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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 Press Higher Ahead Of FOMC; Asia Ends Mixed; Europe Reverses Higher 0 comments
    Mar 19, 2014 9:06 AM

    This morning. Today, U.S. equity futures are modestly higher after fair value adjustment and near their highs. In Asia, equity markets closed mixed, with better strength in Tokyo. In Europe, indexes are mostly higher and trade near their intraday highs. The dollar is mixed. Commodities are mostly higher. Thursday's Nikkei 225 June 2014 (NKM4) equity futures are quiet, up +0.277%.

    The week's focus shifts to the FOMC, which reports this afternoon followed by Chair Yellen's first news conference. A continued taper of asset purchases is expected. In Russia, large air force exercises are taking place. Tomorrow, the FRB will publish the results of its bank CCAR stress tests, followed on March 26th with its approval/disapproval of requested bank capital plans.

    On March 13th, the U.S. equity market outlook worsened to "uptrend under pressure". Since February 7th, the prior 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 +4.19% subsequently. The 4Q2013 quarter's earnings reports are complete, with U.S. materials reports particularly strong, followed by financials. The 1Q2014 earnings reports began on March 15th.

    Tuesday, the SPX, DJ Industrials (DJI), Nasdaq, and NYSE composite closed up +0.72%, +0.55%, +1.25%, and +0.62%, respectively. The DJ Transports (TRAN) rose +0.53%. The SPX, Nasdaq, and NYSE composite are higher on the year. NYSE volume fell -3.36% to 0.83x its 20-day moving average.

    Trading desks note quiet world equity markets overnight. With regard to Tuesday's trade, traders noted a continuation of Monday's "relief" rally, following a somewhat benign Crimean "crisis" that markets could quickly put behind. Focus shifted to today's FOMC report at 2:00, followed by Chair Yellen's first news conference. Trading continues to slow, with higher equity prices coming as sellers remain on the sidelines. Traders expect continued resistance to higher equity prices.

    Indexes remain near recent record levels and P/E multiples remain elevated. With SPX equities trading at a 17.0x 2013 earnings multiple, attention focuses on 2014 earnings and valuations (17.0x times survey $117.48 2014 SPX operating earnings suggests a 1996.82 SPX level next year, a +6.65% rise).

    Technicals improved. Indexes recaptured their 10-day moving averages. All are above their respective 20-, 50-, 100-, and 200-day moving averages. Led by technology, most market segments closed higher. Market breadth was positive, and up volume led down volume. Volatility fell. Treasury bond markets strengthened. The U.S. Treasury 10-year bond yield -1.99 bps to 2.6722%, compared to 2.6921% at the prior close.

    This morning, 10-year U.S. Treasury yields are up +1.62 bps at 2.6884%, compared to the prior close. Spanish and Italian 10-year debt yields are 3.31% and 3.36%, respectively, compared to 3.30% and 3.37% the prior day. The U.S. dollar is mixed.

    U.S. options markets are unchanged at neutral to bullish, compared to neutral to bullish the prior day. The CBOE SKEW fell -1.90% to 129.37, compared to 131.87 the prior day, above a neutral range (115-120), but again below 130, a level that correlates well with short-term market tops.

    In pre-market futures trading, March SPX equity futures (SPH4) price near the top of a wide 1861-1868 trading range. After a fair value adjustment of +0.85 points, SPX equity futures price at 1867.00, up +2.40 points. The SPX opens +0.83%, +2.30%, +3.37%, and +7.62% above its respective 20-, 50-, 100-, and 200-day moving averages. Initial resistance is 1877.70. Initial support is 1862.86, then 1853.47.

    In Asia, equity markets closed mixed, with better strength in Tokyo. In China, continued weakness focused on real estate development weakness. In Japan, the Nikkei 225 index (NYSEARCA:NKY) rose +0.36%, but remains a bear market. The Hang Sang index (HSI) fell -0.07%. The SHCOMP fell -0.17%. Today's volumes are unavailable.

    Commentary focused on Chinese credit issues. Economic reporting was light. In China, short-term interbank lending rates remain volatile, with 7-day Shibo rates at 3.41%, compared to 2.88% the prior day, up from a 2.26% low on March 11th, but down from the February 7th 5.41% recent high.

