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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 Follow European PMIs Lower 0 comments
    Mar 22, 2012 8:59 AM | about stocks: NLY, DFS
    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 and continue to improve as the BKX 100-day moving average crossed above it 200-day moving average for the first time since last July. 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 +53.3% in the same period.

    In Asia, equities ended mixed, with better strength in Japan. In China, equity markets closed mixed. Commentary focused on stronger than expected Japanese trade, but weak Chinese PMI, which sparked speculation for immediate policy ease. In Europe, where German and French PMIs disappointed, stock exchanges are moderately lower, and near their intraday lows. The dollar is mixed against the euro, pound, and Japanese yen. U.S. options markets suggest a neutral to bearish short-term outlook. Commodities prices are lower. U.S. Treasury yields are lower, with the 10-year at 2.260%, down from 2.296% the prior day. U.S. repo rates are at 13 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 have stabilized in recent weeks lower levels than in December, when Eurozone solvency concerns were at their peak. The 3-month Euro basis swap is at its best level since early August and a third of its worst level of late December.

    After a fair value adjustment of -0.21 points, June SPX equity futures are at 1391.00, down -6.29 points. The SPX opens at 1402.89, +1.80% and +4.08% above its respective 20- and 50-day moving averages, and +8.35% and +11.1% above its respective 100- and 200-day moving averages. Next resistance is at 1406.88. First support is at 1399.77.

    Wednesday. Equity markets closed mixed on mixed volume. The Nasdaq rose +0.04%, but the SPX, NYSE composite, and DJI, fell -0.19%, -0.27%, and -0.35%, respectively. NYSE volume rose +2.16% to 0.90x the 50-day moving average. Market breadth was modestly negative. Treasuries strengthened through most of the session. Segments ended mixed. Leaders were telecommunication, consumer goods, and consumer services, which ended up at least +0.10%. Laggards were utilities, financials, and oil and gas, which closed at least -0.15% lower.

    DJ transports outperformed the industrials, rising +0.82% to close at 5331.81, up from 5288.48 the prior day, and -0.69% off the 5,368.93 February 3rd closing high. The index closed +2.56% and +1.82% above its 20- and 50-day moving averages. The TRAN has not confirmed multiple DJI new highs subsequent to February 3rd.

    Technical factors are generally positive. All major exchanges closed above their respective 20-, 50-, 100-, and 200-day moving averages. Volatility fell -2.89%, and the VIX closed at 15.13, down from 15.58 the prior day. The CBOE put/call skew fell to 124.60, down from 128.02 the prior session, but still well in excess of a neutral range.

    From its prior 1405.52 close, the SPX moved moderately lower to a mid-morning intraday low of 1400.64, where it found support and reversed back to a modest mid-day gain. The index traded near breakeven through most of the afternoon, but sold off in the final minutes to close at 1402.89. For the first time in several trading days, financials were among the laggards, though losses were modest.

    Trading desks reported a quiet day without much conviction in either direction. Traders took note of some strength in the Russell 2000, which rose +0.68% on the day, and transports, which outperformed industrials. Also noted was the late day weakness, which contrasts with recent market behavior. Traders report a persistent bid as investors continue to accumulate shares, especially on weakness. The shift to financial stocks strikes some as tactical and temporary rather than secular and permanent. Performance anxiety is a factor close to quarter-end, motivating some trading and share accumulation, especially in the best performing market segments. Treasuries and currencies are noteworthy, too, for a lack of direction.

    Immediate support is 1399, then 1378 (the 20-day moving average), 1372 (the February high), 1363 (a -23.6% Fibonacci retracement from December 19th), 1348 (50-day moving average), 1334 (a -38.2% Fibonacci retrace), and then 1297 (the January 12th high), and 1293 (the October 27th high). Immediate resistance is 1407, followed by 1411 and 1418.


    Yesterday, the NYSE composite suffered a distribution, but its February 14th distribution grew stale, leaving its count at 5. The distribution day count was unchanged at 3 on the DJI, and 4 on the SPX and Nasdaq. The BKX count fell to 4 as its February 14th distribution grew stale.

