Gary Townsend's  Instablog

This morning.   After yesterday’s equity sharp index losses, the U.S. equity market confirmed uptrend is again under pressure.  This morning, equity futures are rebounding strongly on the heels of a similarly strong rebound in European equities.  A better than expected Italian 1-year debt offering provided part of the boost to confidence.  Also, Greece named its new prime minister.  The dollar is correspondingly weaker, the euro stronger.  Also Cisco (CSCO) reported a very strong 1FQ2012.  Following weak U.S. equity markets overnight, Asian equity markets closed significantly lower on higher volume.  U.S. equity options markets suggest a neutral to bullish short-term outlook.  Commodities prices are lower.  U.S. Treasury yields are also lower.  U.S. repo rates remain at low levels.  Overnight and 3-month LIBOR remain elevated, at the year’s highs.  Euribor-OIS spreads are at 2011 highs.  After a fair value adjustment of +0.70 points, December SPX equity futures are at 1242.20, up +15.90 points.  The SPX opens at 1229.10, -9.86% below its April 29 multi-year 1363.61 closing high, +-0.89% above its 20-day and +2.50% above its 50-day moving averages.  The SPX is -2.27% above its 1257.64 year-end close.  Next resistance is at 1260.64; next support is at 1212.10.

Wednesday.  Accompanied by a sharp increase in volume, U.S. equity markets sold-off sharply, with all but the DJI now lower in 2011.  Largely on Eurozone debt contagion concerns, all indexes gapped lower and trended lower through the day to end near their intraday lows.  The NYSE composite turned in the day’s worst performance, down -4.15%.  The Nasdaq, SPX, and DJI fell -3.88%, -3.67%, and -3.20%, respectively.  All market segments closed at least -2.08% lower.  Leaders were telecommunications, utilities, and health care.  Laggards were oil and gas, basic materials, and financials, which closed off at least -4.22%.

Futures indicated a weak open, but there was no intraday reversal mid-morning, after the European close at 11:30, or in mid-afternoon, as seen in recent days.  After an increase in margin requirements, Italian debt traded with yields well in excess of 7.0% through the day, suggesting even worse possibilities with regard to future sovereign debt downgrades, a weaker euro, economic recession, and declining confidence. 

Trading desk commentary focused again on Eurozone developments, noting that with Italy, the economic consequences of policy failure are much than with Greece, but markets have a strong sense of déjà vu, that viable solutions exist, but that the politics continue to hinder rapid resolutions.  All-in, trading desks noted a “respectable job” of absorbing yesterday’s negative news.

Indexes all added a distribution day.  Distribution days now number 5 on the SPX and NYSE composite, and 4 on the DJI and Nasdaq, since the uptrend commenced on October 4^th.

In Asia, following markets in Europe and the U.S., Asian equity markets closed sharply lower on increased volume.  In Japan, the Nikkei fell -2.55%.  Volume rose +9.49%.  The Hang Seng fell -5.25%, on a +28.4% increase in volume.  Financials were particularly weak.  HSI volatility jumped +21.0%.  The Shanghai composite fell -1.80%, and volume rose +11.6%.  Commentary focused on Europe and Italy in particular, as well as the weakness in U.S. equities overnight. 

In Japan, the NKY closed at 8,500.80, down from 8,755.44 at the prior close, and just above the 8,500.67 intraday low.  The NKY closed -3.31% below its 20-day moving average and is down -16.9% for the year.  The NKY gapped lower to open at 8,597.28, and sold off to 8,520 by mid-morning.  A tepid rally was met by renewed selling at mid-day.  The index traded narrowly through the afternoon session to end just above the intraday low.  Among market segments, only utilities closed higher, up +0.28%.  Other leaders were telecommunications and health care, but these fell -0.98%.  Financials dropped -3.68%.  Laggards were industrials, technology, and oil and gas, with closed off -3.82%. 

In China, the Hang Seng Index closed at 18,963.89, down from 20,014.43 at the prior close.  The index gapped lower and opened at 19,099.08.  The index rallied to 19,200 in the first half hour, then traded sideways through mid-afternoon, before fading into the close.  The index ended -0.83% and +0.30% compared to its respective 20-day and 50-day moving averages.  All market segments closed at least -1.34% lower.  Leaders were utilities, telecommunications, and consumer services.  Laggards were technology, basic materials, and financials, which closed off at least -4.26%.