    Regional relative strength indexes (RSI) show Tokyo, Hong Kong, and Shanghai, which are in the lower end of a neutral range. The NKY RSI rose to 42.81, compared to 41.59 the prior day, up from an oversold 27.92 on February 4th. The HSI RSI ended at 35.46, compared to 35.70 the prior day and an oversold 24.02 on February 5th. The SHCOMP's RSI closed at 43.49, compared to 44.25 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 up +0.94%, +0.14%, and +0.87%, respectively. Last week, the NKY, HSI, and SHCOMP closed down -6.20%, -4.95%, and -2.60%, respectively. In March, the NKY, HSI, and SHCOMP are down -2.55%, -5.55%, and -1.68%, 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 -11.2%, -7.46%, and -4.45%, 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 14,462.52, compared to 14,411.27 the prior day, -11.2% below its recent year-end 16,291.31 high and -62.8% below its late-1989 38,915.87 high close. The index opened higher, but found resistance at 14,500 early in the morning session, and reversed lower to an early afternoon 14,302.37 intraday low. The index rallied strongly in early afternoon, rising to a mid-afternoon 14,663.54 intraday high. The index fell through the final hour, narrowing the day's final gain. The index closed -2.41%, -3.76%, -4.07%, and -0.28% below its respective 20-, 50-, 100-, and 200-day moving averages. Market segments closed mixed. Leaders were consumer services, health care, and technology, which rose at least +0.49%. Laggards were basic materials, financials, and oil and gas, which fell at least -0.26%.

    In China, the HSI closed at 21,568.69, compared to 21,583.50 at the prior close. The index opened below 21,520, and fell to an early 21,485.51 intraday low, but improved to a mid-morning 21,614.53 intraday high, then traded modestly lower through the session's remainder. Most market segments closed lower. Leaders were basic materials, industrials, and oil and gas, which rose at least +0.72%. Financials were unchanged. Laggards were utilities, consumer services, and technology, which fell at least -0.52%. The index closed -9.79% below its recent December 3rd 23,910.47 high, but +18.6% above its 18,185.59 June 4, 2012 low.

    In Shanghai, the SHCOMP closed at 2,021.73, compared to 2,025.20 at the prior close, +3.68% above the 1,950.01 June 27th close, last year's low. The index opened at 2,020 and fell to a late morning 2,002.49 intraday low. The index improved through the afternoon to a late 2,022.18 intraday high. Most market segments closed lower. Leaders were telecommunications, technology, and basic materials, which rose at least +0.31%. Financials fell -0.26%. Laggards were consumer services, consumer goods, and health care, which fell at least -0.26%.

    In Europe, major equity indexes opened lower, but most reversed higher by mid-morning and trade near their intraday highs. The Euro Stoxx50, CAC 40, and DAX are up +0.34%, +0.16%, and +0.71%, respectively, while the FTSE 100 is down -0.05%. The Spanish IBEX 35 is up +0.16%, but the Italian FTSE MIB is down -0.10%. Economic reporting is light. Commentary focuses on Ukrainian developments and associated currency and commodity price movements.

    European bourses have recently outperformed U.S. equity indexes. Euro Stoxx50 relative strength (RSI) is 50.08, compared to 48.53 the prior day, in the middle of a neutral (30-70) range, but 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 3,085.40, -2.63% below its 3,168.76 January 15th post-2008 high close, and -41.2% below its 5,249.55 March 31, 2000, all-time closing high. From its prior day 3,073.75 close, the index traded moderately lower through the morning session, with an early 3,062.51 intraday low, but reversed higher by mid-morning to an early afternoon 3,087.62 intraday high. Most market segments are higher. Leaders are consumer services, consumer goods, and oil and gas, which are up at least +0.68%. Laggards are health care and telecommunications, which are up at least 0.06%, and utilities, which are down -0.38%.