    In Asia, indexes closed mixed, with better strength in Japan. Volumes declined. Commentary focused on an unexpected Japanese trade surplus, and weak Chinese PMI, which fueled speculation that the monetary and fiscal policies must be soon eased. In Japan, the NKY closed up +0.40%. Volume fell -1.94%. In China, the HSI closed up +0.22% on a -22.5% decrease in volume. The SHCOMP closed down -0.10% on a -17.4% decrease in volume. In 2012, the indexes are up +19.8%, and +13.4%, and +8.02%, respectively.

    In Japan, the NKY closed at 10,127.08, up from 10,086.49 at the prior close. The index opened lower below 10,060, but rallied strongly through the morning session to an intraday high 10,136.85. Trading weakened in the afternoon, with the index retesting support at 10,070 before rallying strongly again into the close. The index closed +3.18% and +9.51% above its respective 20- and 50-day moving averages. Most market segments closed higher. Leaders were telecommunications, utilities, and oil and gas, which rose at least +1.05%. Laggards were financials, basic materials, and industrials, which closed down at least -0.10%.

    In China, the Hang Seng closed at 20,901.56, up from 20,856.63 at the prior close. The index opened modestly higher and set a mid-morning intraday high of 20,978.49, but sold back to test support at 20,800 on weak PMI news. In early afternoon, the index rallied back to 20,950 but traded around 20,900 through most of the afternoon to close modestly higher. The HSI closed -1.46% below its 20-day moving average, but remains +0.89% above its 50-day moving average. Most market segments closed higher. Leaders were technology, consumer goods, and utilities, which closed up at least +0.54%. Financials rose +0.10%. Laggards were basic materials, industrials, and oil and gas, which closed down at least -0.12%.

    In Shanghai, the SHCOMP closed at 2,375.77, down from 2,378.20 at the prior close. The SHCOMP opened slightly higher, but lost ground through most of the morning session to an intraday low of 2,364.32 before rallying in early afternoon to an intraday high of 2,385.95. The index struggled to hold its gains, and sold back to 2,370 before rallying again to narrow its losses. The index closed -1.83% below its 20-day moving average, but +1.10% above its 50-day moving average. Most market segments closed lower. Leaders were telecommunications, financials, and utilities, which rose at least +0.02%. Laggards were oil and gas, consumer services, and basic materials, which lost at least -0.62%.

    In Europe, equities have sold off and trade near their intraday lows. Commentary focuses on weak German and French manufacturing PMIs, which add to China's weak print and focus concerns on economic growth. Irish 4Q2011 GDP fell -0.20%, compared to and expected expansion of +1.0%. The Euro Stoxx 50, FTSE 100, and DAX are down -1.55%, -0.94%, and -1.41%, respectively. The Euro Stoxx50 trades below its 20-day moving average. The FTSE 100 trades below both its 20- and 50-day moving averages. The DAX remains above its 20-, 50-, 100-, and 200-day moving averages. Compared to the prior day's 2,567.58 close, the Euro Stoxx 50 trades at 2,527.90, compared to the 2,519.45 intraday low. The index is -0.41% below and +1.43% above its respective 20- and 50-day moving averages. All market segments are at least -0.60% lower. Leaders are consumer goods, health care, and consumer services, which are down at least -0.60%. Laggards are oil and gas, financials, and industrials, which are down at least -1.95%.

    Libor, LOIS, Currencies, Treasuries, Commodities:

    • USD LIBOR rose to 0.15250%, up from 0.15150% the prior day, rising from a low of 0.13850% on March 1st, but down from the December 30th 0.15400% high. USD 3-month LIBOR is 0.47415%, unchanged from 0.47415% the prior day, but down from the January 4th peak of 0.58250%.
    • The US Libor-OIS (LOIS) spread fell to 33.22 bps, from 33.67 bps the prior day, and compares to the recent January 6th high of 50.05 bps. Euribor-OIS fell to 45.55 bps from 46.60 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 -53.000 bps, up from -53.750 bps the prior day, at their best levels since August 1st, and up from a trough of -147.00 bps on December 14th. A normal range is between 25 bps and 50 bps.
    • The U.S. government overnight repo rate is 13 bps, compared to an August 2nd high of 33 bps.
    • U.S. Treasury yields are lower, with 2- and 10-year maturities yielding 0.363% and 2.260%, respectively, compared to 0.367% and 2.296% Tuesday. The yield curve narrowed to +1.897%, from +1.929% 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 mixed, slightly stronger against the euro, British pound, but weaker against the Japanese yen. The dollar trades at US$79.831, compared to a US$79.934 intraday high and US$79.657 at the prior day, and mixed compared to its US$79.499 50-day, US$79.371 100-day, and US$77.536 200-day averages. The euro trades at US$1.3161, compared to an intraday low of US$1.3134 and compares to a close of US$1.3216 the prior day. The euro trades better than its US$1.3146 50-day average, but worse than its US$1.3190 100-day average. In Japan, the dollar trades at ¥82.88, compared to ¥83.41 the day prior. The yen trades worse than its 50-day moving average ¥79.42.
    • Commodities prices are lower, with lower energy, precious metals, mixed aluminum and copper, and lower agriculture prices.