In Shanghai, SHCOMP closed at 2,479.54, down from 2,524.92 at the prior close.  The index opened at 2,498.59, but rebounded to an intraday high of 2,507.45 in the first half hour.  The rest of the day witnessed a downward trend, to a 2,478.14 intraday low just before the close.  The SHCOMP closed +1.51% and +0.70% above its respective 20-day and 50-day moving averages.  All market segments closed at least -0.59% lower.  Leaders were health care, utilities, and technology.  Laggards were financials, consumer services, and telecommunications, which ended off at least -2.16%.

In Europe, equities opened lower, but rebounded after a better-than expected sale of Italian 1-year notes at 6.09%, down from nearly 8.50% in trading yesterday.  Also, the euro strengthened against the dollar.  The Euro Stoxx 50, FTSE, and DAX are up +1.57%, +0.62%, and +1.67%, respectively.  Compared to the prior day’s 2,249.39 close, the EuroStoxx50 trades at 2,283.17, just short of the 2,291.31 intraday high.  All market segments are at least +0.08% higher.  Leaders are financials, utilities, and telecommunications, which added +1.85%.  Oil and gas, and health care, and technology are the laggards.

Libor, LOIS, Currencies, Treasuries, Commodities:

• Interbank lending rates continue to reflect substantial stress, centered on the health of Eurozone banks in the current economic environment.   Overnight USD LIBOR rose to  0.14111%, up from 0.14056% the prior day and below the 0.25188% year-end level.  USD 3-month LIBOR rose to 0.45278%, the highest of the year, up from 0.44917% the prior day and compared to 0.30281% at year-end 2010.
• The US Libor-OIS (LOIS) spread rose to 36.5 bps, the highest level of the year, up from 36.4 bps the prior day and compares to 12.0 bps at the end of 2010.  Euribor-OIS eased to 88.5 bps, from 91.2 bps, the highest level of the year, and compares to 40.6 bps at the end of 2010.  A rise in the LOIS indicates an increased intra-bank lending risk premium.
• The U.S. government overnight repo rate is 3.0 bps, unchanged from 3.0 bps Wednesday, and well off from a recent high of 33 bps on August 2^nd.
• U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.226% and 2.018%, respectively, compared to 0.226% and 1.961% Wednesday.  The yield curve widened to +1.792%, compared to +1.735% the prior day.  In the past year, the 2- and 10-year spread varied from a low of +1.520% on September 22, 2011, to a high of +2.910% on February 4, 2011.
• The U.S. dollar is weaker against the euro, yean, and pound.  The dollar trades at US$77.710, compared to US$77.926 the prior day, and above its US$77.101 50-day, US$75.815 100-day, and US$75.727 200-day averages.  The euro trades at US$1.3593, compared to US$1.3542 Wednesday and US$1.3834 the day prior.  The euro trades worse than its US$1.3728 50-day and US$1.4024 100-day averages.  In Japan, the dollar trades at ¥77.64, compared to ¥77.82 Wednesday and ¥77.73 the prior day.  The yen trades worse than its 50-day moving average ¥76.965.
• Commodities prices are mixed, with higher energy, lower precious metals, aluminum, and copper, and higher agriculture prices.

Volatility, Skew:

• The VIX ended at 36.16, up +31.6% from 27.48 at the prior close.  The VIX is +17.1% above its 20-day moving average 30.87.
• The Euro Stoxx 50 volatility index (V2X) is up +0.51% to 41.94 from 41.72 the prior day.  The V2X index trades +7.96% above its 38.86 20-day moving average, -20.3% below the 52.62 30-day high, and +48.2% above the 28.29 30-day low.
• The Hang Seng volatility index (VHSI) rose +21.0% to 38.2 from 31.55 the prior day.  The VHSI index trades +8.38% above its 35.23 20-day moving average.
• CBOE skew fell -1.52% to 122.87 from 124.77 at the prior day’s close, and above a neutral (115-120) range.  The index tracks the cost of buying out-of-the-money, long-dated options.  A rise implies that investors are paying more to buy puts, a bearish signal.

U.S. news and economic reporting.  At 8:30, scheduled economic reports include October import prices (-0.6% versus survey 0.00), the September trade balance (-$43.1 billion versus survey -$46.0 billion), and the latest week’s initial and continuing jobs claims (+390K versus survey +400K). 

