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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. Market Uptrend Under Pressure; Futures Modestly Lower, Asia And Europe Sell Off 0 comments
    Mar 14, 2014 9:10 AM

    This morning. Today, U.S. equity futures are moderately lower after fair value adjustment and well off earlier highs. In Asia, equity markets closed lower, with particular weakness in Japan, which remains the preferred method to hedge Chinese exposures. In China, credit concerns have heightened significantly, both due to last week's first corporate default, but also with news that PBOC policy will limit corporate bank credit extensions. The dollar is mixed. Commodities are mixed. Thursday's Nikkei 225 March 2014 (NKH4) equity futures up +0.273%.

    The U.S. equity market outlook worsened to "uptrend under pressure". Since February 7th, the U.S. equity market outlook was "confirmed uptrend", following a brief, but sharp "in correction" episode that commenced on January 23rd. The S&P 500 Index (SPX) rose a net +2.74% subsequently. The quarter's earnings reports are nearly complete, with U.S. materials reports particularly strong, followed by financials.

    Since last Tuesday's strong rally, world equity markets have given back all of last week's rally. The SPX, DJ Industrials (DJI), Nasdaq, and NYSE composite closed down -1.17%, -1.41%, -1.46%, and -1.16%, respectively. The DJ Transports (TRAN) fell -1.39%. Only the Nasdaq remains higher on the year. NYSE volume rose +5.29% to 0.97x its 20-day moving average.

    Trading desks note unsettled world markets overnight, based both on this weekend's Crimea referendum, Chinese credit concerns, and associated currency and commodity price developments. With regard to yesterday's trade, traders characterized the sell-off as orderly and never panicked, driven by positioning, with a paucity of buyers. Traders are looking for a new inflection point after the current downward run.

    Despite the sell-off, indexes remain near record levels and P/E multiples remain elevated. With SPX equities trading at a 16.8x 2013 earnings multiple, attention focuses on 2014 earnings and valuations (16.8x times survey $117.55 2014 SPX operating earnings suggests a 1970.34 SPX level next year, a +6.72% rise).

    Technicals worsened. All indexes surrendered their 5-, 10-, and 20-day moving averages, but closed above their respective 50-, 100-, and 200-day moving averages. Most market segments closed lower, with industrials and technology the weakest sectors. By large margins, market breadth was negative, and up volume lagged down volume. Volatility rose. Treasury bond markets strengthened. The U.S. Treasury 10-year bond yield fell -8.54 bps to 2.6446%, compared to 2.7300% at the prior close.

    This morning, 10-year U.S. Treasury yields are down -2.16 bps at 2.6230%, compared to 2.7426% at the prior close. Spanish and Italian 10-year debt yields are 3.34% and 3.40%, respectively, compared to 3.38% and 3.44% the prior day. The U.S. dollar is mixed.

    U.S. options markets weakened to bearish to bullish, compared to neutral the prior day. The CBOE SKEW fell -3.53% to 127.66, compared to 132.33 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 1867-1875 trading range. After a fair value adjustment of -1.76 points, SPX equity futures price at 1836.75, down -1.26 points. The SPX opens -0.40% below its 20-day moving average, but +0.95%, +2.13%, and +6.33% above its respective 50-, 100-, and 200-day moving averages. Initial resistance is 1872.93. Initial support is 1866.54, then 1834.00.

    In Asia, equity markets distributed, with the particular weakness in Japan, which remains the preferred market to hedge Chinese exposures. Weakness was accompanied by reports that China will reduce industrial lending by 20%. In Japan, the Nikkei 225 index (NYSEARCA:NKY) fell -3.30% and is again in a bear market. The Hang Sang index (HSI) fell -1.00%. The SHCOMP fell -0.73%. Today's volumes are unavailable.

    Commentary focused on the new Chinese lending policies, the implied worsened associated corporate credit outlook, and recent weak economic reports. In China, short-term interbank lending rates remain volatile, with 7-day Shibo rates at 2.53%, compared to 2.50% the prior day, at levels last seen in March 2013 and down from the February 7th 5.41% recent high.

