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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 Rise; Asia Rebounds; Europe Higher 0 comments
    Mar 6, 2014 8:44 AM

    This morning. Today, U.S. equity futures are slightly higher after fair value adjustment. In Asia, equity markets closed higher, with weakness in China, where credit issues continue to bubble up. Major European bourses are modestly lower. The dollar is mixed. Thursday's Nikkei 225 March 2014 (NKH4) equity futures are +1.200% higher.

    Commentary focuses on the latest non-actions of the ECB and BOE, which left their respective benchmark interest rates unchanged at +0.25% and +0.50%, respectively.

    Since February 7th, the U.S. equity market outlook is "confirmed uptrend", following a brief, but sharp "in correction" episode that commenced on January 23rd. The S&P 500 Index (SPX) rose +4.27% subsequently. The quarter's earnings reports are nearly complete, with U.S. materials reports particularly strong, followed by financials.

    Wednesday, world equity and bond markets consolidated the prior day's strong rally. U.S. equity markets closed mixed. The Nasdaq rose +0.14%, while the SPX, DJ Industrials (DJI), and NYSE composite fell -0.01%, -0.22%, and -0.07%, respectively. The DJ Transports (TRAN) rose +0.32%. NYSE volume fell -21.8% to 0.92x its 20-day moving average.

    Trading desks noted that absent any dominant macro concern, equities are trading higher in most markets. Foreign ministers meet in Brussels to discuss economic sanctions on Russia, but both London and Berlin block any material action. Domestically, economic reporting focuses on 4Q2013 final non-farm productive and unit labor costs, but the focus is really on tomorrow's February employment report. Traders describe Wednesday as quiet and uneventful, but impressive that the price action largely consolidated Tuesday's exceptional gains. The afternoon's Beige Book reporting supported the argument that weather is largely responsible for recent mixed economic reports. Financials outperformed again as the yield curve steepened.

    Despite what appears to be a higher bias to the market, with the market at or near records and with an elevated P/E multiple, traders continue to doubt a breakout and focus on this Friday's February jobs report. The DJI and TRAN closed -0.19% and -1.31% off their respective record highs. The U.S. 10-year yield rose, but arguably continues to signal equity weakness. With SPX equities trading at a 17.0x 2013 earnings multiple, attention focuses on 2014 earnings and valuations (17.0x times survey $117.67 2014 SPX operating earnings suggests a 2001.66 SPX level next year, a +6.82% rise).

    Technicals were little changed. All indexes closed above their respective 5-, 10-, 20-, 50-, 100-, and 200-day moving averages. Led by financials, all market segments closed mixed. Market breadth was modestly negative, and up volume led down volume. Volatility fell. Treasury bond markets weakened. The U.S. Treasury 10-year bond yield rose +0.71 bps to 2.7048%, compared to 2.6977% at the prior close.

    This morning, 10-year U.S. Treasury yields are up +0.72 bps at 2.7120%, compared to the prior close. Spanish and Italian 10-year debt yields are 3.36% and 3.39%, respectively, compared to 3.36% and 3.38% the prior day. The U.S. dollar is mixed.

    U.S. options markets are neutral to bullish, compared to neutral to bullish the prior day. The CBOE SKEW fell -3.82% to 126.62, compared to 131.65 the prior day, above a neutral range (115-120) and again below 130, which generally correlates well with short-term market tops.

    In pre-market futures trading, March SPX equity futures (SPH4) price near the middle of a 1871-1878 trading range. After a fair value adjustment of -0.09 points, SPX equity futures price at 1876.25, up +3.84 points. The SPX opens +2.34%, +2.69%, +4.20%, and +8.30% above its respective 20-, 50-, 100-, and 200-day moving averages. Initial resistance is 1876.52. Initial support is 1871.10, then 1868.40.

    In Asia, equity markets closed higher, despite Chinese credit concerns. In Japan, the Nikkei 225 index (NYSEARCA:NKY) rose +1.59%. The Hang Sang index (HSI) rose +0.55%. The Shanghai composite (SHCOMP) rose +0.32%. Today's volumes are unavailable.