    This week, the Euro Stoxx50, FTSE 100, CAC 40, and DAX are up +2.69%, +1.17%, +2.49%, and +2.81%, respectively. Last week, the Euro Stoxx50, FTSE 100, CAC 40, and DAX closed down -2.93%, -2.75%, -3.44%, and -3.15%, respectively. In March, Euro Stoxx50, FTSE 100, CAC 40, and DAX are down -2.03%, -3.02%, -1.96%, and -3.94%, respectively. In February, the indexes closed at least +4.14% higher.

    In 2014, the indexes are mostly lower. The CAC 40 is up +0.60%, while the Euro Stoxx50, FTSE 100, and DAX are down -0.76%, -2.15%, and -2.53%, respectively. In 2013, the indexes closed up +18.0%, +14.4%, +18.0%, and +25.5%, respectively.

    1Q2014 SPX Earnings. Of 3 (of 497) reporting companies, 1 or 0.33% surprised positively on earnings, with an average -3.21% surprise average. Of reporting companies, 1 or 0.33% reported sales or revenues above estimates. The average sales/revenue surprise is -0.91%. Consumer staples lag with a -10.0% EPS and -1.21% revenue surprise.

    Valuation. The SPX trades at 17.0x estimated 2013 earnings ($110.15), 15.9x estimated 2014 earnings ($117.48), 14.3x estimated 2015 earnings ($130.74), and 12.9x estimated 2016 earnings ($144.20). The 10-year average median price/earnings multiple is 15.9x. Analysts expect 2013, 2014, 2015, and 2016 earnings to grow +6.52%, +6.65%, +11.3%, and 10.3%, respectively.

    The BKX trades at 13.6x 2013 adjusted EPS ($5.16), 12.8x estimated 2014 earnings ($5.55), 11.5x estimated 2015 earnings ($6.14), and 10.2x 2016 earnings ($6.89). Analysts expect 2013, 2014, 2015, 2016 EPS will grow +19.4%, +7.53%, +10.6%, and +12.3%, respectively.

    Composite, index, and equity options. Options markets are unchanged at neutral to bullish, compared to neutral to bullish the prior session. Composite options are bullish, index options are bullish, and equity options are neutral. The composite put/call ratio is 0.74, compared to 0.83 the prior day, and better than 5- and 10-period moving averages of 0.87 and 0.84, respectively. The index put/call ratio is 0.67, compared to 0.83 the prior day, and better than its 5- and 10-period moving averages of 0.80 and 0.90, respectively. The equity put/call ratio closed the day at 0.80, compared to 0.84 the prior day, and better than its 5- and 10-period moving averages of 0.94 and 0.84, respectively.

    NYSE Volume, Breadth Indicators. Volume fell -3.36% to 585.46 million shares, compared to 605.83 million shares the prior day, 0.83x the 703.04 million share 20-day moving average. Market breadth was positive, and up volume led down volume. Advancing stocks led by +1,648 (compared to +1,369 the prior day), or 3.32:1. Up volume was 4.12:1 down volume.

    Distribution day count and market outlook. Since March 13, the market outlook is "uptrend under pressure". On February 7th, with the SPX at 1797.02, the market outlook improved to "confirmed uptrend" after a brief corrective episode that began on January 23rd. The subsequent distribution day count is 3 for the SPX and 7 for the Nasdaq. The SPX's subsequent rise is +4.19%. Today, the SPX opens -0.31% below its March 7th 1878.04 record closing high.

    Libor, LOIS, Currencies, Treasuries, Commodities:

    · USD LIBOR is 0.08850%, compared to 0.08860% the prior day. USD 3-month LIBOR is 0.23485%, up from 0.23445% the prior day, and compares to the January 4, 2013, recent peak of 0.58250%.

    · The US Libor-OIS (LOIS) spread is 14.885 bps, compared to 14.945 bps the prior day, and compares to the recent June 12, 2012, 46.785 bps high. Euribor-OIS is 12.700 bps, down from 13.000 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 -3.615 bps, compared to -3.284 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 1.58%, compared to 1.57% the prior day. Japanese 10-year debt yields are 0.61%, compared to 0.62% the prior day. Spanish 10-year debt yields are 3.30%, compared to 3.30% the prior day. Italian 10-year debt yields are at 3.35%, compared to 3.37% the prior day.