    Regional relative strength indexes (RSI) show Tokyo, Hong Kong, and Shanghai, which are now in the lower end of a neutral range. The NKY RSI fell to 39.15, compared to 47.45 the prior day, up from an oversold 27.92 on February 4th. The HSI RSI ended at 33.48, compared to 36.60 the prior day and an oversold 24.02 on February 5th. The SHCOMP's RSI closed at 38.66, compared to 41.37 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, HSI, and SHCOMP are down -6.20%, -4.95%, and -2.60%, respectively. Last week, the NKY gained +2.92%, the HSI fell -0.77%, and SHCOMP rose +0.08%. In March, the NKY, HSI, and SHCOMP are down -3.46%, -4.95%, and -2.60%, respectively. In February, the NKY closed down -0.49%, while the HSI and the SHCOMP gained +3.64% and +1.14%, respectively.

    In 2014, the NKY, HSI, and SHCOMP are down -12.1%, -7.58%, and -5.28%, 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 14,327.66, compared to 14,815.98 the prior day, -12.1% below its recent year-end 16,291.31 high and -63.2% below its late-1989 38,915.87 high close. The index gapped lower to open below 14,550 and trended lower to a late afternoon 14,280.75 intraday low. The index closed -3.49%, -5.37%, -5.00%, and -1.27% below its respective 20-, 50-, 100-, and 200-day moving averages. All market segments closed at least -2.56% lower. Leaders were financials, consumer services, and basic materials. Laggards were health care, utilities, and technology, which fell at least -3.55%.

    In China, the HSI closed at 21,539.49, compared to 21,756.08 at the prior close. The index opened above 21,600, but weakened and trended lower to an early afternoon 21,462.49 intraday low. The index improved in the final two hours. Most market segments closed lower. Leaders were basic materials and oil and gas, which rose at least +0.22%, and utilities, which fell -0.39%. Financials fell -0.59%. Laggards were consumer goods, consumer services, and technology, which fell at least -1.36%. The index closed -9.92% below its recent December 3rd 23,910.47 high, but +18.4% above its 18,185.59 June 4, 2012 low.

    In Shanghai, the SHCOMP closed at 2,004.34, compared to 2,019.11 at the prior close, +2.79% above the 1,950.01 June 27th close, last year's low. The index opened below 2,010, rallied to and early morning 2,017.79 intraday high, then trended lower to a late afternoon 1,991.14 intraday low. The index rallied through the final 90 minutes, narrowing the day's losses. All market segments closed at least -0.32% lower. Leaders were technology, basic materials, and oil and gas. Laggards were health care, financials, and utilities, which fell at least -0.93%.

    In Europe, major equity indexes are lower and near their intraday lows. The Euro Stoxx50, FTSE 100, CAC 40, and DAX are down -0.72%, -0.26%, -0.84%, and -0.49%, respectively. The Spanish IBEX 35 is down -1.25%, and the Italian FTSE MIB is down -1.07%. Commentary focuses on Ukrainian developments ahead of this Sunday's succession referendum and currency developments.

    European bourses have recently outperformed U.S. equity indexes. Euro Stoxx50 relative strength (RSI) fell to 34.71, compared to 37.52 the prior day, in the lower end of a neutral (30-70) range, slightly better than its recent February 5th 33.57 low, which coincided with 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 2,996.47, -5.44% below its 3,168.76 January 15th post-2008 high close, and -42.9% below its 5,249.55 March 31, 2000, all-time closing high. From its prior day 3,019.54 close, the index gapped lower to open below 3,005, then traded narrowly with an early 3,011.87 intraday high and 2,994.83 mid-day low. Most market segments are lower. Leaders are oil and gas and basic materials, which are up at least +0.09%, and health care, which is down -0.06%. Laggards are consumer goods, financials, and telecommunications, which are down at least -0.98%.

