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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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  • U.S. Futures Move Modestly Lower, Exhaustion Signals Grow 0 comments
    Jan 20, 2012 8:42 AM | about stocks: CMA, STI, FITB, BLK, HBAN
    This morning.  U.S. equity markets are in a confirmed uptrend.  The uptrend began on November 28th, when the SPX opened at 1158.67, but the SPX 50-day moving average has trended higher since October 13th.  All major indexes are above their respective 20-, 50-, 100-, and 200-day moving averages. Their respective 200-day moving averages continue to trend lower, but are approaching upward inflection points.  Overnight, Asian equity markets closed higher, spurred by improved U.S. economic reports, views that Chinese monetary authorities will ease policy, and a moderation of the Eurozone debt crisis.  European exchanges are modestly lower on mixed earnings reports. The dollar is slightly stronger.  U.S. equity options markets suggest a neutral to bearish short-term outlook.  Commodities prices are mixed.  U.S. Treasury yields are mixed, with the 10-year at 1.986%, up from 1.977% the prior day.  U.S. repo rates are at 16 bps.
    The ECB’s bank lending facilities has eased interbank lending and associated liquidity problems.  Overnight and 3-month LIBO remain elevated, and Euribor-OIS spreads remain near 2011 highs, but are trending lower.  Also, the 3-month Euro basis swap is now at its best levels since August 8th.
    U.S. equity futures are mixed. After a fair value adjustment of -0.05 points, March SPX equity futures are at 1308.00, down -2.35 points.  The SPX opens at 1314.50, -3.60% below its April 29, 2011, multi-year 1363.61 closing high, but +3.02% and +5.37% above its respective 20- and 50-day moving averages and +7.60% and +9.33% above its respective 100- and 200-day moving averages.  Next resistance is at 1317.30.  Next support is at 1309.88.
    Thursday.  Equities extended recent gains, defying gravity and again closing with moderate gains near the day’s highs.  The Nasdaq, NYSE composite, SPX, and DJI rose +0.67%, +0.67%, +0.49%, and +0.36%, respectively.  Most  market segments closed higher.  Leaders were consumer services, industrials, and financials, which rose at least +0.81%.  Laggards were basic materials, which rose a scant +0.03%, and health care and utilities, which closed off at least -0.02%.  For a 3rd consecutive day, all indexes closed above their 20-, 50-, 100-, and 200-day moving averages.  Market breadth was positive.  Volatility again declined sharply, though CBOE put/call skew remains elevated at levels usually consistent with a near-term market top.  Volumes remain relatively light, slightly below the 50-day moving average, signaling that many investors remain sidelined.  Trading desks report greater active trading in specific names rather than in ETFs. 
    European concerns appear near-term assuaged by the 3-year long-term refinancing operation (LTRO), which has allowed Eurozone banks to prefund redemptions due in 2012 that might otherwise have been difficult to fund. The last scheduled LTRO is February 29th. Other central banks (Brazil, PBOC) are also easing.
    Technically, the session was positive.  From its prior day’s 1308.04 close, the SPX traded higher throughout the day, after one brief test of support at 1308 in the first hour. Intraday, the SPX traded to an intraday high of 1315.49, and seemed to find new support at 1312. Weakness was bought. Support is seen at 1309, 1293, the October highs, and 1258, the 200-day moving average.  Resistance is 1320.  Sentiment is improving, but investors remain cautious.  Trading desks report some mutual fund “chasing” into yesterday’s close.
    Distribution days number 3 on the Nasdaq, SPX, and BKX, and 2 on the DJI and NYSE composite.
    In Asia, equity markets closed moderately higher. Commentary focused on improving U.S. jobless claims and Eurozone debt sales. Volumes rose.  In Japan, the NKY closed up +1.47% on a +9.24% increase in volume.  In Hong Kong, the HSI rose +0.84% on a +3.10% increase in volume.  In Shanghai, the SHCOMP rose +1.00% on a +2.01% increase in volume.
    In Japan, the NKY closed at 8,766.36, compared to 8,639.68 the prior day.  The index closed +3.80% and +3.25% above its respective 20- and 50-day moving averages.  The index opened at 8,750 and traded within a narrow range through the trading day, to a mid-day intraday low of 8,725.32 and late session intraday high of 8,791.39.  Most market segments closed higher.  Leaders were financials, telecommunications, and basic materials, which closed up at least +2.03%.  Laggards were health care and oil and gas, which closed up at least +0.40%, and consumer services, which closed down -0.61%.
