by +0.41 points) above the 200-day moving average, closing above it for the fifth straight day.  The directional movement indicator is positive, and with an increasing trend.  Relative strength rose to 64.17 from 58.78, the high end of a neutral range.  Next resistance is 56.21; next support at 54.51.
     


    Disclosure: I am long STI, STT.
    Themes: SPX, DJI, CCMP, NYA, DAX, FTSE, SHCOMP Stocks: RF, STI, KEY
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