    · U.S. Treasury yields are slightly higher, with 2- and 10-year maturities yielding 0.347% and 2.670%, respectively, compared to 0.347% and 2.672% Tuesday. The yield curve narrowed -0.020 bps, with the 2- to 10-year spread at +2.324%, compared to 2.326% 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 compared to the euro, but weaker compared to the Japanese yen and British pound. The dollar trades at US$79.431, compared to a US$79.521 intraday high and US$79.414 the prior day, and worse compared to its $80.385 50-day, US$80.481 100-day, and US$80.950 200-day averages. The euro trades at US$1.3927, compared to a US$1.3905 intraday low and US$1.3934 the prior day. The euro trades better compared to its US$1.3700 50-day and US$1.3654 100-day averages, and compares to a multi-year low of US$1.1877 on June 7, 2010. In Japan, the dollar trades at ¥101.54, compared to ¥101.44 the prior day. The yen trades better than its 50-day moving average ¥102.64, and better than its January 1st 105.31 closing low, its weakest prior multi-year closing low.

    · Citigroup Economic Surprise Index improved to -33.50, compared to -35.80 the prior day, its 20th consecutive negative reading. The index is worse compared to its respective -33.24 5-day and -31.85 10-day moving averages. The index fell to a 52-week low of -33.26 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 lower energy, lower precious metals, higher aluminum and copper, and mostly higher agriculture prices.

    Volatility, Skew:

    · The CBOE SPX Volatility Index (VIX) fell -7.16% to 14.52, compared to 15.64 at the prior close. The VIX is -1.64% below the 14.76 20-day moving average. Its 30-day high is 20.72. 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 19.66, down -2.24% from 20.11 at the prior day's close. The V2X index trades +3.46% above its 19.00 20-day moving average, -19.3% below the 24.35 30-day high, and +22.9% above the 15.99 30-day low.

    · The Hang Seng volatility index (VHSI) closed at 17.55, down -3.84% from 18.25 at the prior close. The VHSI index trades -1.50% above its 17.82 20-day moving average. Its lowest historical close was 11.72, on June 30, 2005.

    · CBOE SKEW (SKEW) fell -1.90% to 129.37, down from 131.87 the prior session, above a neutral (115-120) range for the first time since last September, but again below 130, a level that correlates well with short-term market tops. The recent record high was 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 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:
     

    • The latest week's MBA mortgage applications fell -1.2%, compared to -2.1% prior.


    Overseas Economic Reporting and News:
     

    • Australia - February MoM Westpac leading index fell -0.1%, compared to -0.1% revised prior.
    • Japan - January MoM all industry activity index rose +1.0%, compared to +1.1% survey and -0.3% revised prior. January final leading index was 113.1, compared to 112.2 prior.
    • Eurozone - January MoM construction output rose +1.5%, compared to +1.3% revised prior. YoY labor costs rose +1.4%, compared to +1.1% prior.
    • United Kingdom - January ILO 3 month ILO unemployment was 7.2%, compared to 7.2% survey and prior.


    Company Ratings/News:
     

    • None.


    Tuesday's Trade. On lower and below average NYSE volume, U.S. equity indexes ended with modest gains and are again approaching record highs. The SPX, DJI, Nasdaq, and NYSE composite rose +0.72%, +0.55%, +1.25%, and +0.62%, respectively. Both the SPX and Nasdaq are higher this year.

    On March 13th, the U.S. equity market outlook worsened to "uptrend under pressure", despite the past two days' gains. 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 +4.19% above the February 7th 1797.02 close and -0.32% below the recent March 7, 2014 record close.

    Market breadth was positive, with gainers +3.32x losing stocks. Most SPX market segments closed higher. Leaders were technology, health care, and oil and gas, which rose at least +0.78%. Financials rose +0.55%. Laggards were consumer goods and consumer services, which rose at least +0.24%, and utilities, which fell -0.13%.

    NYSE volume fell -3.36% to 585.46 million shares, compared to 605.83 million shares the prior day, 0.83x the 703.04 million share 20-day moving average volume. On the day, bond markets strengthened. The U.S. 10-year yield opened at 2.6939%, eased to a mid-session 2.6597% intraday low, then rebounded to 2.6925 through most of the afternoon. The index ended at 2.6722%, -1.99 bps compared to the 2.6921% prior close.

