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Gary Townsend - Since 2007, a founding partner, CEO and Portfolio Manager of Hill-Townsend Capital LLC, a long/short equity financial sector fund based in Chevy Chase, Maryland. Mr. Townsend has 30 years banking, regulatory, and investment experience. He started his business career in 1978, as... More
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  • U.S. Futures Move Ahead, SPX Golden Cross Likely Today 0 comments
    Jan 31, 2012 9:10 AM | about stocks: BBT, TCB, MS, GS
    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. Notably, their respective 200-day moving averages are at upward inflection points. For example, the SPX's 1257.20 200-day moving average was unchanged Monday, after rising 1 bp Friday, its 1st upward move since August 5th, and reversing a 5-month decline. Its 50-day moving average has trended higher since November 28th, rising from a trough of 1205.51 on November 29th to 1256.28 at yesterday's close, up 1.11 points on the day. It will likely set a "golden cross" above the SPX 200-day moving average after today's close. The Nasdaq's 200-day moving average rose also rose on the day.

    In Asia, equity markets closed modestly higher overnight, with greater strength in China. European exchanges are moderately higher and near the day's highs on perceived progress in Eurozone governance and Greek sovereign debt resolution. The dollar is weaker, and the euro comparably stronger. U.S. equity options markets suggest a neutral short-term outlook. Commodities prices are higher for the most part with weakness only in copper. U.S. Treasury yields are higher at the long end of the curve, with the 10-year at 1.845%, up from 1.844% the prior day. U.S. repo rates are unchanged at 10 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 early August and less than half its worse level of late December.

    Economic reporting is light ahead of the market open, but will see the January Chicago PMI at 9:45 and consumer confidence at 10:00. After a fair value adjustment of +0.11 points, March SPX equity futures are at 1314.50, up +5.49 points. The SPX opens at 1313.01, -3.71% below its April 29, 2011, multi-year 1363.61 closing high, but +1.17% and +4.52% above its respective 20- and 50-day moving averages and +6.73% and +4.44% above its respective 100- and 200-day moving averages. Next resistance is at 1319.28. Next support is at 1303.61.

    Monday. Equity markets lost ground, but found support after the session's first hour, reversed, and closed with modest losses. Volumes were light. The NYSE composite suffered the greater -0.54% loss, followed by the SPX, Nasdaq, and DJI, which closed off -0.25%, -0.16%, and -0.05%, respectively. Late in the session, the SPX, Nasdaq, and DJI traded briefly higher. Commentary focused on Eurozone developments, particularly with regard to Greek sovereign debt negotiations and the Eurozone leaders' conference, in which enhanced governance strictures were agreed. Trading desks reported a slight increase in shorting activity at the open, but after that faded, there was more inaction than activity during the day. Mutual fund participation was muted.

    From the 1316.33 prior close, the SPX opened at 1305 and traded within the first hour to the 1300.49 intraday low. Equities found support at that level, and the day's action turned to another "buy the dip" as equities recovered slowly through mid-day and rallied more strongly into the final 3 hours. As in the prior day's trade, financials, the market's leader in recent weeks, trailed other sectors out of the gate and lagged all other sectors on the day with a loss of -0.97%. Leaders were telecommunications and technology, which ended up at least +0.44%, and health care which closed down -0.12%. Laggards were oil and gas, utilities, and financials, which closed off at least -0.42%.

    For a 7th consecutive day, all indexes closed above their respective 20-, 50-, 100-, and 200-day moving averages. Market breadth was negative positive. NYSE volume fell -12.5%, to 0.88x the 50-day moving average. As on Friday, volatility initially rose, to an intraday high of 20.33, but trended lower through most of the day to end at 19.40, up +4.70% on the day. The CBOE put/call skew remains elevated, but at 121.99 is just above a neutral range.

    Technically, the day was mixed, as indexes closed lower, but well above their intraday lows and above key support levels at 1301. Despite having lost ground in 3 consecutive trading days, the SPX is off less than -1.5% from its January 26th intraday 1333.47 high. Other important support levels include 1297 (the January 12th high) 1293 (the October 27 high), and 1283 (a 38.2% retrace of the rally since December 19).

    Distribution days were unchanged. They number 4 on the SPX and 3 on the Nasdaq, BKX, and NYSE composite. Distribution days rose to 3 on the DJI.

    In Asia, equity markets closed higher, with the best strength in Hong Kong. In Japan, the NKY closed up +0.11% on a +40.8% increase in volume. In China, the HSI and SHCOMP closed up +1.14% and +0.33%, respectively, on a +11.7% increase and -16.6% decrease in volume. Commentary focused on reports of progress on Greek sovereign debt.

