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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 Start New Quarter Flat, Europe Lower 0 comments
    Apr 2, 2012 9:03 AM | about stocks: HBAN
    This morning. The U.S. equity markets begin 2Q2012 with their uptrend under pressure. 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. Most technical indicators remain positive, but recent market distributions suggest growing resistance and greater probability of a market pull-back or correction. All major indices are above their respective 20-, 50-, 100-, and 200-day moving averages. All moving averages are trending higher. Shorter-term averages are above longer term averages. The SPX is in bull market territory, closing Thursday up +31.1% above the 1074.77 October 4th intraday low. Financial stocks have outperformed, up +52.8% in the same period.

    In Asia, despite a better than expected Chinese government March PMI, equities closed modestly lower, which Shanghai closed for a "tomb sweeping" holiday. Hong Kong is closed Wednesday. Commentary focused on speculation regarding prospective Chinese monetary and fiscal policies, with current opinion suggesting no material changes. In Europe, stock exchanges beginning the quarter lower, with modest losses outside France, where a disappointing March PMI has hurt equity prices. PMIs in Germany and the United Kingdom were mixed, with a better UK result. French elections are scheduled for April 22nd, with a May 6th run-off, as required. Also, Greek parliamentary elections are on May 6th. The dollar is lower. U.S. options markets suggest a neutral short-term outlook. Commodities prices are mostly lower. U.S. Treasury yields are lower, with the 10-year at 2.198%, down from 2.209% the prior day. U.S. repo rates are at 17 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. 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 +0.12 points, June SPX equity futures are at 1402.30, down -1.02 points. The SPX opens at 1408.47, +1.26% and +3.34% above its respective 20- and 50-day moving averages, and +7.91% and +11.2% above its respective 100- and 200-day moving averages. Next resistance is at 1412.43. First support is at 1402.96.

    Friday. Markets ended 1Q2012 on a generally positive note, closing mixed with moderate gains on all major indexes save the Nasdaq. Volumes rose solidly. The NYSE composite and DJI rose +0.50%, while the SPX added +0.37% on the day. The Nasdaq lost -0.12%. Equity markets rallied early, but the SPX reversed and sold off to a mid-morning intraday low of 1401.42, then reversed again to reach a mid-afternoon intraday high of 1410.89, before drifting lower into the close. NYSE volume rose +18.2% to 1.19x the 50-day moving average, as portfolio managers closed positions. Market breadth was positive. Most market segments closed higher. Leaders were health care, oil and gas, and consumer goods, which closed up at least +0.56%. Financials rose +0.43%. Laggards were basic materials and telecommunications, which rose at least +0.10%, and technology, which lost -0.35%.

    DJ transports underperformed the industrials, falling -0.06% to close at 5253.16, down from 5256.21 the prior day, and -2.16% off its 5,368.93 February 3rd closing high. The index closed +0.46% and +0.19% above its respective 20- and 50-day moving averages. The TRAN has not confirmed multiple DJI new highs subsequent to February 3rd. The DJI closed -0.31% below its recent high.

    Technical indicators are generally positive. All major exchanges closed above their respective 20-, 50-, 100-, and 200-day moving averages. Volatility rose slightly, as the VIX closed at 15.50, up +0.13% from 15.48 the prior day. The CBOE put/call skew rose +2.70% to 124.97, from 121.69 the prior session, and above a 115-120 neutral range.

    Trading desks reported a continuance of the past two week's lack of direction, as markets await March employment report on Thursday and the start of 2Q2012 earnings. Trading desks noted the narrowing of market breadth over the past two weeks. Sentiment remains skeptical.

    Immediate support is 1403, then 1391 (the 20-day moving average), 1372 (the February high), 1369 (a -23.6% Fibonacci retracement from December 19th), 1363 (50-day moving average), 1339 (a -38.2% Fibonacci retrace), and then 1297 (the January 12th high), and 1293 (the October 27th high). Immediate resistance is 1412, followed by 1416 and 1426.


    There was no change in the distribution day counts of 3 on the Nasdaq, 4 on the DJI and SPX, and 7 on the NYSE composite. The BKX count rose to 5.