    From its prior day 1858.83 close, SPX futures signaled a moderately higher open. The index opened modestly higher, but generally improved through the session to a late 1873.76 intraday high. The index ended at 1872.25, -0.31% below its March 7th record close. The index closed +74.2% above the 1074.77 October 4, 2011, intraday low.

    The DJ Transportation index (TRAN) rose +0.53%, compared to DJI's +0.55% gain. From its prior 7,542.40, the TRAN gapped higher to open above 7,550 and set a mid-morning 7,614.02 intraday high, then eased to 7,582, and then traded narrowly through the close with resistance at 7,600. The index closed at 7,582.43, -0.13% below its recent 7,592.36 March 7 record close. Volume fell -0.18% to 9.503 million shares, compared to 11.600 million shares the prior session, and 0.78x the 15-day moving average volume. The TRAN closed +2.13% and +3.11% above its respective 20- and 50-day moving averages, and +4.50% and +10.6% above its respective 100- and 200-day moving averages.

    Market volatility fell -7.16%, as the CBOE SPX volatility index (VIX) closed at 14.52, compared to 15.64 at the prior close. The VIX opened at 15.40 and fell by mid-morning to 14.20, which proved support through the session's remainder. 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 improved. All indexes recaptured their 10-day moving averages. All exchanges closed above their 5-, 10-, 20-, 50-, 100-, and 200-day moving averages. SPX relative strength (RSI) rose to 59.62, compared to 55.17 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 -1.90% to 129.37, compared to 131.87 the prior session, 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 HYSE composite are up +1.69%, +1.68%, +2.07%, and +1.52%, respectively. Last week, the SPX, DJI, Nasdaq, NYSE composite closed down -1.97%, -2.35%, -2.09%, and -2.16%, respectively. In March, the SPX, DJI, and Nasdaq are up +0.69%, +0.09%, +0.58%, and +0.15%, 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 SPX, Nasdaq, and NYSE composite are up +1.29%, 3.75%, and +0.40%, respectively, while the DJI is down -1.45%. 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 70.77, up +0.51% from 70.41 at the prior day's close, its 2nd consecutive close above 70.00. The index trended higher through the session and ended at its intraday high. Volume rose +1.55% to 39.327 million shares, compared to 38.727 million shares the prior day, and 1.25x the 49.225 million share 15-day moving average.

    Large cap banks equaled the performance of the regional banks, as the KBW regional banking index (KRX) rose +0.51%.

    This week, the BKX is up +2.15%, compared to a loss of -2.89% last week and a gain of +3.36% the prior week. In March, the BKX is up +2.554%. In February, the BKX closed up +2.41%, compared to January, when the BKX closed down -1.07%. In 2014, the BKX is up +2.18%. In 2013, the BKX rose +35.1%, better than the SPX's +29.6% rise.

    The BKX is now +19.6% 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 +117.3% 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 +74.2% in the same period.

    The BKX index closed -41.5% below its February 20, 2007, record 121.06 high. The BKX is up +280.1% from its 18.62 March 6, 2009, closing low.

    Technical indicators were little changed. The index closed +1.88%, +2.33%, +4.16%, and +7.70% above its respective 20-, 50-, 100-, and 200-day moving averages. The 20-day moving average rose +10 bps to 69.46. The 69.16 50-day moving average rose +3 bps. Its 100-day moving average rose +5 bps to 67.94, and the 200-day moving average rose +4 bps to 65.71. The 20-day closed (by +0.31 points) above the 50-day, and the gap widened +8 bps. The 50-day moving average closed (by +3.45 points) above the 200-day moving average, and the gap narrowed -2 bps. The 100-day moving average closed (by +2.23 points) above the 200-day moving average, and the gap widened +1 bp.

    The directional movement indicator widened to +11.360, compared to +9.576 the prior day, its 12th consecutive positive reading. Relative strength rose to 59.21, compared to 57.11 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 70.89; next support is 70.53.

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