    In Japan, the NKY closed at 8,802.51, compared to 8,793.05 the prior day. The index closed +2.49% and +3.42% above its respective 20- and 50-day moving averages. The index opened at 8,785, but immediately traded higher to a mid-morning intraday high of 8,836.68. The index traded within a narrow 10 point range around 8,820 through mid-afternoon, then weakened to retest support at 8,800 before ending with a modest gain. Market segments closed mixed. Leaders were industrials, consumer services, and health care, which closed up at least +0.47%. Financials gained +0.02%. Laggards were utilities, oil and gas, and telecommunications, which closed off at least -1.29%.

    In China, the Hang Seng closed at 20,390.49, up from 20,160.41 at the prior close. The index gapped higher to open at 20,325, but traded sideways through the morning trending back to 20,300 at mid-day and an intraday low of 20,219.27 in early afternoon. The afternoon session was stronger, trending strongly higher to a late afternoon intraday high of 20,465.89 before profit taking into the close. The index closed +5.88% and +8.36% above its respective 20- and 50-day moving averages. All market segments closed at least +0.01% higher. Leaders were technology, telecommunications, and industrials, which gained at least +1.72%. Financials gained +0.92%. Laggards were consumer goods, utilities, and consumer services. In Shanghai, the SHCOMP closed at 2,292.61, up from 2,285.04 at the prior close. The SHCOMP traded higher at the open to an early morning intraday high of 2,296.30, but quickly faded to an intraday low of 2,277.18. The rest of the session passed from gains to losses, with a late rally yielding a modest daily gain. Market segments closed mixed. Consumer services, consumer goods, and utilities led with gains of at least +0.30%. Financials added +0.26%. Laggards were technology, health care, and oil and gas, which closed off at least -0.26%.

    In Europe, equity indexes are moderately higher and near their intraday highs. Commentary focused on Eurozone leaders' agreement to tighten budget controls. The Euro Stoxx 50, FTSE 100, and DAX are up +1.09%, +0.67%, and +0.94%, respectively. Compared to the prior day's 2,404.62 close, the Euro Stoxx 50 trades at 2,430.55, compared to a 2,433.58 intraday high and 2,415.14 intraday low. The index is +2.07% and +5.37% above its respective 20- and 50-day moving averages. All market segments are at least +0.07% higher. Leaders are financials, oil and gas, and utilities, which are up at least +1.17%. Laggards are consumer goods, telecommunications, and consumer services.

    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 is easing. USD LIBOR is unchanged at 0.13950%, from 0.13950% the prior day, but down from the December 30th 0.15400% high. USD 3-month LIBOR is 0.54235%, down from 0.54685% the prior day and from the January 4th peak of 0.58250%.
    • The US Libor-OIS (LOIS) spread fell to 44.88 bps, down from 46.14 bps the prior day, and compares to the recent January 6th high of 50.05 bps. Euribor-OIS eased to 76.10 bps, from 76.75 bps Monday 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 -71.625 bps, at levels of early August, from -75.0650 bps the prior day, and up from a trough of -147.00 bps on December 14th.
    • The U.S. government overnight repo rate is 10.0 bps, unchanged from 10.0 bps the prior day, but well off from the August 2nd high of 33 bps.
    • U.S. Treasury yields are higher at the long end of the curve, with 2- and 10-year maturities yielding 0.215% and 1.867%, respectively, compared to 0.211% and 1.844% Monday. The yield curve narrowed to +1.650%, compared to +1.633% 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.
    • Though off the day's low, the U.S. dollar is weaker against the euro, British pound, and Japanese yen. The dollar trades at US$78.849, compared to the US$78.741 intraday low and to the US$79.167 at the prior day's close, and below its US$79.869 50-day, US$78.626 100-day, and US$76.674 200-day averages. The euro trades at US$1.3186, compared to an intraday high of US$1.3214, and compares to a close of US$1.3144 Monday and US$1.3082 the day prior. The euro trades better than its US$1.3069 50-day, but worse than its US$1.3369 100-day averages. In Japan, the dollar trades at ¥76.40, compared to ¥76.35 Monday and ¥76.70 the prior day. The yen trades better than its 50-day moving average ¥77.42.
    • Commodities prices are higher, with higher energy, precious metals, and aluminum, lower copper, and higher agriculture prices.

    Volatility, Skew:
    • The VIX ended at 19.40, up +4.70% from 18.53 at the prior close. The VIX is -5.02% below its 20.43 20-day moving average.
    • The Euro Stoxx 50 volatility index (V2X) is down -3.33% to 25.99, compared to 26.88 at the prior day's close. The V2X index trades -6.13% below its 27.68 20-day moving average, -22.1% below the 33.37 30-day high, and +8.45% above the 23.96 30-day low.
    • The Hang Seng volatility index (VHSI) closed at 23.62, down -4.37% from 24.70 the prior day. The VHSI index trades +1.51% above its 23.27 20-day moving average.
    • CBOE skew roe +0.40% to 121.99 from 121.50 at the prior day's close, but remained above a neutral (115-120) range. 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. A spike to 130, as on January 18th close, correlates well with short-term market peaks.