    In Asia, equity indexes closed mixed, with a modest gain in Tokyo and similarly modest loss in Hong Kong. Shanghai is closed through Wednesday. Hong Kong is closed Wednesday. Volumes rose in Tokyo, but declined in Hong Kong. Commentary focused on speculation that China will not relax its monetary and fiscal policies, contributing to the market weakness. Also, March Chinese PMI reports were mixed, with the government's report rising to 53.1, compared to 50.8 survey and 51.0 prior, while HSBC's report showed actual of 48.3, down from 49.6 prior. In Japan, the NKY closed up +0.26%. Volume rose +10.6%. In China, the HSI closed down -0.16% on a -43.7% decrease in volume.

    In Japan, the NKY closed at 10,109.87, up from 10,083.56 at the prior close. The index gapped higher to open at the 10,160 level and rallied to a mid-morning intraday high of 10,190.35, but trended lower through the afternoon to end at the day's low. The index closed +1.35% and +6.69% above its respective 20- and 50-day moving averages. Market segments closed mixed. Leaders were financials, industrials, and technology, which rose at least +0.64%. Laggards were consumer services, which rose +0.04%, and basic materials and health care, which lost at least -0.33%.

    In China, the Hang Seng closed at 20,522.26, down from 20,555.58 at the prior close. The index closed -5.34% below its February 29th high. The index opened at 20,662.97, the intraday high, after the stronger than expected manufacturing report. The index reversed lower, and fell to its +20,417.69 intraday low by mid-morning. The index rallied modestly through mid-day and traded within a narrow range through the close, bounded by 20,450 on the downside. Volatility fell -0.64%, and closed under the 20-day moving average. The HSI closed -2.12% and -2.02% below its respective 20- and 50-day moving averages. Most market segments closed lower. Leaders were utilities and financials, which rose at least +0.13%, and technology, which ended unchanged. Laggards were consumer goods, industrials, and telecommunications, which closed off at least -0.76%.

    In Europe, equities have lost early gains and trade moderately lower, after PMI March from France, Germany, and the United Kingdom. French PMI declined, while German and UK PMIs advanced compared to the prior month. UK PMI surprised by rebounding to 52.1, compared to survey 50.7 and 51.5 revised prior. The Euro Stoxx 50, FTSE 100, and DAX are down -0.65%, -0.02%, and -0.04%, respectively. All trade below their respective 20-day moving averages. The Euro Stoxx 50 and FTSE 100 also trade below their 50-day moving averages. Compared to the prior day's 2,477.28 close, the Euro Stoxx 50 trades at 2,457.64, compared to the 2,453.35 intraday low. The index is -2.90% and -2.02% below its respective 20- and 50-day moving averages. Most market segments are lower. Leaders are technology and oil and gas, which are up at least +0.07%, and consumer goods, which id down -0.10%. Laggards are industrials, utilities, and financials, which are down at least -0.92%.

    Libor, LOIS, Currencies, Treasuries, Commodities:

    • USD LIBOR is 0.15000%, down from 0.15250% the prior day, up from a low of 0.13850% on March 1st, but down from the December 30th 0.15400% high. USD 3-month LIBOR is 0.46815%, unchanged from 0.46815% the prior day, and down from the January 4th peak of 0.58250%.
    • The US Libor-OIS (LOIS) spread is 34.31 bps, up from 31.11 bps the prior day, but compares to the recent January 6th high of 50.05 bps. Euribor-OIS fell to 41.00 bps from 41.30 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 is -50.125 bps, up from -50.500 bps the prior day, near its 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 17 bps, compared to an August 2nd high of 33 bps.
    • U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.341% and 2.209%, respectively, compared to 0.329% and 2.209% Friday. The yield curve narrowed to +1.868%, from +1.880% 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 weaker against the euro, British pound, and Japanese yen. The dollar trades at US$78.939, compared to a US$78.788 intraday low and US$79.286 the prior day, and mixed compared to its US$79.269 50-day, US$79.499 100-day, and US$77.675 200-day averages. The euro trades at US$1.3344, compared to an intraday high of US$1.3381 and compares to a close of US$1.3343 the prior day. The euro trades better than its US$1.3214 50-day and $1.3163 100-day averages. In Japan, the dollar trades at ¥82.64, compared to ¥82.69 the day prior. The yen trades worse than its 50-day moving average ¥80.23.
    • Commodities prices are mixed, with mixed energy, precious metals, aluminum and copper, and agriculture prices.