    In China, the Hang Seng closed at 20,110.37, up from 19,942.95 at the prior day’s close and its first close above 20,000 since November 9th. The index gapped higher to open just above 20,150, but quickly retreated to a mid-morning intraday low of 19,927.88. Investors bought the weakness and the index rallied through the afternoon and into the close.  The index closed +6.56% and +7.26% above its respective 20- and 50-day moving averages.  Market segments closed mostly higher.  Leaders were consumer services, industrials, and technology, which gained at least +1.23%.  Financials gained +1.15%. Laggards were oil and gas, consumer goods, and basic materials, which lost at least -0.07%.  In Shanghai, the SHCOMP closed at 2,319.12, up from 2,296.08 the prior day.  At the open, the SHCOMP opened slightly above 2,300, but twice tested support at the prior day’s closing level before rallying into the afternoon to a 2322.76 intraday high.  The close was Shanghai’s best since December 9th, and the index recaptured its 50-day moving average. The index closed +4.61% and +0.53% above its respective 20- and 50-day moving averages.  All market segments closed at least +0.25% higher.  Leaders were health care, consumer goods, and consumer services, which gained at least +1.58%. Financials rose +1.18%. Laggards were utilities, basic materials, and oil and gas.
    In Europe, equity indexes are modestly lower, on mixed earnings reports. The Euro Stoxx 50, FTSE 100, and DAX are down -0.40%, -0.03%, and -0.07%, respectively.  Compared to the prior day’s 2,435.04 close, the Euro Stoxx 50 trades at 2,422.44, compared to a 2,440.29 intraday high and 2,418.31 intraday low.  The index is +3.78%  and +6.09% above its respective 20- and 50-day moving averages.  Market segments are mixed.  Leaders are financials, consumer goods, and technology, which are up at least +0.03%.  Laggards are utilities, basic materials, and oil and gas, which are down -0.89%.
    Libor, LOIS, Currencies, Treasuries, Commodities:
    • Recent interbank lending rates suggest that the substantial stress, evident in the latter half of 2011 and centered on the health and liquidity of Eurozone banks, has peaked and begun to ease.  USD LIBOR is at 0.14430%, down from 0.14540% the prior day and the December 30th 0.15400% high.  USD 3-month LIBOR is 0.56110%, down from 0.56120% the prior day and recent January 4th peak of 0.58250%.
    • The US Libor-OIS (LOIS) spread fell to 47.21 bps from 47.74 bps the prior day, and compares to the recent January 6th high of 50.05 bps.  Euribor-OIS eased to 84.3 bps, from 84.5 bps Thursday and December 27th high of 98.80 bps.  A fall in the LOIS indicates a decreased intra-bank lending risk premium.
    • The Euro 3-month basis swap continues to improve, rising to -76.250 bps, the best level since August 18th, from -79.735 bps the prior day, and up from a trough of -147.00 bps on December 14th.
    • The U.S. government overnight repo rate is 16.0 bps, down from 18.0 bps the prior day, and well off from the August 2nd high of 33 bps.
    • U.S. Treasury yields are mixed, with 2- and 10-year maturities yielding 0.230% and 1.986%, respectively, compared to 0.234% and 1.977% Thursday.  The yield curve widened to +1.756%, compared to +1.743% 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 modestly stronger against the euro, British pound, and Japanese yen.  The dollar trades at US$80.300, off the intraday high of US$80.438, and compares to US$80.216 at the prior day’s close, and is above its US$79.687 50-day, US$78.416 100-day, and US$76.501 200-day averages.  The euro trades at US$1.2907, compared to an intraday low of US$1.2891, and compares to a close of US$1.2968 Thursday and US$1.2863 the day prior.  The euro trades worse than its US$1.3124 50-day and US$1.3422 100-day averages.  In Japan, the dollar trades at ¥77.18, compared to ¥77.11 Thursday and ¥76.82 the prior day.  The yen trades better than its 50-day moving average ¥77.41.
    • Commodities prices are mixed, with lower energy, lower precious metals, higher aluminum and copper, and mixed agriculture prices.
    Volatility, Skew:
    • The VIX ended at 19.87, down -4.88% from 20.89 at the prior close.  The VIX is -8.11% below its 21.62 20-day moving average.
    • The Euro Stoxx 50 volatility index (V2X) is down -2.91% to 25.77, compared to 26.54 the prior day.  The V2X index trades -12.9% below its 29.58 20-day moving average, -33.1% below the 38.49 30-day high, and +0.31% above the 25.69 30-day low.
    • The Hang Seng volatility index (VHSI) fell to 21.81, down -2.37% from 22.34 the prior day.  The VHSI index trades -7.23% below its 23.51 20-day moving average.
    • CBOE skew fell -0.90% to 129.60 from 130.78 at the prior day’s close, but well above a neutral (115-120) range.  The index tracks tail risks, the cost of buying out-of-the-money, long-dated options, i.e., options not affected by expirations.  The rise suggests that investors are buying more puts than calls, a bearish signal. A spike to 130, as on January 18th close, correlates well with short-term market peaks.