    U.S. news and economic reporting:

    · The 4Q2011 employment cost index rose +0.4%, compared to +0.4% survey and +0.3% prior.

    · S&P/CaseShiller November home price index was 138.49, down from 140.30 prior.

    · At 9:45, January Chicago Purchasing Manager Index with survey at 63.0 and prior 62.2.

    · January consumer confidence with survey at 68.0 and prior 64.5.

    Overseas news: Following yesterday's Eurozone leaders summit, 25 EU countries (not including the U.K. and the Czech Republic) adopted the new "Fiscal Pact," under which countries will be fined as much at 0.1% of GDP in the event of certain budget violations. Eurozone leaders also agreed to enact the €500 billion Emergency Stabilization Mechanism (ESM), the permanent rescue vehicle that will replace the current Emergency Financial Stabilization Fund (EFSF), but postponed a decision whether to run the two funds simultaneously until their next meeting in March. In December, Italy's unemployment rate rose more than expected to 8.9% compared to estimates of 8.7% while Germany's unemployment rate fell to 6.7% compared to estimates of no change at 6.8%. In December, French consumer spending fell -0.7% over the prior month, missing expectations for a +0.2% increase. Today, Chinese money market rates declined the most since July after data revealed the People's Bank of China injected nearly $75 billion into the financial system, easing liquidity.

    Company news/ratings changes:

    · BBT - initiated at buy at Wunderlich, $34 price target

    · TCB - downgraded to neutral at Morgan Stanley, $12 price target

    · MidCap Banks - downgraded to neutral from buy at Morgan Stanley

    4Q2011 Earnings. The fourth quarter's earnings reports have so far exceeded expectations. Of the 178 S&P500 companies that reported earnings to date, 67% (120 out of 178) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat EPS expectations by an average of +2.9% (versus a historical average of +2%). EPS is up +3.0% over the prior year. Though challenged in the current operating environment, 72% of companies reported increased revenues over the prior year and 57% 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 all 24 BKX members reporting fourth quarter earnings, 42% beat operating EPS estimates, with aggregated results disappointing by -16.7%, while 46% beat revenue estimates, with aggregated results missing by -0.9%. EPS is down by -20.4% over the prior year while revenue has decline by -3.8%. In the fourth quarter, the BKX earned $1.25 per share, compared to $1.24 and $0.91 per share in 3Q11 and 4Q10, a +0.8% and +37.4% change, respectively.

    Valuation. The SPX trades at 12.6x estimated 2012 earnings ($104.58) and 11.2x estimated 2013 earnings ($117.51), compared to 12.6x and 11.2 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 -3.8%, and -0.2%, respectively. Analysts expect 2012 and 2013 earnings to exceed 2011 earnings ($94.97) by +10.1% and +23.7%, respectively.

    Large-cap banks trade at a median 1.31x tangible book value, and 10.2x and 8.9x 2012and 2013 consensus earnings, respectively, compared to 1.33x tangible book value and 10.3x/9.0x 2012/2013 earnings Friday. 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 $4.34 per share, compared to $4.30 and $2.96 in 2011 and 2010, a +0.9% and +46.6% increase, respectively.

    Options. Options markets are neutral. Composite options markets are neutral, index options markets are neutral, and equity options markets are neutral. The composite put/call ratio closed at 0.93, compared to 0.88 the prior day and above its 5- and 10-period moving averages of 0.92 and 0.88, respectively. The index put/call ratio closed at 1.31, compared to 1.32 the prior day, and in between the 5- and 10-period moving averages of 1.51 and 1.30, respectively. The equity put/call ratio closed the day at 0.68, compared to 0.60 the prior day, above its 5- and 10-period moving averages of 0.67 and 0.61, respectively.

    Price Exhaustion/Trend Reversal. On a daily timeframe, technical price exhaustion metrics show the SPX reached a potential upward price exhaustion level on January 18th and 11th, the first such signals since April, while S&P futures reached full upward price exhaustion on January 23rd. Intra-day timeframes of 120- and 60-minute intervals show the SPX and BKX reached multiple levels of potential price exhaustion most recently as January 25th and 12th, respectively. A reversal in the SPX from these levels could extend as low as 1170.