Overseas news:  Today, Italy sold €5 billion worth of 12-month notes, the maximum amount targeted and at yields of 6.09%, +240 bps above last month’s auction but well below yesterday’s closing level of 8.57%.  Today, Greece named as interim prime minister Lucas Papademos, a former European Central Bank vice-president.  According to yesterday’s press reports, Germany’s ruling party is exploring a framework for countries to leave the euro-area.  Today, the European Union slashed its 2012 growth forecasts for the region to +0.5%, down from the prior 1.8% estimate made just six months ago.  In September, Italy’s industrial output fell -2.7% over the prior year and -4.8% from August, missing estimates for a year-over-year gain and a smaller month-over-month decline.  In November, the Reuters Tankan survey of Japanese manufacturing was weaker than expected, with the current sentiment and outlook indexes posting the largest drop in several months.

Company news/ratings changes:

• None.

3Q2011 Earnings.  The third quarter’s earnings reports surprised expectations.  Of the 422 S&P500 companies that reported earnings to date, 73% (307 out of 422) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies beat EPS expectations by an average of +4.8% (versus a historical average of +2%).  EPS is up +16.2% over the prior year.  Though challenged in the current operating environment, 80% of companies reported increased revenues over the prior year and 57% beat revenue estimates.  In the third quarter of 2011, analysts estimate the SPX will earn $24.98 per share, compared to $24.84 and $21.49 per share in 2Q11 and 3Q10, a +0.6% and +16.2% increase, respectively. 

With all of the 24 BKX members reporting, 75% beat operating estimates with aggregated results surprising by +14.3% and 63% have beat revenue estimates with aggregated surprising by +4.2%.  EPS is up +21.2% over the prior year, while revenue is up +1.5%.  In the third quarter of 2011, the BKX earned $1.24 per share, beating analysts’ estimate of $1.15 per share, and compared to $1.12 and $0.71 in 2Q11 and 3Q10, (an +11% and +48% increase, respectively).  In the second quarter, 88% (21 of 24) beat earnings estimates on an operating basis.  Revenues also exceeded expectations, with 79% of BKX members beating estimates. 

Valuation.  The SPX trades at 12.4x estimated 2011 earnings ($99.08) and 11.0x estimated 2012 earnings ($111.57), compared to 12.9x and 11.4 respective 2011-12 earnings yesterday.  The 10-year average median Price/Earnings multiple is 20.0x.  Since the beginning of 2011, analysts increased 2011 and 2012 earnings estimates by +4.7%, and +4.0%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +16.9% and +31.6%, respectively. 

Large-cap banks trade at a median 1.18x tangible book value, and 10.6x and 9.4x 2011 and 2012 consensus earnings, respectively, compared to 1.24x tangible book value and 11.1x/9.9x 2011/2012 earnings yesterday.  These compare to the 10-year average median multiples of 3.08x tangible book value and 15.9x earnings.  Analysts expect 2011 and 2012 BKX earnings to exceed 2010 operating earnings by +28.9% and +53.8%, respectively.

Options.  Options markets are neutral to bullish.  Composite options markets are neutral to bullish, index options markets are neutral, and equity options markets are neutral to bullish.  The composite put/call ratio closed at 1.33, compared to 1.22 the prior day and above its 5- and 10-period moving averages of 1.15 and 1.14, respectively.  The index put/call ratio closed at 1.66, compared to 1.83 the prior day and above the 5- and 10-period moving averages of 1.58 and 1.59, respectively.  The equity put/call ratio closed the day at 0.89, compared to 0.64 the prior day and above its 5- and 10-period moving averages of 0.73 and 0.70, respectively.   

NYSE Indicators.  Volume rose +26.5% to 1.123 billion shares, from 879.63 million shares Tuesday, 1.01x the 1.102 billion share 50-day moving average.  Market breadth was negative, and up volume lagged down volume, both by large margins.  Advancing stocks lagged decliners by -2,517 (compared to +1,459 the prior day), or 0.10:1.  Up volume lagged down volume by 0.01:1.

SPX.  On higher volume, the SPX fell -46.82 points, or -3.67%, to end at 1229.10, the largest point and percentage decline since August 18^th.  Volume rose +29.43% to 852.91 million shares, up  from 658.99 million shares Tuesday but below the 858.48 million share 50-day moving average.  For the 62^nd straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1199.17 vs. 1272.63, respectively).  The SPX closed above its 200-week moving average (1137.74) for the 24^th straight session. 