    This week, the Euro Stoxx50, FTSE 100, CAC 40, and DAX are down -3.19%, -2.63%, -3.50%, and -4.05%, respectively. Last week, the Euro Stoxx50, FTSE 100, CAC 40, and DAX closed down -1.71%, -1.42%, -0.95%, and -3.52%, respectively. In March, Euro Stoxx50, FTSE 100, CAC 40, and DAX are down -4.85%, -4.01%, -4.42%, and -7.43%, respectively. 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 lower. The Euro Stoxx50, FTSE 100, CAC 40, and DAX are down -3.62%, -3.15%, -1.92%, and -6.07%, respectively. In 2013, the indexes closed up +18.0%, +14.4%, +18.0%, and +25.5%, respectively.

    4Q2013 SPX Earnings. Of 496 (of 499) reporting companies, 363 or 73.6% surprised positively on earnings, with an average +4.59% surprise average. Of reporting companies, 303 or 61.5% reported sales or revenues above estimates. The average sales/revenue surprise is +0.85%. 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 16.8x estimated 2013 earnings ($110.15), 15.7x estimated 2014 earnings ($117.55), 14.1x estimated 2015 earnings ($130.82), and 12.8x estimated 2016 earnings ($144.38). The 10-year average median price/earnings multiple is 15.9x. Analysts expect 2013, 2014, 2015, and 2016 earnings to grow +6.52%, +6.72%, +11.3%, and 10.4%, respectively.

    The BKX trades at 13.6x 2013 adjusted EPS ($5.16), 12.7x estimated 2014 earnings ($5.55), 11.4x estimated 2015 earnings ($6.14), and 10.1x 2016 earnings ($6.90). Analysts expect 2013, 2014, 2015, 2016 EPS will grow +19.4%, +7.61%, +10.6%, and +12.3%, respectively.

    Composite, index, and equity options. Options markets worsened to bearish to bullish, compared to neutral the prior session. Composite options are neutral, index options are bullish, and equity options are bearish. The composite put/call ratio is 1.04, compared to 0.96 the prior day, and worse than 5- and 10-period moving averages of 0.89 and 0.86, respectively. The index put/call ratio is 0.90, compared to 1.00 the prior day, and worse than its 5- and 10-period moving averages of 0.87 and 0.96, respectively. The equity put/call ratio closed the day at 1.14, compared to 0.94 the prior day, and worse than its 5- and 10-period moving averages of 0.92 and 0.84, respectively.

    NYSE Volume, Breadth Indicators. Volume rose +5.29% to 692.73 million shares, compared to 657.94 million shares the prior day, 0.97x the 710.58 million share 20-day moving average. Market breadth was negative, and up volume lagged down volume. Advancing stocks lagged by -1,134 (compared to +328 the prior day), or 0.46:1. Up volume was 0.19:1 down volume.

    Distribution day count and market outlook. After yesterday's distributions, the market outlook worsened to "uptrend under pressure". On February 7th, with the SPX at 1797.02, the market outlook improved to "confirmed uptrend". The subsequent distribution day count is 3 for the SPX and 7 for the Nasdaq. The SPX's subsequent rise is +2.74%. Today, the SPX opens -1.69% below its March 7th 1878.04 record closing high.

    Libor, LOIS, Currencies, Treasuries, Commodities:

    · USD LIBOR is 0.08790%, compared to 0.08890% the prior day. USD 3-month LIBOR is 0.23335%, up from 0.23410% the prior day, and compares to the January 4, 2013, recent peak of 0.58250%.

    · The US Libor-OIS (LOIS) spread is 15.135 bps, compared to 15.210 bps the prior day, and compares to the recent June 12, 2012, 46.785 bps high. Euribor-OIS is 14.400 bps, up from 13.800 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 -4.660 bps, compared to -4.947 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 1.53%, compared to 1.54% the prior day. Japanese 10-year debt yields are 0.63%, compared to 0.64% the prior day. Spanish 10-year debt yields are 3.35%, compared to 3.38% the prior day. Italian 10-year debt yields are at 3.41%, compared to 3.44% the prior day.