    Commentary focused on currency developments, as the yen weakened slightly. In China, short-term interbank lending rates remain surprisingly volatile, with 7-day Shibo rates falling to 2.48%, compared to 3.80% the prior day, at levels last seen in March and down from the February 7th 5.41% recent high.

    Regional relative strength indexes (RSI) show Tokyo, Hong Kong, and Shanghai in neutral ranges. The NKY RSI improved to 55.16, compared to 50.62 the prior day, up from an oversold 27.92 on February 4th. The HSI RSI ended at 54.78, compared to 52.35 the prior day and an oversold 24.02 on February 5th. The SHCOMP's RSI closed at 46.46, compared to 44.83 the prior session. On June 27, 2013, the index's RSI fell to a low of 15.27, which was also last year's low index close.

    This week, the NKY is up +1.98%, the HSI is down -0.59%, and SHCOMP is up +0.16%. Last week, the NKY ended down -0.17%, the HSI closed up +1.19%, and the SHCOMP closed off -2.72%. In February, the NKY closed down -0.49%, while the HSI and the SHCOMP gained +3.64% and +1.14%, respectively. In January, the NKY lost -8.45%, the HSI closed down -5.45%, and the SHCOMP lost -3.92%.

    In 2014, the NKY, HSI, and SHCOMP are down -7.10%, -2.59%, and -2.67%, respectively. In 2013, the NKY rose +56.7%. The HSI closed up +2.87%. The SHCOMP closed down -6.75%.

    In Japan, the NKY closed at 15,134.75, 14,897.63, compared to 14,721.48 the prior day and -61.1% below its late-1989 38,915.87 high close. Through the morning session, the index traded narrowly around breakeven, with a mid-morning 14,871.56 intraday low. In early afternoon, the index moved higher to a mid-afternoon 15,203.12 intraday high, then eased to the close. The index closed +3.18%, +0.75%, and +4.28% above its respective 20-, 100-, and 200-day moving averages, but -0.58% below its 50-day moving average. Most market segments closed higher. Leaders were telecommunications, financials, and industrials, which rose at least +1.53%. Laggards were technology, which rose +10.2%, and oil and gas and utilities, which fell at least -0.05%.

    In China, the HSI closed at 22,702.97, compared to 22,579.78 at the prior close. The index opened slightly higher, then rallied above 22,700 in early trading, which proved resistance through the session. Most market segments closed higher. Leaders were technology, industrials, and basic materials, which rose at least +1.26%. Financials rose +0.23%. Laggards were telecommunications and consumer goods, which rose at least +0.05%, and consumer services, which fell -0.01%. The index closed -5.05% below its recent December 3rd 23,910.47 high, but +24.8% above its 18,185.59 June 4, 2012 low.

    In Shanghai, the SHCOMP closed at 2,059.58, compared to 2,053.08 at the prior close, +5.62% above the 1,950.01 June 27th close, last year's low. The index moved lower to a mid-morning 2,030.98, but reversed higher by mid-session to a late afternoon 2,065.54 intraday high. Most market segments closed lower. Leaders were oil and gas, financials, and consumer services, which rose at least +0.42%. Laggards were utilities, technology, and health care, which fell at least -0.67%.

    In Europe, the major equity indexes are moderately higher. The Euro Stoxx50, FTSE 100, CAC 40, and DAX are up +0.57%, +0.32%, +0.70%, and +.29%, respectively. The Spanish IBEX 35 is up +1.33%, while the Italian FTSE MIB is up +0.82%. Commentary focuses on this morning's ECB rate decision, expected at 7:45 am EST.

    European bourses have recently outperformed U.S. equity indexes. Euro Stoxx50 relative strength (RSI) is 58.08, compared to 55.57 the prior day, in a neutral (30-70) range and better than its recent February 5th 33.57 low, its 2014 low. The indexes lowest recent RSI level was 25.77 on June 24th, which marked the 2013 2,494.54 closing low.