From its prior close at 1275.92, the SPX gapped lower to the 1254 level, a -1.8% decline, and set the intra-day high.  Spurred lower by Italian sovereign debt concerns, the index fell lower to the 1240 level by 10:40.  A rally through 11:55 lifted the index back to 1252, but momentum faded.  The index retreated to the 1245 level by 12:30 and, at 1:10, a more aggressive sell-off began.  The index dropped from 1245 to 1226.64 by 2:25, setting the intra-day low.  Through 3:30, the index attempted to rally, reaching 1235.  The SPX sold off into the close, and finished just above the day’s low. 

Technical indicators are turning neutral.  The market returned to a confirmed uptrend following October 12^th’s follow-through confirmation of October 4^th’s strong reversal.  November 8^th’s strong gains in higher volume reconfirmed the uptrend after last week’s sharp losses place the trend under pressure.   The SPX closed below 1300 for the 73^rd straight session but above 1200 for the 21^st straight session.  The index closed above its April 2010 highs for the 12^th time in the previous 13 sessions.  The 50-day moving average has been below the 100-day moving average since July 11^th.  The 100-day moving average crossed the 200-day average to the downside on September 7^th.  The SPX closed (by -0.89%) below its 20-day moving average (1240.15) for the only the second time in the last 25 sessions.  The index closed (by +2.50%) above its 50-day moving average for the 22^nd straight session.  The index closed (by +0.05%) above its 100-day moving average (1228.45) for the 10^th time in 11 sessions.  The SPX closed -3.42% below its 200-day moving average, closing below that average for the seventh time in eight sessions.  The 20-, 50-, and 100-day moving averages rose.  The directional momentum indicator switched back to negative for the first time in five sessions, and the trend is weak and declining.  Relative strength fell to 50.04 from 59.72, a neutral range.  Next resistance is at  1260.64; next support is at 1212.10.

BKX.  On higher volume, the KBW bank index fell -2.41 points, or -5.90%, to end at 38.43, recording its 69^th close below the prior 52-week low of 42.70 from August 25, 2010, finishing below the 40-level for the third time in the last four sessions, and with the worst percent loss since August 10^th.  Volume rose +27.04% to 104.54 million shares, up from 82.29 million shares Tuesday but below the 106.28 million share 50-day average. The BKX closed -10.59% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -33.68% and -30.92% below its April 23, 2010, and February 14, 2011 respective closes.

Financials were the market’s worst performing sector, and large-cap banks performed in-line with regional banks.  From its prior close at 40.84, the BKX gapped lower at the open to 39.77 and fell through 10:45 to the 39.19 level.  Through 11:15, the index attempted a rebound with the broader market, but failed to sustain its momentum. The index reached 39.60 at 11:15, but fell back to the morning lows by 1:15.  Losses accelerated at 1:45, and the index fell from 39.20 to 38.57 at 2:25.  A weak rebound through 3:25 retook 38.90, but the index fell sharply into the close, setting the intra-day low of 38.30 at 3:55 and closing modestly above that level. 

Technical indicators are negative but improving.  Bank stocks are leading the market’s direction, which switched to an uptrend after October 13’s confirmation of October 4^th’s strong reversal.  November 8^th’s strong gains in higher volume reconfirmed the uptrend after last week’s sharp losses placed the trend under pressure.  The BKX has now recorded its 21^st close above the 50-day moving average since October 12^th, a level which provided meaningful resistance since February 22^nd.  Moving averages align bearishly, as most shorter duration averages are below the longer duration averages, although some gaps are narrowing and some averages are rising.  The 50-day average (37.82) crossed below the 100- and 200-day moving averages (40.76 and 46.06, respectively) on April 25^th and June 16th.  The 20-day closed (by +1.40 points) above the 50-day for the 12^th straight session, but the gap narrowed.  The 50-day moving average closed (by -8.25 points) below the 200-day moving average for the 106^th straight session, but the gap narrowed.  The 100-day moving average closed (by -5.31 points) below the 200-day moving average for the 84^th straight session, and the gap expanded.  The BKX closed below its 20-day moving average for the second time in the last 23 sessions.  The index closed above its 50-day moving average for the 21^st time in 22 sessions.  The index closed below the 100-day moving average for the eighth straight session and below its 200-day moving averages for the 113^th  consecutive session.  The index closed below 50.0 for the 113^th straight session and below the 40.0 level for the third time in four sessions.  The directional movement indicator is positive for the 18^th straight session, and the trend is weak and declining.  Relative strength fell to 48.39 from 56.75, a neutral range.  Next resistance is 39.85; next support at 37.65.