Gary Townsend's  Instablog

This morning. U.S. equity markets are in correction, closing lower for a 3rd consecutive day. Only the Nasdaq remains above its 20-day moving average. All major indexes remain above their respective 50-day moving averages. The SPX closed -1.48% below its recent April 2nd high of 1419.04. All major indices are above their respective 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 Wednesday up +30.0% above the 1074.77 October 4th intraday low. Financial stocks have outperformed, up +50.1% in the same period.

In Asia, Tokyo and Shanghai equity markets closed lower, extending last week's losses. Hong Kong was closed. Commentary focused on Friday's disappointing U.S. employment report. In Europe, stock exchanges are closed for the Easter holiday. 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 mixed. U.S. options markets suggest a neutral short-term outlook. Commodities prices are mixed. U.S. Treasury yields are lower, with the 10-year at 2.060%, down from 2.055% the prior day. U.S. repo rates are at 23 bps.

After a fair value adjustment of +3.48 points, June SPX equity futures are at 1375.00, down -18.68 points. The SPX opens at 1398.08, -0.22% below and +2.05% above its respective 20- and 50-day moving averages, and +6.61% and +10.1% above its respective 100- and 200-day moving averages. Next resistance is at 1402.15. First support is at 1393.47.

Thursday. On Eurozone debt and world growth concerns, markets gapped lower, but rallied to mid-morning intraday highs before drifting through the pre-holiday afternoon session to close mixed. From its prior 1398.96 close, the SPX opened at 1393, but rallied to a late-morning intraday high of 1401.60. As participation eased, so did the index, which retested support at 1395 in mid-afternoon, then rallied modestly into the close. NYSE volume fell -13.6% to 0.89x the 50-day moving average. The Nasdaq managed a +0.40% gain, while the DJI, SPX, and NYSE composite closed down -0.11%, -0.22%, and -0.31%, respectively. Market breadth was negative. Most market segments closed lower.

DJ transports outperformed the industrials, rising +0.15% to close at 5284.33, from 5276.51 the prior day, and -1.58% off its 5368.93 February 3rd closing high. The index closed +0.31% and +0.73% 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 -1.54% below its recent April 2nd high.

Technical indicators are generally positive, but show deterioration. Most major exchanges closed below their 20-day moving averages, but remain above their respective 50-, 100-, and 200-day moving averages. Volatility rose as the VIX closed at 16.70, up +1.70% from 16.44 the prior day. The CBOE put/call skew fell -0.32% to 120.61 from 121.00 the prior session, and above a 115-120 neutral range.

Trading desks reported a generally quiet day, particularly after the European close at 11:30. Activity was again skewed toward short-term traders. There was somewhat greater buying on the dips, but participation was weak ahead of Friday's U.S. employment report and the Easter and Passover weekend. Conviction remains lacking. Sentiment remains skeptical ahead of the start of 1Q2012 earnings next week.

Immediate support is 1393, 1374 (a -23.6% Fibonacci retracement from December 19th), 1372 (the February high), 1370 (50-day moving average), 1345 (a -38.2% Fibonacci retrace), and then 1297 (the January 12th high), and 1293 (the October 27th high). Immediate resistance is 1401 (the 20-day moving average), then 1406, 1414, and 1419 (the April high).

(click to enlarge)

Distribution day counts were unchanged. Counts number 8 on the NYSE composite, 5 on the DJI, 4 on the SPX, and 3 on the Nasdaq. BKX count is 6.

In Asia, equity markets closed lower on lower volume. In Tokyo, the NKY closed down -1.47% on a -5.74% decrease in volume, its 5th consecutive loss. The index closed below 10,000 for the 4th consecutive day. Hong Kong was closed. In Shanghai, the SHCOMP fell -0.90% on a -17.0% decrease in volume. Commentary focused on Friday's U.S. employment report, Chinese inflation, and announced job cuts at Sony.

In Japan, the NKY closed at 9,546.26, down from 9,767.61 at the prior close. The index gapped lower to open at 9,560, and traded to a mid-morning intraday low of 9,535.33. The index rallied by mid-day to the 9,618.10 intraday high, but sold off again through the afternoon. The index closed -6.91% below its recent March 27th high, and -4.77% and -0.39% below its respective 20- and 50-day moving averages. All market segments closed at least -0.60% lower. Leaders were telecommunications, consumer services, and utilities. Laggards were oil and gas, basic materials, and financials, which closed down at least -1.87%.