    · U.S. Treasury yields are slightly higher, with 2- and 10-year maturities yielding 0.346% and 2.654%, respectively, compared to 0.338% and 2.645% Thursday. The yield curve widened +0.010 bps, with the 2- to 10-year spread at +2.308%, compared to 2.307% 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 weaker compared to the euro and Japanese yen, but slightly better compared to the British pound. The dollar trades at US$79.514, compared to a US$79.697 intraday high and US$79.620 the prior day, and worse compared to its $80.472 50-day, US$80.486 100-day, and US$80.978 200-day averages. The euro trades at US$1.3890, compared to a US$1.3895 intraday high and US$1.3868 the prior day. The euro trades better compared to its US$1.3681 50-day and US$1.3648 100-day averages, and compares to a multi-year low of US$1.1877 on June 7, 2010. In Japan, the dollar trades at ¥101.53, compared to ¥101.84 the prior day. The yen trades better than its 50-day moving average ¥102.91, and better than its January 1st 105.31 closing low, its weakest prior multi-year closing low.

    · Citigroup Economic Surprise Index improved to -30.10, compared to -34.10 the prior day, its 17th consecutive negative reading. The index is mixed compared to its respective -32.12 5-day and -26.39 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 mostly higher energy, higher precious metals, lower aluminum and copper, and mostly lower agriculture prices.

    Volatility, Skew:

    · The CBOE SPX Volatility Index (VIX) fell -2.23% to 14.47, compared to 14.80 at the prior close. The VIX is +0.86% above the 14.35 20-day moving average. Its 30-day high is 21.48. Its 30-day low is 13.44. 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 19.92, down -1.44% from 20.21 at the prior day's close. The V2X index trades +10.3% above its 18.07 20-day moving average, -19.0% below the 24.60 30-day high, and +24.6% above the 15.99 30-day low.

    · The Hang Seng volatility index (VHSI) closed at 18.19, up +0.22% from 18.15 at the prior close. The VHSI index trades +4.09% above its 17.48 20-day moving average. Its lowest historical close was 11.72, on June 30, 2005.

    · CBOE SKEW (SKEW) rose +1.73% to 132.33, compared to 130.08 the prior day, above a neutral (115-120) range, and above 130 for a 5th consecutive session, 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:
     

    • February monthly federal budget deficit was -$193.5 billion, compared to -$195.0 billion survey and -$203.5 billion prior.
    • February MoM PPI final demand rose %, compared to +0.2% survey and +0.2% prior.
    • At 9:55, University of Michigan confidence, with 82.0 survey and 81.6 prior.


    Overseas Economic Reporting and News:
     

    • Japan - January final MoM industrial production rose +3.8%, compared to +4.0% prior. YoY industrial production rose +10.3% and 10.6% prior.
    • United Kingdom - January MoM construction output rose +1.8%, compared to +1.5% survey and +2.0% prior.


    Company Ratings/News:
     

    • None.


    Thursday's Trade. On greater, but below average NYSE volume, U.S. equity indexes modestly mixed. Equities opened modestly higher, but quickly reversed lower on Chinese growth and other macro concerns, then eased steadily through the session to late intraday lows. The SPX, DJI, Nasdaq, and NYSE composite fell -1.17%, -1.42%, -1.46%, and -1.16%, respectively. Only the Nasdaq remains higher this year.

    The U.S. equity market weakened to "uptrend under pressure". Since February 7th, the U.S. equity market outlook is "confirmed uptrend". The subsequent distribution count is 3 on the SPX and 7 on the Nasdaq. The SPX closed +2.74% above the February 7th 1797.02 close and -1.69% below the recent March 7, 2014 record close.

    Market breadth was negative, with gainers only +0.46x losing stocks. Most SPX market segments closed lower. Leaders were utilities, which closed up +0.81%, and telecommunications and consumer goods, which closed down at least -0.39%. Financials fell -1.24%. Laggards were health care, industrials, and technology, which fell at least -1.44%.

    NYSE volume rose +5.29% to 692.73 million shares, compared to 657.94 million shares the prior day, 0.97x the 710.58 million share 20-day moving average volume. On the day, bond markets strengthened. The U.S. 10-year yield opened at 2.7300%, and traded narrowly through early afternoon, when the yield fell sharply to 2.66% by late afternoon and then to a late session 2.6410% intraday low. The yield ended at 2.6446%, down -8.54 bps compared to the 2.7300% prior close.