    NYSE Indicators. Volume fell -12.5% to 743.68 million shares, 0.88x the 50-day moving average, from 850.21 million shares Friday. Market breadth was negative, and up volume lagged down volume. Advancing stocks lagged decliners by -797 (compared to +857 the prior day), or 0.58:1. Up volume lagged down volume by 0.41:1.

    SPX. On lower volume, the SPX fell -3.32 points, or -0.25%, to 1313.01, the ninth straight close above 1300. Volume fell -14.67% to 577.44 million shares, down from 676.68 million shares Friday and below the 656.95 million share 50-day moving average. For the 26th consecutive day, the SPX closed above its 50-day moving average (1,256.28) and remained above its 200-day moving average (1,257.20) for the 23rd time in the past 24 sessions. For the 117th straight session, the SPX's 50-day moving average closed below its 200-day moving average, but the 50-day average's positive trend will likely overtake the 200-day after today's close. The SPX closed above its 200-week moving average (1133.49) for the 78th straight session.

    From its prior close at 1316.33, the SPX opened lower to 1305 and fell to the intra-day low of 1300.49 at 10:15. The index bounced off of the 1300 level, and rallied through 11:30, reaching 1308. After two hours of sideways trading, the index climbed to 1314.01 at 2:45, setting the intra-day high. Momentum stalled through the bell, and the index closed just below the intra-day high.

    The SPX closed above all major moving averages, above 1200 for the 40th straight session and above 1300 for the ninth 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. The 200-day moving has troughed and the 50-day moving average will climb above the 200-day moving average and achieving a "golden cross" today. For the 27th straight session, the SPX closed (by +1.17%) above its 20-day moving average (1297.84). The index closed (by +4.52%)above its 50-day moving average for the 27th straight session. The index closed (by +6.73%) above its 100-day moving average (1230.23) for the 41st straight session. The SPX closed +4.44% above its 200-day moving average for the 22nd time in the past 24 sessions. All moving averages rose. The directional momentum indicator was positive for the 27th straight session, and the trend is strong. Relative strength fell to 62.92 from 65.12, a neutral range. Next resistance is at 1319.28; next support is at 1303.61.

    BKX. On lower volume, the KBW bank index fell -0.47 points, or -1.10%, to end at 42.40, its 19th straight close above 40 but closing below its 200-day moving average for the first time in nine sessions. Volume fell -27.84% to 71.58 million shares, down from 99.19 million shares Friday and below the 81.58 million share 50-day average. The BKX closed -1.35% below its August 30, 2010, closing low of 42.98, the trough of the 2010's correction, and -26.83% and -23.78% below its April 23, 2010 (the post-2008 high point), and February 14, 2011 (the most recent high point) respective closes.

    Financials were the market's worst performing segment, and large-cap banks underperformed regionals. From its prior close of 42.87, the BKX opened lower to 42.50 and fell to the intra-day low of 42.01 at 10:30. A positive Dallas Federal Reserve economic index release at 10:30 reversed momentum, and the BKX rallied to the 42.30 level. Through 1:30, the index traded sideways before a rally took the index up to 42.59 at 2:45, setting the intra-day high. The index consolidated the rally through the close and finished just below its opening level but at the higher end of the day's negative range.

    Technical indicators are mixed, but improving. On a percentage basis, bank stocks have outperformed the broader market's rebound from the October lows, rising +30.22% from the 32.56 October 4th intra-day low compared to a +22.25% rebound in the SPX. However, the BKX is still -23.8% below its 2011 high, compared to the SPX which has corrected only -3.7%. Moving averages alignment is mixed, as the 20- and 50-day moving averages (42.54 and 39.74, respectively) moved above the 100-day moving average (38.82), and each average is rising. The 100-day moving average appears to have troughed, though the 200-day moving average (42.46) 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 22nd time in the past 23 sessions, the 20-day closed (by +2.80 points) above the 50-day, and the gap is expanding. The 50-day moving average closed (by -2.72 points) below the 200-day moving average for the 160th straight session, but the gap continues to narrow. The 100-day moving average closed (by -3.65 points) below the 200-day moving average for the 138th straight session, but the gap is narrowing. The BKX closed (by -0.33%) below its 20-day moving average for the first time in 27 sessions. The index closed (by +6.69%) above its 50-day moving average for the 25th straight session. The index closed (by +9.24%) above the 100-day moving average for the 26th straight session. The index closed (by -0.14%) above its 200-day moving average for the first time in nine sessions. The index closed below 50.0 for the 167th straight session but above 40.0 for the 19th straight session. The directional movement indicator was positive for the 24th consecutive session, and the trend is strong. Relative strength fell to 54.74 from 58.91, a neutral range. Next resistance is 42.68; next support at 42.06.

    Stocks: BBT, TCB, MS, GS
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