    Volatility, Skew:
    • The VIX ended at 15.13, down -2.89% from 15.58 at the prior close. The VIX is -10.4% below its 16.88 20-day moving average.
    • The Euro Stoxx 50 volatility index (V2X) is up +11.2% to 22.26, compared to 20.03 at the prior day's close. The V2X index trades -1.82% below its 22.67 20-day moving average, -23.4% below the 29.07 30-day high, and +28.9% above the 17.26 30-day low.
    • The Hang Seng volatility index (VHSI) closed at 20.50, down -1.73% from 20.86 the prior day. The VHSI index trades -5.36% below its 21.66 20-day moving average.
    • CBOE skew fell -2.67% to 124.60 from 128.02 at the prior day's close, well above a neutral (115-120) range. Spikes in excess of 130 (as on March 12, 15, and 16) 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:

    · For the week ending March 17th, initial jobless claims were 348K, compared to 350K survey and 353K revised prior.

    · Continuing claims for the week ending March 10th were 3352K, compared to 3380K survey and 3361K revised prior.

    Overseas News. In March, China's preliminary Purchasing Managers Index (PMI) fell to 48.1 from 49.6 in February, below the 50.0 expansionary threshold and the fifth straight monthly decline. Preliminary March composite, services, and manufacturing PMIs for the Eurozone, France, and Germany all missed expectations, with the Eurozone composite, Eurozone services, Eurozone manufacturing, France manufacturing, and German manufacturing PMIs all recording sub 50.0 levels. In the fourth quarter, Ireland's GDP contracted by -0.2% over the prior quarter compared to estimates for +1.0% growth.

    Company News:

    · NLY - downgraded to underperform at Sterne Agee

    · DFS - reported 1Q12 EPS of $1.18 compared to $0.94 estimates

    4Q2011 Earnings. The fourth quarter's earnings reports have so far exceeded expectations. Of the 482 S&P500 companies that reported earnings to date, 68% (324 out of 482) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat EPS expectations by an average of +3.3% (versus a historical average of +2%). EPS is up +5.1% 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 ($104.33) and 11.9x estimated 2013 earnings ($117.94), compared to 13.5x and 11.9 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 -4.0%, 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 1.43x tangible book value, and 11.7x and 10.0x 2012and 2013 consensus earnings, respectively, compared to 1.43x tangible book value and 11.8x/10.0x 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 neutral to bearish. Composite options markets are neutral, index options markets are neutral, and equity options markets are bearish. The composite put/call ratio closed at 0.98, compared to 0.86 the prior day and above its 5- and 10-period moving averages of 0.83 and 0.87 respectively. The index put/call ratio closed at 1.39, compared to 1.31 the prior day, and above the 5- and 10-period moving averages of 1.24 and 1.24, respectively. The equity put/call ratio closed the day at 0.56, compared to 0.54 the prior day, in between its 5- and 10-period moving averages of 0.53 and 0.58, 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 on both indices and March 16th and 21st on the BKX. 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 rose +2.16% to 726.47 million shares, 0.90x the 50-day moving average, from 711.14 million Tuesday. Market breadth was slightly negative, and up volume lagged down volume. Advancing stocks lagged decliners by -32 (compared to -1,018 the prior day), or 0.98:1. Up volume lagged down volume by 0.80:1.