In China, in Shanghai, the SHCOMP closed at 2,285.78, down from 2,306.55 at last Friday's close. The SHCOMP closed -6.95% below its recent March 14th high. The SHCOMP opened at 2,300, traded to 2,285 in early session, and rallied back to an intraday high of 2,304.65 in late morning. The afternoon session traded consistently lower, ending just better than the 2,284.44 intraday low. The index is -7.61% of its recent March 14th high. The index closed -3.37% and -3.31% below its respective 20- and 50-day moving averages. All market segments closed at least -0.73% lower. Leaders were financials, consumer goods, and consumer services. Laggards were basic materials, health care, and telecommunications, which closed off at least -1.14%.

In Europe, equity market are closed.

Libor, LOIS, Currencies, Treasuries, Commodities:
 

• USD LIBOR is 0.15100%, unchanged from 0.15100% 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 0.46915%, unchanged from 0.46915% the prior day, and down from the January 4th peak of 0.58250%.
• The US Libor-OIS (LOIS) spread is 32.47 bps, down from 32.67 bps the prior day, and compares to the recent January 6th high of 50.05 bps. Euribor-OIS is 41.60 bps, up from 40.70 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 -54.00 bps, unchanged from -54.00 bps the prior day, but up from a trough of -147.00 bps on December 14th. A normal range is between -10 bps and -40 bps.
• The U.S. government overnight repo rate is 23 bps, compared to an August 2nd high of 33 bps.
• U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.322% and 2.060%, respectively, compared to 0.314% and 2.055% Friday. The yield curve narrowed to +1.738%, from +1.741% 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 +2.76% on April 11, 2011.
• The U.S. dollar is mixed, better compared to the euro and British pound, but worse compared to the Japanese yen. The dollar trades at US$79.921, compared to a US$80.096 intraday high and US$79.886 the prior day, and mixed compared to its US$79.311 50-day, US$79.584 100-day, and US$77.807 200-day averages. The euro trades at US$1.3073, compared to an intraday low of US$1.3033 and a close of US$1.3096 the prior day. The euro trades worse than its US$1.3214 50-day and $1.3145 100-day averages. In Japan, the dollar trades at ¥81.35, compared to ¥81.64 the day prior. The yen trades worse than its 50-day moving average ¥80.71.
• Commodities prices are mixed, with lower energy, mixed precious metals, higher aluminum and copper, and mixed agriculture prices.

Volatility, Skew:
 

• The VIX ended at 16.70, up +1.58% from 16.44 at the prior close. The VIX is +7.87% above its 15.48 20-day moving average.
• The Euro Stoxx 50 volatility index (V2X) is down -1.05% to 25.59, compared to 25.86 at the prior day's close. The V2X index trades +17.0% above its 21.87 20-day moving average, -12.0% below the 29.07 30-day high, and +48.2% above the 17.26 30-day low.
• The Hang Seng volatility index (VHSI) closed at 19.89, up +7.34% from 18.53 the prior day. The VHSI index trades -2.77% below its 20.46 20-day moving average.
• CBOE skew fell -0.32% to 120.61, from 121.00 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:

· There are no scheduled economic reports.

Overseas News. In March, China's consumer price index rose more than expected, increasing +3.6% over last year's level compared to estimates of +3.4% and February's +3.2% increase.

Company News.

· None.

4Q2011 Earnings. First quarter earnings reports begin tomorrow with Alcoa. 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.

JPMorgan Chase and Wells Fargo kick of bank earnings on Friday, April 13th. 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 13.4x estimated 2012 earnings ($104.28) and 11.9x estimated 2013 earnings ($117.94), compared to 13.4x and 11.9 respective 2011-12 earnings Thursday. 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 1.43x tangible book value, and 11.5x and 9.8x 2012and 2013 consensus earnings, respectively, compared to 1.44x tangible book value and 11.5x/9.9x 2012/2013 earnings Thursday. 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 0.94, compared to 0.98 the prior day and in between its 5- and 10-period moving averages of 0.93 and 0.97 respectively. The index put/call ratio closed at 1.33, compared to 1.35 the prior day, below the 5- and 10-period moving averages of 1.41 and 1.47, respectively. The equity put/call ratio closed the day at 0.60, compared to 0.67 the prior day, below its 5- and 10-period moving averages of 0.60 and 0.62, 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 2011, 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 April 2nd and March 26th. On April 4th, the SPX closed below the lowest level in the previous four days and followed through with lower trading the next day, signaling a potential reversal's initiation.