    Volatility, Skew:
    • The VIX ended at 15.50, up +0.13% from 15.48 at the prior close. The VIX is -3.47% below its 16.106 20-day moving average. The Euro Stoxx 50 volatility index (V2X) is down -0.65% to 22.40, compared to 22.55 at the prior day's close. The V2X index trades -0.03% below its 22.40 20-day moving average, -23.0% below the 29.07 30-day high, and +29.7% above the 17.26 30-day low.
    • The Hang Seng volatility index (VHSI) closed at 20.11, down -0.64% from 20.24 the prior day. The VHSI index trades -4.38% below its 21.03 20-day moving average.
    • CBOE skew rose +2.70% to 124.97 from 121.69 at the prior day's close, 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:

    · At 10:00, February construction spending, with survey at +0.7% and compares to -0.1% prior.

    · March ISM manufacturing, with survey at 53.0, up from 52.4 prior.

    Overseas News. In March, purchasing manager indices (PMI) for the U.K and Germany unexpectedly improved to 52.1 and 48.4, from 51.2 and 48.1, respectively, while the French PMI fell to 46.7 from 47.6. In February, Spain's unemployment rate rose to +23.6% from 23.3%, while the Eurozone's unemployment rate also increased to +10.8% from +10.7% in January, the highest rate since 1997. In March, China's NBS PMI, which measures large firm activity, unexpectedly rose for the fourth straight month to 53.1 from 51.0 in February while the Markit PMI, which measures small business activity, fell to 48.3 in March from 49.6 in February.

    Company News.

    · HBAN - assumes $750 million in deposits through the FDIC from Fidelity Bank in Dearborn, MI

    4Q2011 Earnings. The fourth quarter's earnings reports exceeded expectations. Of the 496 S&P500 companies that reported earnings to date, 68% (336 out of 496) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat EPS expectations by an average of +3.4% (versus a historical average of +2%). EPS is up +4.8% 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, the SPX earned $24.68 per share, compared to $25.19 and $22.25 per share in 3Q11 and 4Q10, a -3.4% and +9.4% change, respectively. In the first quarter, analysts estimate the SPX will earn $23.88 per share, compared to $24.68 and $23.03 per share in 4Q11 and 1Q11, a -3.2% and +3.7% 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. In the first quarter, analysts estimate the BKX will earn $0.97 per share, compared to $1.20 and $0.96 per share in 4Q11 and 1Q11, a -19.2% and +1.0% change, respectively.

    Valuation. The SPX trades at 13.5x estimated 2012 earnings ($104.34) and 11.9x estimated 2013 earnings ($117.94), compared to 13.5x and 11.9 respective 2011-12 earnings Friday. 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 +9.9% and +24.2%, respectively.

    Large-cap banks trade at a median 1.45x tangible book value, and 11.7x and 10.0x 2012and 2013 consensus earnings, respectively, compared to 1.44x tangible book value and 11.7x/9.9x 2012/2013 earnings yesterday. These compare to the 10-year average median multiples of 2.90x tangible book value and 15.9x earnings. In 2012, analysts expect the BKX to earn $4.31 per share, compared to $4.30 and $2.96 in 2011 and 2010, a +0.2% and +45.5% increase, respectively.

    Options. Options markets are neutral. Composite options markets are neutral, index options markets are neutral, and equity options markets are neutral. The composite put/call ratio closed at 0.97, compared to 1.03 the prior day and below its 5- and 10-period moving averages of 1.00 and 0.98 respectively. The index put/call ratio closed at 1.43, compared to 1.49 the prior day, below the 5- and 10-period moving averages of 1.45 and 1.45, respectively. The equity put/call ratio closed the day at 0.59, compared to 0.67 the prior day, below its 5- and 10-period moving averages of 0.64 and 0.61, 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, March 26st on the SPX and March 21st and 16th 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 indicators coming on March 26th, 15th and 14th.

    NYSE Indicators. Volume rose +18.2% to 966.39 million shares, 1.19x the 50-day moving average, from 817.38 million shares Thursday. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by +473 (compared to -662 the prior day), or 1.38:1. Up volume led down volume by 2.03:1.