    Today, the Euro Stoxx50 trades at 3,153.72, 3,136.01, -0.55% below its 3,168.76 January 15th post-2008 high close, and -40.0% below its 5,249.55 March 31, 2000, all-time closing high. From its prior day 3,135.97 close, the index rose in early trading to the 3,158.15 intraday high, but then fell back to the mid-session 3,142.61 intraday low. Most market segments are higher. Leaders are financials, consumer services, and telecommunications, which rose at least +0.77%. Laggards are basic materials, consumer goods, and utilities, which are up at least +0.01%.

    This week, the Euro Stoxx50 and CAC 40 are up +0.07% and +0.23%, respectively, while the FTSE 100 and DAX are down -0.33% and -1.30%, respectively. Last week, the Euro Stoxx50, CAC 40, and DAX closed up +0.56%, +0.62%, and +0.36%, while the FTSE 100 closed off -0.41%. In February, the indexes closed at least +4.14% higher. In January, the indexes close at least -2.57% lower.

    In 2014, the indexes are again higher. The Euro Stoxx50, FTSE 100, CAC 40, and DAX are up +0.69%, +0.52%, +2.05%, and +0.09%, respectively. In 2013, the indexes closed up +18.0%, +14.4%, +18.0%, and +25.5%, respectively, compared to +13.8%, 5.84%, +15.2%, and +29.1% the prior year.

    4Q2013 SPX Earnings. Of 491 (of 499) reporting companies, 360 or 73.8% surprised positively on earnings, with an average +4.65% surprise average. Of reporting companies, 301 or 61.7% reported sales or revenues above estimates. The average sales/revenue surprise is +0.87%. Materials lead with +13.6% EPS and +0.72% revenue surprises. Financials follow with a 9.59% earnings surprise and +3.47% revenue surprise.

    Valuation. The SPX trades at 17.0x estimated 2013 earnings ($110.15), 15.9x estimated 2014 earnings ($117.67), 14.3x estimated 2015 earnings ($130.87), and 13.0x estimated 2016 earnings ($144.60). The 10-year average median price/earnings multiple is 15.9x. Analysts expect 2013, 2014, 2015, and 2016 earnings to grow +6.52%, +6.82%, +11.2%, and 10.5%, respectively.

    The BKX trades at 13.6x 2013 adjusted EPS ($5.16), 12.6x estimated 2014 earnings ($5.55), 11.4x estimated 2015 earnings ($6.14), and 10.2x 2016 earnings ($6.91). Analysts expect 2013, 2014, 2015, 2016 EPS will grow +19.4%, +7.65%, +10.5%, and +12.5%, respectively.

    Composite, index, and equity options. Options markets improved to neutral to bullish, compared to neutral to bullish the prior session. Composite options are bullish, index options are neutral, and equity options are neutral. The composite put/call ratio is 0.76, compared to 0.80 the prior day, and better than 5- and 10-period moving averages of 0.84 and 0.82, respectively. The index put/call ratio is 1.31, compared to 1.00 the prior day, and worse than its 5- and 10-period moving averages of 1.02 and 0.95, respectively. The equity put/call ratio closed the day at 0.61, compared to 0.72 the prior day, and better than its 5- and 10-period moving averages of 0.78 and 0.78, respectively.

    NYSE Volume, Breadth Indicators. Volume fell -21.8% to 666.47 million shares, compared to 852.54 million shares the prior day, 0.92x the 722.86 million share 20-day moving average. Market breadth was slightly negative, though up volume led down volume. Advancing stocks lagged by -90 (compared to +2,065 the prior day), or 0.94:1. Up volume was 1.20:1 down volume.

    Distribution day count and market outlook. On February 7th, with the SPX at 1797.02, the market outlook improved to "confirmed uptrend". There have been no subsequent distribution days. The SPX's subsequent rise is +2.71%.

    Libor, LOIS, Currencies, Treasuries, Commodities:

    · USD LIBOR is 0.08760%, compared to 0.08790% the prior day. USD 3-month LIBOR is 0.23510%, unchanged from 0.23440% the prior day, and compares to the January 4, 2013, recent peak of 0.58250%.