    SPX. On higher volume, the SPX fell -2.63 points, or -0.19%, to 1402.89, the 45th straight close above 1300 and the fifth straight close above 1400. Volume rose +4.53% to 569.46 million shares, up from 544.78 million shares Tuesday but below the 630.85 million share 50-day moving average. For the 62nd consecutive day, the SPX closed above its 50-day moving average (1347.89) and remained above its 200-day moving average (1262.64) for the 58th time in the past 59 sessions. The SPX closed above its 200-week moving average (1132.82) for the 113th straight session.

    From its prior close at 1405.52, the SPX opened flat, rose to the intra-day high of 1407.75 at 9:45, then sank into negative territory by 9:50 and reached the intra-day low of 1400.64 at 11:00. Through 12:45, the index rallied back to break-even and fluctuated at that level through 3:45. A sell-off into the bell was not bought, and the index finished with a modest loss and at the lower end of the day's mixed range.

    Technical indicators are positive. The SPX closed above 1200 for the 77th straight session, above 1300 for the 45th session, and above 1400 for the fifth straight session. The 50-day moving average crossed above the 100-day moving average on December 6th, having been below that average since July 11th. After peaking on June 6th at 1317.97, the 100-day moving average crossed below the 200-day average on September 7th. On December 22nd, the 100-day set a low at 1202.28, and began an upward trend. The 200-day moving 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 10th straight session, the SPX closed (by +1.80%) above its 20-day moving average (1378.09). The index closed (by +4.08%)above its 50-day moving average for the 63rd straight session. The index closed (by +8.35%) above its 100-day moving average (1294.76) for the 77th straight session. The SPX closed +11.11% above its 200-day moving average for the 58th time in the past 59 sessions. All moving averages increased. The directional momentum indicator is positive for the 10th straight session, and the trend is strong and increasing. Relative strength fell to 67.91 from 69.92, the high end of an neutral range. Next resistance is at 1406.88; next support is at 1399.77.

    BKX. On lower volume, the KBW bank index fell -0.28 points, or -0.56%, to 49.90, its 53rd straight close above 40. Volume fell -6.45% to 82.39 million shares, down from 88.07 million shares Tuesday but above the 83.31 million share 50-day average. The BKX closed +16.10% above its August 30, 2010, closing low of 42.98, the trough of the 2010's correction, but -13.89% and -10.30% below its April 23, 2010 (the post-2008 high point), and February 14, 2011 (the most recent high point) respective closes.

    Financials underperformed the market, and large-cap banks underperformed regional banks. From its prior close of 50.18, the BKX opened higher at 50.44, setting the intra-day high. By 9:55, gains retraced to break-even and the index sold off further, reaching 49.82 by 10:05. At 10:15, a relief rally nearly back to the prior day's close was sold, and the index fell to the intra-day low of 49.76 at 11:00. Through 12:15, the BKX rebounded slightly to 50.08 and fluctuated at the 50.0 level through the close. A small dip at the bell closed the index below that level and left the index at the lower end of the day's mostly negative range.

    Technical indicators are positive. On a percentage basis, bank stocks have outperformed the broader market's rebound from the October lows, rising +53.26% from the 32.56 October 4th intra-day low compared to a +30.62% rebound in the SPX. However, the BKX is still -10.3% below its 2011 high, compared to the SPX which is +2.9% above its 2011 peak. Moving average alignment is fully bullish, as shorter term moving averages are above longer term moving averages and are increasing more rapidly. On February 22nd, the 50-day moving average crossed above the 200-day moving average for the first time since June 15th. On March 20th, the 100-day moving average crossed above the 200-day moving average for the first time since July 18th, 2011. For the 58th time in the past 59 sessions, the 20-day closed (by +1.61 points) above the 50-day, and the gap expanded. The 50-day moving average closed (by +3.33 points) above the 200-day moving average for the 21st straight session, and the gap widened. The 100-day moving average closed (by +0.21 points) above the 200-day moving average for the third straight session, and the gap widened. The BKX closed +7.08% above its 20-day moving average for the 10th straight session. The index closed (by +10.91%) above its 50-day moving average for the 61st straight session. The index closed (by +19.15%) above the 100-day moving average for the 62nd straight session. The index closed (by +19.76%) above its 200-day moving average for the 44th time in 45 sessions. The index closed above 40.0 for the 55th straight session. The directional movement indicator is positive for the ninth straight session, and the trend is moderate and increasing. Relative strength fell to 72.60 from 75.26, an overbought range. Next resistance is 50.31; next support at 49.63.

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