NYSE Indicators. Volume fell -13.6% to 719.28 million shares, +0.89x the 50-day moving average, from 832.49 million shares Wednesday. Market breadth was negative, and up volume lagged down volume. Advancing stocks lagged decliners by -410 (compared to -1,838 the prior day), or 0.76:1. Up volume lagged down volume by 0.48:1.

SPX. On lower volume, the SPX fell -0.88 points, or -0.06%, to 1398.08, the 56th straight close above 1300 but the second straight close below 1400. Volume fell -5.64% to 589.87 million shares, down from 625.15 million shares Wednesday and below the 620.53 million share 50-day moving average. For the 73rd consecutive day, the SPX closed above its 50-day moving average (1370.05) and remained above its 200-day moving average (1269.66) for the 69th time in the past 70 sessions. The SPX closed above its 200-week moving average (1133.31) for the 124th straight session.

From its prior close at 1398.96, the SPX opened lower to 1395 and set the intra-day low of 1392.92 at 9:35. Through 11:15, the index rallied, turning positive at 10:45 and reaching the intra-day high of 1401.60 at 11:15. The index retraced to 1398 by 12:45 and further to 1395 by 2:00. A rally took hold into the close, but the index could not retake its prior day's close and finished with a modest loss.

Technical indicators are positive. The SPX closed above 1200 for the 88th straight session, above 1300 for the 54th session, but below 1400 for the second 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, 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 increased. For the second straight session, the SPX closed (by -0.22%) below its 20-day moving average (1401.14). The index closed (by +2.05%)above its 50-day moving average for the 74th straight session. The index closed (by +6.61%) above its 100-day moving average (1311.42) for the 88th straight session. The SPX closed +10.11% above its 200-day moving average for the 69th time in the past 70 sessions. The directional momentum indicator is positive for the 21st straight session, and the trend is moderate and declining. Relative strength fell to 53.76 from 54.25, a neutral range. Next resistance is at 1402.15; next support is at 1393.47.

BKX. On lower volume, the KBW bank index fell -0.13 points, or -0.27%, to 48.87, its 62nd straight close above 40 but its third straight close below 50. Volume fell -9.21% to 67.18 million shares, down from 74.00 million shares Wednesday and below the 80.79 million share 50-day average. The BKX closed +13.70% above its August 30, 2010, closing low of 42.98, the trough of the 2010's correction, but -15.67% and -12.15% 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 regional banks underperformed large-cap banks. From its prior close of 49.00, the BKX opened lower to 48.70 and set the intra-day low of 48.64 at 9:35. Like the broader market, the index rallied through 10:50 into positive territory and set the intra-day high of 49.24 at 10:50. Gains retraced back to break-even at 11:40, and the index continued falling through 1:50 back to the morning's low. A small rebound from 2:00 through the close lifted the index back to 48.90, but momentum stalled in the final hour and the index closed with a modest loss.

Technical indicators are positive. On a percentage basis, bank stocks have outperformed the broader market's rebound from the October lows, rising +50.09% from the 32.56 October 4th intra-day low compared to a +30.18% rebound in the SPX. However, the BKX is still -12.2% below its 2011 high, compared to the SPX which is +2.5% 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 69th time in the past 70 sessions, the 20-day closed (by +2.71 points) above the 50-day, and the gap expanded. The 50-day moving average closed (by +4.57 points) above the 200-day moving average for the 32nd straight session, and the gap widened. The 100-day moving average closed (by +1.14 points) above the 200-day moving average for the 14th straight session, and the gap widened. The BKX closed -0.43% below its 20-day moving average for the first time in 21 sessions. The index closed (by +5.38%) above its 50-day moving average for the 72nd straight session. The index closed (by +13.79%) above the 100-day moving average for the 73rd straight session. The index closed (by +16.89%) above its 200-day moving average for the 55th time in 56 sessions. The directional movement indicator is positive for the 20th straight session, and the trend is strong and stable. Relative strength fell to 54.75 from 55.78, a neutral range. Next resistance is 49.19; next support at 48.59.