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Gary Townsend - Founding partner 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 Up Small As Major Indexes Close At Multi-Year Highs, Financials Power Ahead 0 comments
    Mar 16, 2012 8:59 AM | about stocks: BLK, MS, STT, BK, NTRS, SNV
    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. Technical indicators are positive. All major indices are above their respective 20-, 50-, 100-, and 200-day moving averages. The SPX is in bull market territory, closing Wednesday up +30.5% above the 1074.77 October 4th intraday low. Financial stocks have outperformed, up 51.8% in the same period.

    In Asia, equity markets closed mixed, with greater strength in Shanghai, which reversed and rallied strongly into the close. In Europe, stock exchanges are higher and trade near their intraday highs. The dollar is mixed against the euro, pound, and Japanese yen. U.S. options markets suggest a neutral short-term outlook. Commodities prices are mixed. U.S. Treasury yields are higher, with the 10-year at 2.326%, up from 2.279% the prior day. U.S. repo rates are at 21 bps.

    The ECB's bank LTRO lending facilities are credited with easing interbank lending and associated liquidity problems. Overnight and 3-month LIBO and Euribor-OIS spreads are trending lower. The 3-month Euro basis swap fell to its best level since early August and less than half its worst level of late December.

    After a fair value adjustment of +1.05 points, June SPX equity futures are at 1398.50, up +1.45 points. The SPX opens at 1402.60, a new multi-year high, and +2.46% and +4.85% above its respective 20- and 50-day moving averages, and +8.88% and +11.3% above its respective 100- and 200-day moving averages. Next resistance is at 1405.89. First support is at 1396.04.

    Thursday. Equity markets closed moderately higher and major indexes closed at or near their intraday highs. After lagging in recent days, the NYSE composite led with a gain of +0.75%, followed by the SPX, Nasdaq, and DJI, with rose +0.60%, +0.51%, and +0.44%, respectively. Market breadth was negative. NYSE volume fell -5.94% to 1.07x the 50-day moving average. Most market segments closed higher. Leaders were financials, industrials, and basic materials, which closed up at least +0.90%. Laggards were health care and oil and gas, which closed up at least +0.08%, and utilities, which closed off -0.05%.

    DJ transports outperformed, rising +3.27% to closed at 5349.74, after rising intraday to a new multi-year high of 5374.84. The index closed +3.44% and +2.56% above its 20- and 50-day moving averages. The TRAN closed -0.36% below its February 3rd 5,368.93 closing high and has not confirmed subsequent DJI new highs.

    Technical factors are positive. All major exchanges closed above their respective 20-, 50-, 100-, and 200-day moving averages. Volatility rose +0.72%, but remains low with the VIX closing at 15.42, up from 15.31 the prior day. The CBOE put/call skew spiked 14.9% to 136.51, from 118.82 the prior session. Spikes above 130 correlate well with short-term market tops, though the March 12th spike to 139.25 produced no pullback. From its prior 1395.95 close, the SPX opened higher and rose in early trading to its 1399.42 intraday high. Unable to move through 1400, the index sold off modestly to 1394 through mid-day, then rallied after the European close at 12:30 back to 1398. Weakness returned through most of the afternoon. In the final hour, the SPX successfully tested support at 1390 and rallied to close with a modest loss.

    Trading desks reported that financials dominated the trade on heavy, but slower volume. Outside that sector, trading was light. Outside equities, Treasuries traded in a more benign manner than in the prior two days. Commodities, principally petroleum, were roiled by reports, later denied, that the U.S. and United Kingdom had agreed to release strategic petroleum reserves. Short selling remains subdued.

    Immediate support is 1396, then 1372 (the February high), 1369 (the 20-day moving average), 1356 (a -23.6% Fibonacci retracement from December 19th), 1338 (50-day moving average), 1327 (a -38.2% Fibonacci retrace), and then 1297 (the January 12th high), and 1293 (the October 27th high). Immediate resistance is 1406, followed by 1409 and 1419.

    The distribution day count is 3 on the DJI, 4 on the SPX and Nasdaq, and 5 on the NYSE composite. The BKX count is 6.

    In Asia, indexes opened higher, reversed lower, and closed mixed, with greater strength in Shanghai. Volumes were also mixed. Commentary focused on the weakening yen and speculation that Chinese authorities will maintain curbs on property prices. In Japan, the NKY closed up +0.06% on a -8.22% decrease in volume. In China, the HSI closed down -0.17% on a +16.4% increase in volume. The SHCOMP closed up +1.30% on a -14.5% decrease in volume. In 2012, the indexes are up +19.8%, +15.6%, and +9.34%, respectively.