    · The US Libor-OIS (LOIS) spread is 15.710 bps, compared to 15.640 bps the prior day, and compares to the recent June 12, 2012, 46.785 bps high. Euribor-OIS is 16.800 bps, unchanged from 16.800 bps the prior day, and down from the December 27, 2011, high of 98.800 bps. Moves in the LOIS indicate changes in intra-bank lending risk premiums.

    · The 3-month Euro basis swap is -6.244 bps, compared to -6.2156 bps the prior day, up from a trough of -147.00 bps on December 14, 2011, but far better than a normal -10 bps and -40 bps range.

    · German 10-year debt yields are 1.64%, compared to 1.61% the prior day. Japanese 10-year debt yields are 0.62%, compared to 0.61% the prior day. Spanish 10-year debt yields are 3.36%, compared to 3.36% the prior day. Italian 10-year debt yields are at 3.39%, compared to 3.38% the prior day.

    · U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.333% and 2.710%, respectively, compared to 0.333% and 2.705% Wednesday. The yield curve widened +0.520 bps, with the 2- to 10-year spread at +2.377%, compared to 2.372% the prior day. In the past year, the 2- and 10-year spread varied from a low of +1.429% on May 1, 2013, to a high of +2.648% on December 31, 2013.

    · The U.S. dollar is mixed, slightly stronger weaker compared to the euro and British pound, but stronger compared to the Japanese yen. The dollar trades at US$80.090, compared to a US$80.073 intraday low and US$80.109 the prior day, and worse compared to its $80.560 50-day, US$80.473 100-day, and US$81.063 200-day averages. The euro trades at US$1.3759, compared to a US$1.3753 intraday high and US$1.3733 the prior day. The euro trades better compared to its US$1.3659 50-day and US$1.36404 100-day averages, and compares to a multi-year low of US$1.1877 on June 7, 2010. In Japan, the dollar trades at ¥102.73, compared to ¥102.30 the prior day. The yen trades better than its 50-day moving average ¥103.12, and better than its January 1st 105.31 closing low, its weakest prior multi-year closing low.

    · Citigroup Economic Surprise Index worsened to -27.90, compared to -18.70 the prior day, its 11th consecutive negative reading. The index is worse compared to its respective -17.70 5-day and -14.05 10-day moving averages. The index fell to a 52-week low of -32.90 on June 10th. The index improved and turned positive on July 30th and rose to 53.30 on October 1st, but subsequently fell on dollar weakness to -2.10 on October 31st. It subsequently strengthened to a +72.70 high on January 15th, but then subsequently trended lower and turned negative on February 19th. After a lag, the CESIUSD correlates with EPS revisions.

    · Commodities prices are mixed, with mixed energy, lower precious metals, mixed aluminum and copper, and mixed agriculture prices.

    Volatility, Skew:

    · The CBOE SPX Volatility Index (VIX) fell -1.49% to 13.89, compared to 14.10 at the prior close. The VIX is -6.58% below the 14.87 20-day moving average. Its 30-day high is 21.48. Its 30-day low is 12.55. The index's all-time closing low is 9.31 on December 22, 1993. The long-term average is 20.14.

    · The Euro Stoxx 50 volatility index (V2X) is 18.28, down -2.24% from 18.70 at the prior day's close. The V2X index trades +2.16% above its 17.90 20-day moving average, -25.7% below the 24.60 30-day high, and +14.3% above the 15.63 30-day low.

    · The Hang Seng volatility index (VHSI) closed at 17.18, down -4.56% from 18.00 at the prior close. The VHSI index trades -3.83% below its 17.87 20-day moving average. Its lowest historical close was 11.72, on June 30, 2005.