    From its prior day 1868.20 close, SPX futures signaled a modestly higher open. The index set an early 1874.40 intraday high, then eased and reversed lower by mid-morning and eased steadily through the session to a late 1841.86 intraday low. The index ended at 1846.34. The index closed +71.8% above the 1074.77 October 4, 2011, intraday low.

    The DJ Transportation index (TRAN) fell -1.39%, compared to the DJI's -1.41% loss. From its prior 7,585.98 record close, the TRAN rose to an early 7,624.11 intraday high in early trading, but reversed lower by mid-morning and trended lower to a late session 7,446.17 intraday low. The index closed at 7,480.76. Volume rose +23.2% to 14.687 million shares, compared to 11.921 million shares the prior session, and 1.18x the 15-day moving average volume. The TRAN closed +1.29% and +1.89% above its respective 20- and 50-day moving averages, and +3.38% and +9.44% above its respective 100- and 200-day moving averages.

    Market volatility rose +12.1%, as the CBOE SPX volatility index (VIX) closed at 16.62, compared to 14.47 at the prior close. The VIX opened at 14.20, then rose to 16.00by early afternoon, then trended higher to a late 16.66 intraday high. 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 worsened. All exchanges surrendered their 20-day moving averages, but closed above their respective 50-, 100-, and 200-day moving averages. SPX relative strength (RSI) rose to 50.32, compared to 60.88 the prior day, in 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 -3.53% to 127.66, compared to 132.33 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, NYSE composite are down -1.69%, -2.9%, -1.11%, and -2.04%, respectively. Last week, the SPX, DJI, Nasdaq, and NYSE composite closed up +1.00%, +0.80%, +0.65%, and +0.83%, respectively. In March, the SPX, DJI, and Nasdaq are down -0.71%, -1.30%, -1.11%, and -1.23%, respectively. In February, the SPX, DJI, Nasdaq, and NYSE composite closed up +4.31%, +3.97%, +4.98%, and +4.60%, respectively.

    In 2014, The Nasdaq is up +2.01%, while the SPX, DJI, and NYSE composite are down -0.11%, -2.82%, and -0.99%, respectively. 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 higher, but below average volume, the BKX closed at 69.92, down -0.85% from 70.52 at the prior day's close, its first close below 70.00 since March 4th. The index rose in early trading to the 70.93 intraday high, but reversed lower by mid-morning and trended lower to a late session 69.75 intraday low. Volume rose +16.2% to 44.687 million shares, compared to 38.457 million shares the prior day, and 0.87x the 51.366 million shares 15-day moving average.

    Large cap banks underperformed the regional banks, as the KBW regional banking index (KRX) fell -0.54%.

    This week, the BKX is down -1.99%. Last week, the BKX closed up +3.36%, compared to a gain of +0.70% the prior week. In March, the BKX is up +1.30%. In February, the BKX closed up +2.41%, compared to January, when the BKX closed down -1.07%. In 2014, the BKX is up +0.95%. In 2013, the BKX rose +35.1%, better than the SPX's +29.6% rise.

    The BKX is now +18.1% 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, which persisted until March 6th. The BKX closed +114.7% 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 +77.6% in the same period.

    The BKX index closed -42.2% below its February 20, 2007, record 121.06 high. The BKX is up +275.5% from its 18.62 March 6, 2009, closing low.

    Technical indicators were little changed. The index closed +0.99%, +1.19%, +3.13%, and +6.61% above its respective 20-, 50-, 100-, and 200-day moving averages. The 20-day moving average rose +8 bps to 69.23. The 69.10 50-day moving average rose +2 bps. Its 100-day moving average rose +5 bps to 67.80, and the 200-day moving average rose +4 bps to 65.59. The 20-day closed (by +0.13 points) above the 50-day, and the gap widened +5 bps. The 50-day moving average closed (by +3.51 points) above the 200-day moving average, and the gap narrowed -2 bps. The 100-day moving average closed (by +2.21 points) above the 200-day moving average, and the gap was unchanged.

    The directional movement indicator widened to +12.461, compared to +10.137 the prior day, its 9th consecutive positive reading. Relative strength fell to 54.39, compared to 59.25 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 70.65; next support is 69.47.

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