    U.S. news and economic reporting:
    • At 10:00, December existing home sales, with survey at 4.65 million compared to 4.42 million prior.
    Overseas news:  In January, China’s preliminary purchasing managers index for January showed manufacturing activity increased slightly over December.  Today marks the deadline for Eurozone banks to submit recapitalization plans to regulators that meet the latest stress test requirements. 
    Company news/ratings changes:
    ·         CMA – reports GAAP and operating EPS of $0.48 and $0.60, compared to estimates of $0.52
    ·         STI – reports GAAP and operating EPS of $0.28 and $0.15, compared to estimates of $0.27
    ·         FITB – reports GAAP and operating EPS of $0.33 and $0.39, compared to estimates of $0.35
    ·         BLK – downgraded to neutral at Citi, $193 price target
    ·         HBAN –downgraded to neutral at Morgan Keegan, $6.25 price target
    4Q2011 Earnings.  The fourth quarter’s earnings reports have so far disappointed expectations.  Of the 44 S&P500 companies that reported earnings to date, 64% (28 out of 44) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies missed EPS expectations by an average of -2.6% (versus a historical average of +2%).  EPS is down -13.2% over the prior year.  Though challenged in the current operating environment, 62% of companies reported increased revenues over the prior year and 62% beat revenue estimates.   In the fourth quarter of 2011, analysts estimate the SPX will earn $24.34 per share, compared to $25.19 and $22.25 per share in 3Q11 and 4Q10, a -3.4% and +9.4% change, respectively. 
    With 15 out of 24 BKX members reporting fourth quarter earnings, 33% beat operating EPS estimates, with aggregated results disappointing by -16.9%, while 57% beat revenue estimates, with aggregated results missing by -0.6%.  EPS is down by -25.1% over the prior year while revenue has decline by -3.0%.  In the fourth quarter, analysts estimate the BKX will earn $0.96 per share, compared to $1.24 and $0.91 per share in 3Q11 and 4Q10, a -22.6% and +5.5% change, respectively.
    Valuation.  The SPX trades at 12.5x estimated 2012 earnings ($104.77) and 11.2x estimated 2013 earnings ($117.51), compared to 12.5x and 11.1 respective 2011-12 earnings yesterday.  The 10-year average median Price/Earnings multiple is 20.0x.  Since the beginning of 2012, analysts changed 2012 and 2013 earnings estimates by -3.6%, and -0.2%, respectively.  Analysts expect 2012 and 2013 earnings to exceed 2011 earnings ($94.97) by +10.3% and +23.7%, respectively. 
    Large-cap banks trade at a median 1.31x tangible book value, and 10.9x and 9.1x 2012and 2013 consensus earnings, respectively, compared to 1.31x tangible book value and 10.9x/9.1x 2012/2013 earnings yesterday.  These compare to the 10-year average median multiples of 3.08x tangible book value and 15.9x earnings.  In 2012, analysts expect the BKX to earn $4.42 per share, compared to $4.30 and $2.96 in 2011 and 2010, a +2.7% and +49.2% increase, respectively.
    Options.  Options markets are mixed.  Composite options markets are bullish, index options markets are neutral to bullish, and equity options markets are bearish.  The composite put/call ratio closed at 0.68, compared to 0.84 the prior day and below its 5- and 10-period moving averages of 0.78 and 0.82, respectively.  The index put/call ratio closed at 1.00, compared to 1.14 the prior day, and below the 5- and 10-period moving averages of 1.09 and 1.17, respectively.  The equity put/call ratio closed the day at 0.48, compared to 0.55 the prior day, below its 5- and 10-period moving averages of 0.56 and 0.59, respectively, and at the lowest level since February 2, 2011. 
    Price Exhaustion/Trend Reversal.  Daily technical price exhaustion metrics signal that the SPX reached a potential upward price exhaustion level on January 1th and again on the 18th, the first such signals since April.  Intra-day timeframes of 120- and 60-minute intervals show the SPX reached levels of price exhaustion on January 10th and 13th, while the BKX recorded similar indications on the 11th and 12th. CBOE skew is elevated, having spiked to 130 on Wednesday, a level associated with short-term market tops.
    NYSE Indicators.  Volume rose +1.04% to 806.03 million, shares, +0.95x the 50-day moving average, from 797.74 million shares Wednesday.  Market breadth was positive, and up volume led down volume.  Advancing stocks led decliners by +922 (compared to +1,773 the prior day), or 1.90:1.  Up volume led down volume by 1.89:1.
    In January, we expect dividend accruals of $77.6 thousand.