    SPX. On higher volume, the SPX rose +5.19 points, or +0.37%, to 1408.47, the 52nd straight close above 1300 and the 10th close above 1400 in the last 12 sessions. Volume rose +20.13% to 745.57 million shares, up from 620.65 million shares Thursday and above the 626.90 million share 50-day moving average. For the 69th consecutive day, the SPX closed above its 50-day moving average (1362.91) and remained above its 200-day moving average (1267.07) for the 65th time in the past 66 sessions. The SPX closed above its 200-week moving average (1132.96) for the 120th straight session.

    From its prior close at 1403.28, the SPX opened higher to 1408 but sold off through 10:40, turning negative at 10:35 and reaching the intra-day low of 1401.42. Momentum reversed, and the index promptly retook the break-even line and rallied further to 1408 by 11:15. By 2:45, the index reached the intra-day high of 1410.89. Gains retraced back to the 1408 level at the close and the index finished towards the higher end of the day's mostly positive range.

    Technical indicators are positive. The SPX closed above 1200 for the 84th straight session, above 1300 for the 52nd session, and above 1400 for the 10th time in the past 12 sessions. The 50-day moving average crossed above the 100-day moving average on December 6th, having been below that average since July 11th, and climbed above the 200-day moving average on January 31st, having been below that average since August 11th. The 100-day moving average crossed above the 200-day moving average February 23rd, having been below that average since September 7, 2011. All moving averages are increasing. For the 17th straight session, the SPX closed (by +1.26%) above its 20-day moving average (1390.98). The index closed (by +3.34%)above its 50-day moving average for the 70th straight session. The index closed (by +7.91%) above its 100-day moving average (1305.19) for the 84th straight session. The SPX closed +11.16% above its 200-day moving average for the 65th time in the past 66 sessions. The directional momentum indicator is positive for the 17th straight session, and the trend is moderate and declining. Relative strength rose to 62.82 from 60.66, a neutral range. Next resistance is at 1412.43; next support is at 1402.96.

    BKX. On higher volume, the KBW bank index rose +0.16 points, or +0.32%, to 49.74, its 58th straight close above 40, but its third close below 50 in the past five sessions. Volume rose +38.06% to 100.44 million shares, up from 72.75 million shares Thursday and above the 82.05 million share 50-day average. The BKX closed +15.73% above its August 30, 2010, closing low of 42.98, the trough of the 2010's correction, but -14.17% and -10.59% below its April 23, 2010 (the post-2008 high point), and February 14, 2011 (the most recent high point) respective closes.

    Financials outperformed the market, and large-cap banks' gains outperformed regional banks' losses. From its prior close of 49.58, the BKX opened higher to 49.85, immediately setting the intra-day high. Through 10:10, the index fluctuated between positive and negative until a stronger sell-off dropped the index to its intra-day low of 49.18 at 10:25. By 11:15, the index recovered back to its break-even line and traded mostly sideways at that level through 3:30. A rally into the bell closed the index with a gain at the high end of the day's mixed range.

    Technical indicators are positive. On a percentage basis, bank stocks have outperformed the broader market's rebound from the October lows, rising +52.76% from the 32.56 October 4th intra-day low compared to a +31.14% rebound in the SPX. However, the BKX is still -10.6% below its 2011 high, compared to the SPX which is +3.3% 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 65th time in the past 66 sessions, the 20-day closed (by +2.23 points) above the 50-day, and the gap expanded. The 50-day moving average closed (by +4.13 points) above the 200-day moving average for the 28th straight session, and the gap widened. The 100-day moving average closed (by +0.78 points) above the 200-day moving average for the 10th straight session, and the gap widened. The BKX closed +3.35% above its 20-day moving average for the 17th straight session. The index closed (by +8.37%) above its 50-day moving average for the 68th straight session. The index closed (by +16.90%) above the 100-day moving average for the 69th straight session. The index closed (by +19.09%) above its 200-day moving average for the 51st time in 52 sessions. The directional movement indicator is positive for the 16th straight session, and the trend is strong and increasing. Relative strength rose to 63.20 from 62.42, a neutral range. Next resistance is 50.00; next support at 49.33.

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