    In Japan, the NKY closed at 10,129.83, up from 10,123.28 the prior day. The index opened slightly lower and trended lower to a mid-morning intraday low of 10,090.09, when the index reversed and rallied within an hour to the 10,148.47 intraday high. Before mid-day, however, the index reversed again and successfully retested support at 10,100. The index the reversed again, rallied modestly through the afternoon, and ended with a small gain. The index closed +4.29% and +10.8% above its respective 20- and 50-day moving averages. Market segments closed mixed. Leaders were technology, oil and gas, and basic materials which closed up at least +0.43%. Financials fell -0.06%. Consumer goods, consumer services, and telecommunications lagged and closed down at least -0.19%.

    In China, the Hang Seng closed at 21,317.85, down from 21,353.53 at the prior close. The index opened lower, but reversed and traded to a mid-morning intraday high of 21,438.62, then reversed again to a mid-day intraday low of 21,253.39. The index rallied back to breakeven twice in the afternoon, but settle lower late in the session. The index closed +0.09% and +3.82% above its 20- and 50-day moving averages. Market segments closed mixed. Leaders were technology, industrials, and utilities, which rose at least +0.18%. Financials fell -0.31%. Laggards were oil and gas, consumer services, and telecommunications, which lost at least -0.49%. In Shanghai, the SHCOMP closed at 2,404.74, up from 2,373.77 at the prior close. The SHCOMP traded higher through the morning session, but reversed to an intraday low of 2,368.66 by early afternoon. The index reversed again and rallied through the afternoon to close just off it 2,405.69 intraday high. All market segments closed at least +0.60% higher. Leaders were consumer goods, health care, and consumer services, which gained at least +2.29%. Laggards were telecommunications, oil and gas, and financials.

    In Europe, equities are higher and trade near their intraday highs. Commentary focuses on conflicting reports that the U.S. and United Kingdom will coordinate efforts to dampen oil price increases, perhaps through the release of strategic petroleum reserves. The Euro Stoxx 50, FTSE 100, and DAX are up +0.51%, +0.50%, and +0.64%, respectively. All are above their respective 20-day, 50-day, 100-, and 200-day moving averages. Compared to the prior day's 2,593.97 close, the Euro Stoxx 50 trades at 2,606.44, compared to the 2,607.37 intraday high. The index is +3.03% and +5.38% above its respective 20- and 50-day moving averages. Most market segments are higher. Leaders are industrials, financials, and technology, which are up at least +0.81%. Laggards are oil and gas and telecommunications, up at least +0.02%, and health care, off -0.07%.

    Libor, LOIS, Currencies, Treasuries, Commodities:
     

    • USD LIBOR rose to 0.14850%, up from 0.14670% the prior day, but down from the December 30th 0.15400% high. USD 3-month LIBOR is 0.47365%, unchanged from 0.47375% the prior day and down from the January 4th peak of 0.58250%.
    • The US Libor-OIS (LOIS) spread fell to 34.22 bps, from 33.87 bps the prior day, and compares to the recent January 6th high of 50.05 bps. Euribor-OIS fell to 49.35 bps from 50.90 bps the prior day and the 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 improved to -57.50 bps, up from -58.00 bps the prior day, at their best levels since August 1st, and up from a trough of -147.00 bps on December 14th.
    • The U.S. government overnight repo rate is 21 bps, compared to an August 2nd high of 33 bps.
    • U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.386% and 2.326%, respectively, compared to 0.367% and 2.279% Thursday. The yield curve widened to +1.960%, from +1.917% 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 +2.77% on April 8, 2011.
    • The U.S. dollar is slightly stronger against the euro, British pound, and Japanese yen. The dollar trades at US$80.309, compared to a US$80.420 intraday high and US$80.150 at the prior day's close, and worse compared to its US$79.612 50-day, US$79.206 100-day, and US$77.154 200-day averages. The euro trades at US$1.3074, compared to an intraday low of US$1.3049 and compares to a close of US$1.3080 the prior day. The euro trades worse than its US$1.3108 50- and US$1.3212 100-day averages. In Japan, the dollar trades at ¥83.73, compared to ¥83.57 the day prior. The yen trades worse than its 50-day moving average ¥78.91.
    • Commodities prices are mixed, with higher energy, lower precious metals, higher aluminum and copper, and mixed agriculture prices.