    SPX. On lower volume, the SPX rose +6.46 points, or +0.49%, to 1314.50, the second straight close above 1300.  Volume fell -1.76% to 664.91 million shares, down from 676.81 million shares Wednesday but above the 653.73 million share 50-day moving average.  For the 19th consecutive day, the SPX closed above its 50-day moving average (1,247.46) and remained above its 200-day moving average (1,257.51) for the 16th time in the past 17 sessions.  For the 110th straight session, the SPX’s 50-day moving average closed below its 200-day moving average, but the 50-day average’s positive trend has narrowed the range considerably.  The SPX closed above its 200-week moving average (1133.60) for the 71st straight session. 
    From its prior close at 1308.04, the SPX gapped higher at the open to 1312 but fell back to break-even at 10:00 on worse than expected U.S. economic news.  The index set the intra-day low of 1308.10 at 10:05.  Through noon, the index rallied to 1315 and fluctuated at that level through the close to finish at the high end of the day’s positive range. 
    The SPX closed above all major moving averages, above 1200 for the 33rd straight session and above 1300 for the second straight session.  The 50-day moving average crossed above the 100-day moving average on December 6th, having been below that average since July 11th.  After peaking on June 6th at 1317.97, the 100-day moving average crossed below the 200-day average on September 7th.  On December 22nd, the 100-day set a low at 1202.28, and began an upward trend.  For the 20th straight session, the SPX closed (by +3.02%) above its 20-day moving average (1275.97).  The index closed (by +5.37%)above its 50-day moving average for the 20th straight session.  The index closed (by +7.60%) above its 100-day moving average (1221.66) for the 34th straight session.  The SPX closed +4.53% above its 200-day moving average for the 15th time in the past 17 sessions.  The 20-, 50-, and 100-day moving averages rose.  The directional momentum indicator was positive for the 19th straight session, and the trend is moderate.  Relative strength rose to 68.69 from 66.99, the higher end of a neutral range.  Next resistance is at 1317.30; next support is at 1309.88.
    BKX.  On higher volume, the KBW bank index fell -0.12 points, or -0.28%, to end at 43.19, its 12th straight close above 40 and closing above the 2010 low of 42.98 for the fifth time in the last six sessions.  Volume rose +13.3% to 94.45 million shares, up from 83.35 million shares Wednesday and above the 80.83 million share 50-day average.  The BKX closed +0.49% above its August 30, 2010, closing low of 42.98, the trough of the 2010’s correction, but -25.47% and -22.36% below its April 23, 2010 (the post-2008 high point), and February 14, 2011 (the most recent high point), respective closes.
    Financials as a whole outperformed the market, though both large-cap and regional banks lost ground, with large-caps outperforming regionals.  From its prior close of 43.31, the BKX opened higher to 43.70 and set the intra-day high of 43.81, up +1.2%, at 9:32.  By 9:45, the index retraced gains back to break-even and further fell to the 43.20 level by 10:05.  The index fluctuated between 43.20 and 43.30 through 2:30 when a sell-off dropped the index to its intra-day low of 43.04 by 3:00.  The index was able to climb back to its mid-day trading range at the close to finish with a modest loss. 
    Technical indicators are mixed, but improving.  On a percentage basis, bank stocks have outperformed the broader market’s rebound from the October lows, rising +32.65% from the 32.56 October 4th intra-day low compared to a +22.39% rebound in the SPX.  However, the BKX is still -22.4% below its 2011 high, compared to the SPX which has corrected only -3.6%.  Moving averages alignment is mixed, as the 20- and 50-day moving averages (41.17 and 39.20, respectively) moved above the 100-day moving average (38.49), and each average is rising.  The 100-day moving average appears to have troughed, though the 200-day moving average (42.78) continues to trend lower.  On December 16th, the 50-day average crossed above the 100-day moving average for the first time since April 25th.  The 50-day remains below the 200-day moving average, as it has since June 16th.  For the 15th time in the past 16 sessions, the 20-day closed (by +1.97 points) above the 50-day, and the gap is expanding.  The 50-day moving average closed (by -3.58 points) below the 200-day moving average for the 153rd straight session, but the gap continues to narrow.  The 100-day moving average closed (by -4.29 points) below the 200-day moving average for the 131st straight session, but the gap is narrowing.  The BKX closed (by +4.90%) above its 20-day moving average for the 22nd time in the last 23 sessions.  The index closed (by +10.18%) above its 50-day moving average for the 18th straight session.  The index closed (by +12.21%) above the 100-day moving average for the 19th straight session.  The index closed (by +0.95%) above its 200-day moving average for the fifth time in six sessions.  The index closed below 50.0 for the 160th straight session but above 40.0 for the 12th straight session.  The directional movement indicator was positive for the 17th consecutive session, and the trend is moderate and strengthening.  Relative strength fell to 65.41 from 66.43, a neutral range.  Next resistance is 43.65; next support at 42.88.
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