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Gary Townsend - Since 2007, a founding partner, CEO and Portfolio Manager of Hill-Townsend Capital LLC, a long/short equity financial sector fund based in Chevy Chase, Maryland. Mr. Townsend has 30 years banking, regulatory, and investment experience. He started his business career in 1978, as... More
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  • U.S. Futures Weaken After April ADP Disappoints 0 comments
    May 2, 2012 9:09 AM | about stocks: COF, GNW

    This morning. U.S. equity markets confirmed a new uptrend on April 25, ending a three week long correction. All major indexes closed above their respective 20-, 50-, 100-, and 200-day moving averages. The SPX closed -0.93% below its recent April 2nd 1419.04 high. The SPX's 20-day moving average moved lower Tuesday, as it has in 15 of the past 16 trading days. The 50-, 100-, and 200-day moving averages are trending higher. Shorter-term averages are above longer term averages. The SPX is in bull market territory, closing up +30.8% above the 1074.77 October 4th intraday low. Financial stocks have outperformed, with the BKX up +50.1% in the same period.

    In Asia, equity markets closed higher on mixed volume, as Hong Kong and Shanghai reopened after holidays. Commentary focused on reports showing stronger than expected manufacturing activity. In Europe, continental markets reopened after the May Day holiday. After initial strength, markets are mixed with better strength on the CAC and DAX. A worse than expected April ADP employment report took markets lower and brought U.S. equity futures lower as well. The French election run-off is scheduled for May 6th. Also, Greek parliamentary elections are on May 6th. The dollar is stronger. U.S. options markets suggest a neutral short-term outlook. Commodities prices are mostly lower. U.S. Treasury yields are slightly lower, with the 10-year at 1.930%, down from 1.944% the prior day. U.S. repo rates are at 23 bps.

    After a fair value adjustment of +1.37 points, June SPX equity futures are at 1393.00, down -8.37 points. The SPX opens at 1405.82, +1.45% and +1.50% above its respective 20- and 50-day moving averages, and +5.02% and +10.2% above its respective 100- and 200-day moving averages. Next resistance is at 1415.52. First support is at 1395.93.

    Tuesday. Equities opened tepidly, but surged after a much stronger than expected April ISM manufacturing report, which rose to 54.8 from 53.4 in March. Markets strengthened through mid-day, but faded through the afternoon and into the close. For example, the SPX set an intraday high of 1415.82, but closed nearly 10 points lower, up +7.91 points on the day. At the close, the SPX gained +0.57%, followed by the NYSE composite, DJI, and Nasdaq, which gained +0.55%, +0.50%, and +0.13%, respectively. NYSE volume fell -9.44% to +0.96x the 50-day moving average. The SPX closed +1.45% and +1.50% above its respective 20- and 50-day moving averages. Market breadth was positive. All market segments rose at least +0.26%. Leaders were oil and gas, financials, and basic materials, which rose at least +0.65%. Laggards were health care, technology, and industrials.

    The DJ transports outperformed the industrials, rising +1.07% to close at 5285.97, up from 5230.24 the prior day, and -1.55% below its 5368.93 February 3rd closing high. The index closed +0.88% and +1.24% 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 +0.11% above its previous April 2nd high.

    Technical indicators improved. All major indexes closed above their respective 20- and 50-day moving averages for a 5th consecutive day. Also, all closed above their respective 100- and 200-day moving averages. Volatility fell -3.21%, with the VIX ending at 16.60 at the close. The CBOE put/call skew rose to 120.18, up +0.29% from 119.83 the prior session, and above a neutral 115-120 range.

    Immediate SPX support is 1395, then 1386 (the 20-day moving average), 1385 (the 50-day moving average), 1371 (a -23.6% Fibonacci retracement), 1357 (the April low), 1342 (a -38.2% Fibonacci retrace), 1343 (the March low), 1325 (the February low), 1295 (a -61.8% Fibonacci retrace), 1297 (the January 12th high), and 1293 (the October 27th high). Immediate resistance is 1416, then 1419 (the April high).

    Trading desks focused on yesterday's lower volume, attributing the morning's strong advance to short covering. The SPX poked above the recent 1370-1400 range, however. Economic data heavied up today with the release of a disappointing April ADP employment change report, which is followed by the latest weekly jobless claims Thursday, and the April change in non-farm payrolls Friday. Despite the current uptrend, conviction remains challenged, with trading dominating investing activity, and a continued focus on Eurozone and economic strength developments.

    Since the April 24th confirmation of a new market uptrend, the distribution day count is 1 on the Nasdaq, SPX, and NYSE composite. The BKX count is one.

    In Asia, Hong Kong and Shanghai reopened after a holiday. Markets closed higher, with better strength in China. Commentary focused on reported manufacturing gains in both the U.S. and China, boosting export outlooks. Volumes were mixed. The NKY rose +0.31% on a -19.8% volume decrease. The HSI and SHCOMP rose +1.02% and +1.76%, respectively, on volume increases of +14.6% and +41.1%.