    Volatility, Skew:
    • The VIX ended at 15.42, up +0.72% from 15.31 at the prior close. The VIX is -12.1% below its 17.54 20-day moving average.
    • The Euro Stoxx 50 volatility index (V2X) is down -8.84% to 17.64, compared to 19.35 at the prior day's close. The V2X index trades -25.6% below its 23.70 20-day moving average, -39.3% below the 29.07 30-day high, and +1.09% above the 17.45 30-day low.
    • The Hang Seng volatility index (VHSI) closed at 19.77, down -2.47% from 20.27 the prior day. The VHSI index trades -10.6% below its 22.11 20-day moving average.
    • CBOE skew rose +14.9% to 136.51 from 118.82 at the prior day's close, well above a neutral (115-120) range. Spikes in excess of 130 correlate well with short-term market tops. 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.

    U.S. news and economic reporting:

    · February consumer prices rose 0.4%, compared to survey +0.4% and prior +0.2%. Ex food and energy, CPI rose +0.1%, compared to +0.2% survey and prior.

    · At 9:15, Industrial production is expected to rise +0.4% in February, compared to 0.0% in January.

    · Capacity utilization is expected at 78.8%, compared to 78.5% in January.

    Overseas News. Today, India's finance minister set a fiscal deficit target of -5.1% of GDP for the 2012 fiscal year beginning in April. Today, North Korea said it planned to test launch a long range rocket from a northwest coast facility, a move which would violate international sanctions.

    Company News.

    · BLK - downgraded to neutral at Deutsche Bank, $210 price target

    · MS - downgraded to neutral at Deutsche Bank, $22 price target

    · STT - reinstated at buy at BofA/ML, $54 price target

    · BK - reinstated at neutral at BofA/ML, $27 price target

    · NTRS - reinstated at neutral at BofA/ML, $49 price target

    · SNV - downgraded to neutral at Credit Suisse, $2.25 price target

    4Q2011 Earnings. The fourth quarter's earnings reports have so far exceeded expectations. Of the 474 S&P500 companies that reported earnings to date, 68% (320 out of 474) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat EPS expectations by an average of +3.2% (versus a historical average of +2%). EPS is up +4.9% over the prior year. Though challenged in the current operating environment, 73% of companies reported increased revenues over the prior year and 56% 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 13.4x estimated 2012 earnings ($104.29) and 11.9x estimated 2013 earnings ($117.94), compared to 13.4x and 11.8 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 -4.1%, and +0.1%, respectively. Analysts expect 2012 and 2013 earnings to exceed 2011 earnings ($94.97) by +9.8% and +24.2%, respectively.

    Large-cap banks trade at a median 1.42x tangible book value, and 11.8x and 10.0x 2012and 2013 consensus earnings, respectively, compared to 1.38x tangible book value and 11.6x/9.7x 2012/2013 earnings yesterday. These compare to the 10-year average median multiples of 3.08x tangible book value and 15.9x earnings. In 2012, analysts expect the BKX to earn $4.30 per share, compared to $4.30 and $2.96 in 2011 and 2010, a +0.1% and +45.4% increase, respectively.

    Options. Options markets are mixed. Composite options markets are bullish, index options markets are neutral, and equity options markets are bearish. The composite put/call ratio closed at 0.69, compared to 0.82 the prior day and below its 5- and 10-period moving averages of 0.86 and 0.91 respectively. The index put/call ratio closed at 0.89, compared to 1.09 the prior day, and below the 5- and 10-period moving averages of 1.24 and 1.29, respectively. The equity put/call ratio closed the day at 0.53, compared to 0.59 the prior day, below its 5- and 10-period moving averages of 0.61 and 0.64, respectively.

    Price Exhaustion/Trend Reversal. On a daily timeframe, technical price exhaustion metrics show the SPX and S&P futures began reaching potential upward price exhaustion levels as early as January 18th, the first such signals since April, and repeatedly through February with the most recent reading on February 21st. Intra-day timeframes of 120- and 60-minute intervals show the SPX and BKX reached multiple levels of potential price exhaustion in January and February with the most recent indicator coming on March 14th and 15th.