    · CBOE SKEW (SKEW) fell -3.82% to 126.62, compared to 131.65 the prior day, above a neutral (115-120) range but again below 130, a level which correlates well with market tops. The recent high was a record 143.20 on December 20th. Its recent low was 112.47 on May 25, 2013. Spikes in excess of 130 correlate well with short-term market tops, though not in October or November. The prior record high was 139.25, on March 12, 2012. The index rarely falls below 110, last on July 31, 2009. The index correlates with 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. Economic Reporting and News:
     

    • 4Q2013 final nonfarm productivity rose +1.8%, compared to +2.2% survey and +3.2% prior. Unit labor costs fell -0.1%, compared to -0.5% survey and -1.6% prior.
    • The latest weeks' initial and continuing jobless claims were 323K and 2907K, compared to 336K and 2970K survey and 349K and 2915K revised prior.
    • At 10:00, January factory orders, with -0.5% survey and -1.5% prior.


    Overseas Economic Reporting and News:
     

    • Australia - January MoM retail sales rose +1.2%, compared to +0.4% survey and +0.7% revised prior.
    • Eurozone - Benchmark interest rate is 0.25%, compared to +0.25% survey and prior.
    • France - 4Q2013 ILO unemployment fell to 10.2%, compared to 11.0% survey and +10.3% revised prior.
    • Germany - January MoM factory orders rose +1.2%, compared to +0.9% survey and -0.2% revised prior.


    · United Kingdom - BOE benchmark interest rate is 0.50%, compared to +0.50% survey and prior.

    Company Ratings/News:
     

    • None.


    Wednesday's Trade. On lower and below average NYSE volume, U.S. equity indexes closed mixed. Equities traded narrowly through the session. The SPX, NYSE composite and Russell 2000 (RTY) all closed at record highs. The Nasdaq rose +0.14%, while the SPX, DJI, and NYSE composite fell -0.01%, -0.22%, and -0.07%, respectively. The SPX, Nasdaq, NYSE composite, and RTY are all higher this year.

    Since February 7th, the U.S. equity market outlook is "confirmed uptrend". There have been no subsequent distributions. The SPX closed +4.27% above the February 7th 1797.02 close.

    Market breadth was slightly negative, with gainers 0.94:1 losing stocks. Led by financials, all SPX market segments closed mixed. Leaders were financials, consumer services, and basic materials, which rose at least +0.25%. Laggards were telecommunications, utilities, and oil and gas, which fell at least -0.54%.

    NYSE volume fell -21.8% to 666.47 million shares, compared to 852.54 million shares the prior day, 0.92x the 722.86 million share 20-day moving average volume. On the day, bond markets weakened slightly. The U.S. 10-year yield opened at 2.6923%, rose to an early afternoon 2.7174% intraday high, then fell back to 2.6959% during the afternoon. The yield ended at 2.7048%, up +0.71 bps compared to the 2.6977% prior close.

    From its prior day 1845.73 close, SPX futures suggested a slightly lower open. The index initially moved lower and set an immediate 1871.11 intraday low, the traded to a mid-morning 1876.53 intraday high before easing back to breakeven by mid-session. The index traded narrowly through the close. The index ended with a fractional loss at 1873.81, -0.01% below the prior day's record close. The index closed +74.4% above the 1074.77 October 4, 2011, intraday low.

    The DJ Transportation index (TRAN) rose +0.32%, compared to the DJI's -0.22% loss, and closed -0.19% off its January 23, 2013 record close. From its prior 7,466.08 close, the TRAN opened higher and trended higher through the morning session to a 7,506.99 mid-day intraday high. The index eased back to 7,475 by mid-afternoon, but then improved into the close. Volume probably fell, but volume is unavailable. The TRAN closed +2.92% and +2.39% above its respective 20- and 50-day moving averages, and +4.27% and +10.1% above its respective 100- and 200-day moving averages.

    Market volatility fell -1.49%, as the CBOE SPX volatility index (VIX) closed at 13.89, compared to 14.10 at the prior close. The VIX initially moved higher and set and early 14.31 intraday high before easing and spending most of the day lower. The mid-morning intraday low was 13.81. The VIX's all-time closing low was 9.31, on December 22, 1993. Its lifetime average is 20.09.