    NYSE Indicators. Volume fell -1.03% to 844.45 million shares, 1.06x the 50-day moving average, from 853.21 million shares Wednesday. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by +579 (compared to -1,436 the prior day), or 1.47:1. Up volume led down volume by 3.39:1.

    SPX. On lower volume, the SPX rose +8.32 points, or +0.60%, to 1402.60, the 41st straight close above 1300 and the first close above 1400 since June 5, 2008. Volume fell -2.35% to 662.68 million shares, down from 678.61 million shares Wednesday but above the 619.65 million share 50-day moving average. For the 58th consecutive day, the SPX closed above its 50-day moving average (1337.78) and remained above its 200-day moving average (1260.60) for the 54th time in the past 55 sessions. The SPX closed above its 200-week moving average (1132.95) for the 109th straight session.

    From its prior close at 1394.28, the SPX opened higher to 1396, fell into negative territory by 9:40 and set the intra-day low of 1392.78 at 9:45, the rallied strongly through 12:45. By 12:15, the index breached the 1400 level, but momentum paused when the index hit 1402 at 12:45. Gains retraced back to 1400 and the index traded sideways at the 1400-1402 level through the close to finish just below the 3:35 intra-day high of 1402.63.

    Technical indicators are positive. The SPX closed above 1200 for the 73rd straight session, above 1300 for the 41st session, and above 1400 for the first time since June 5, 2008. 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 average has troughed and is increasing. The 50-day moving average climbed above the 200-day moving average on January 31st, having been below that average since August 11th. For the sixth straight session, the SPX closed (by +2.46%) above its 20-day moving average. The index closed (by +4.85%)above its 50-day moving average for the 59th straight session. The index closed (by +8.88%) above its 100-day moving average (1288.17) for the 73rd straight session. The SPX closed +11.26% above its 200-day moving average for the 54th time in the past 55 sessions. All moving averages increased. The directional momentum indicator is positive for the sixth straight session, and the trend is strong and steady. Relative strength rose to 71.09 from 68.63, an overbought range. Next resistance is at 1405.89; next support is at 1396.04.

    BKX. On lower (but well above average) volume, the KBW bank index rose +1.31 points, or +2.72%, to 49.42, its 50th straight close above 40 and its highest close since May 31, 2011. Volume fell -13.44% to 123.15 million shares, down from 142.27 million shares Wednesday but above the 79.71 million share 50-day average. The BKX closed +14.98% above its August 30, 2010, closing low of 42.98, the trough of the 2010's correction, but -14.72% and -11.16% 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 best performing sector, and large-cap banks outperformed regional banks. From its prior close of 48.11, the BKX opened at 48.30, fell into negative territory at 9:40 and set the intra-day low of 47.90 then, but rallied strongly through 12:45 to set the intra-day high of 49.54. The index maintained those gains through the close and finished just below the intra-day high.

    Technical indicators are positive. On a percentage basis, bank stocks have outperformed the broader market's rebound from the October lows, rising +51.78% from the 32.56 October 4th intra-day low compared to a +30.60% rebound in the SPX. However, the BKX is still -11.2% below its 2011 high, compared to the SPX which is +2.9% above its 2011 peak. On February 22nd, the 50-day moving average crossed above the 200-day moving average for the first time in 176 sessions, or since June 15th. Moving average alignment is mostly positive. Only the 100-day moving average (41.46) is below the 200-day moving average (41.62), though a bullish cross should occur next week. The 20-day (45.66) is above all moving averages and the 50-day (44.32) is above the 100- and 200-day moving averages. For the 54th time in the past 55 sessions, the 20-day closed (by +1.33 points) above the 50-day, and the gap expanded. The 50-day moving average closed (by +2.70 points) above the 200-day moving average for the 18th straight session, and the gap widened. The 100-day moving average closed (by -0.17 points) below the 200-day moving average for the 170th straight session, but the gap is narrowing. The BKX closed +8.25% above its 20-day moving average for the sixth straight session. The index closed (by +11.50%) above its 50-day moving average for the 57th straight session. The index closed (by +19.21%) above the 100-day moving average for the 58th straight session. The index closed (by +18.74%) above its 200-day moving average for the 40th time in 41 sessions. The index closed below 50.0 for the 199th straight session but above 40.0 for the 51st straight session. The directional movement indicator is positive for the fifth straight session, and the trend is weak. Relative strength rose to 72.96 from 68.59, an overbought range and the highest level since January 5, 2011. Next resistance is 50.01; next support at 48.37.

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