    The market's technical factors were little changed. All exchanges closed above their 20-, 50-, 100-, and 200-day moving averages. SPX relative strength (RSI) eased to 65.31, compared to 65.36 the prior day, in the upper end of a neutral range, and much better than an oversold 31.24 on February 3rd. The RSI is also down from an overbought 71.26 on December 31st, when the SPX closed an earlier record high, but above earlier oversold levels of 35.14 on August 27th and 39.19 on October 9th. The CBOE put/call SKEW fell -3.82%, to 126.62, compared to 131.65 the prior day, well above a neutral 115-120 range but again below 130, a level that correlates well with short-term market tops.

    This week, the SPX, DJI, Nasdaq, and NYSE composite are up +0.77%, +0.24%, +1.16%, and +1.62%, respectively. Last week, the SPX, DJI, Nasdaq, and NYSE composite closed up +1.13%, +1.04%, +1.51%, and +1.39%, respectively. In February, the SPX, DJI, Nasdaq, and NYSE composite closed up +4.31%, +3.97%, +4.98%, and +4.60%, respectively. In January, the SPX, DJI, Nasdaq, and NYSE composite closed down -3.56%, -5.30%, -1.74, and -4.16%, respectively.

    In 2014, the SPX, Nasdaq, and NYSE composite are up +1.38, +4.34%, and 0.79%, respectively, while the DJI is down -1.31%. In 2013, the SPX, DJI, Nasdaq, and NYSE composite closed up +29.6%, +26.5%, +38.2%, +23.2%, respectively. All closed at least +5.91% higher in 2012.

    KBW Bank Index (BKX). On lower and below average volume, the BKX closed at 70.14, up +0.73% compared to 69.63 at the prior day's close, its 1st close above 70.00 since June 24th. After brief minor opening weakness, the index rallied to a mid-morning 70.28 intraday high, then traded narrowly through the close. Volume is unavailable.

    Large cap banks outperformed the regional banks, as the KBW regional banking index (KRX) fell -0.32%.

    This week, the BKX is up +1.62%, compared to a gain of +0.70% the prior week. In February, the BKX closed up +2.51%, compared to January, when the BKX closed down -2.79%. In 2014, the BKX is up +1.27%. In 2013, the BKX rose +35.1%, better than the SPX's +29.6% rise.

    The BKX is now +18.5% better than the June 24th 59.19 close, its worst since May 13, 2013. The index crossed above 50 on December 17, 2012, 60 on May 15, 2013, and 70 on January 8, 2014, but then dropped back below 70 on January 24th. The BKX closed +115.4% above the 32.56 intraday low on October 4, 2011. Large-cap bank stocks have outperformed the broader market's rebound, with the SPX up +74.4% in the same period.

    The BKX index closed -42.1% below its February 20, 2007, record 121.06 high. The BKX is up +276.7% from its 18.62 March 6, 2009, closing low.

    Technical indicators were little changed, as the index recovered its 50-day moving average. The index closed +2.34%, +2.69%, +4.20%, and +8.30% above its respective 20-, 50-, 100-, and 200-day moving averages. The 20-day moving average rose +20 bps to 68.30. The 68.88 50-day moving average rose +4 bps. Its 100-day moving average rose +9 bps to 67.40, and the 200-day moving average rose +4 bps to 65.30. The 20-day closed (by -0.58 points) above the 50-day, and the gap narrowed -16 bps. The 50-day moving average closed (by +3.58 points) above the 200-day moving average, and the gap was unchanged. The 100-day moving average closed (by +2.09 points) above the 200-day moving average, and the gap rose +4 bps.

    The directional movement indicator widened to +10.954, compared to +6.968 the prior day, its 2nd consecutive positive reading. Relative strength rose to 60.73, compared to 58.04 the prior day, in a neutral range, up from the recent 32.95 low on February 3rd, but down sharply from an overbought 75.56 and 71.88 on January 9th and 10th, respectively. The recent low RSI level 31.08 on November 14, 2012, which is also the date of the BKX's 2012 closing low. Next resistance is 70.42; next support is at 69.72.

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