    In Japan, the NKY closed at 9,380.25, up from 9,350.95 at the prior close. The index gapped higher to open at 9,400, but weakened through the morning session to a 9,332.79 mid-session intraday low. The index rallied through most of the afternoon, posting a 9,472.25 late-session intraday high before weakening in the session's final 20 minutes. The index closed -8.30% below its recent March 27th high, and -2.18% and -3.88% below its respective 20- and 50-day moving averages. Most market segments closed higher. Leaders were oil and gas, financials, and industrials, which rose at least +0.76%. Laggards were consumer services, technology, and utilities, which fell at least -0.26%.

    In China, the Hang Seng closed at 21,309.08, up from 21,094.24 at the prior close, its best close since March 16th. The index gapped higher to open above 21,240 and rallied to a late session intraday high of 21,385.30 before weakening modestly into the close. The index closed -1.71% below its February 29th high. Volatility fell -1.32% as the VHSI closed -6.52% below its 20-day moving average. The HSI closed +3.15% and +1.59% above its respective 20- and 50-day moving averages. Most market segments closed higher. Leaders were consumer services, telecommunications, and industrials, which rose at least +1.30%. Financials gained +1.23%. Laggards were basic materials and oil and gas, which rose at least +0.45%. Technology declined -0.08%.

    In Shanghai, the SHCOMP reopened and closed at 2,438.44, up from Friday's 2,396.32 close. The index gapped higher to open above 2,420. After some early weakness that brought the index back to a 2394.23 intraday low, the index rallied strongly, setting a mid-afternoon 2,446.35 intraday high. The index closed -1.44% below its recent 2,474.07 March 14th high. The index closed +4.07% and +2.53% above its respective 20- and 50-day moving averages. All market segments closed at least +1.30% higher. Leaders were basic materials, technology, and telecommunications, which closed up at least +2.13%. Laggards were consumer services, industrials, and financials.

    In Europe, continental markets reopened after the May Day holiday. Markets opened higher, but are currently mixed. The Euro Stoxx50, FTSE 100, and DAX are -0.15%, -0.57%, and +0.14%, respectively. The Euro Stoxx50 rallied in early trading to a 2,344.95 intraday high, but reversed to a mid-session 2,296.42 intraday low. The index trades -1.70% and -6.29% below its respective 20- and 100-day moving averages. The DAX trades +0.32% above its 20-day moving average. The Euro Stoxx 50 and CAC trade below their respective 20- and 50-day moving averages. The Euro Stoxx 50 and CAC also trade below their 100- and 200-day moving averages.

    Libor, LOIS, Currencies, Treasuries, Commodities:
     

    • USD LIBOR is 0.14700%, unchanged from 0.14700% the prior day. The recent low was 0.13850% on March 1st, down from the December 30th 0.15400% high. USD 3-month LIBOR is 0.46585%, unchanged from 0.46585% the prior day, but down from the January 4th peak of 0.58250%.
    • The US Libor-OIS (LOIS) spread is 32.34, up from 32.18 bps the prior day, and compares to the recent January 6th high of 50.05 bps. Euribor-OIS is 39.70 bps, up from 39.30 the prior day and the December 27th high of 98.80 bps. Moves in the LOIS indicate changes in intra-bank lending risk premiums.
    • The Euro 3-month basis swap is -43.50, up from -45.00 the prior day, and 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 mixed, with 2- and 10-year maturities yielding 0.258% and 1.930%, respectively, compared to 0.266% and 1.944% Tuesday. The yield curve narrowed to +1.672%, from +1.678% 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 +2.74% on July 4, 2011.
    • The U.S. dollar is stronger compared to the euro, British pound, and Japanese yen. The dollar trades at US$79.239, compared to a US$79.298 intraday high and US$78.864 the prior close, and mixed compared to its US$79.383 50-day, US$79.634 100-day, and US$78.184 200-day averages. The euro trades at US$1.3147, compared to an intraday low of US$1.3130 and its US$1.3237 close the prior day. The euro compares to its US$1.3211 50-day and $1.3118 100-day averages. In Japan, the dollar trades at ¥80.31, compared to ¥80.09 at the prior close. The yen trades better than its 50-day moving average ¥81.73.
    • Commodities prices are mostly lower, with lower energy, lower precious metals, higher aluminum and copper, and lower agriculture prices.


    Volatility, Skew:
     

    • The VIX ended at 16.60, down -3.21% from 17.15 at the prior close. The VIX is -7.11% below its 17.87 20-day moving average.
    • The Euro Stoxx 50 volatility index (V2X) is up +3.56% to 27.91 from 26.95 at the prior day's close. The V2X index trades +3.88% above its 26.87 20-day moving average, -10.0% below the 31.02 30-day high, and +52.1% above the 18.36 30-day low.
    • The Hang Seng volatility index (VHSI) closed at 18.73, down -1.32% from 18.98 the prior day. The VHSI index trades -6.52% below its 20.04 20-day moving average.
    • CBOE skew rose +0.29% to 120.18 from 119.83 at the prior day's close, and 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:

    · April vehicle sales were 14.38 million, compared to 14.40 survey and 14.32 prior.

    · The April ADP employment change report was 119K, compared to 170K survey and 201K revised prior.

    · At 9:45, April ISM New York, with prior of 67.4.

    · At 10:00, March factory orders, with survey of -1.7%, compared to +1.3% prior.

    Overseas News. In April, the Eurozone manufacturing purchasing managers index (PMI) fell to 45.9, disappointing expectations for no change from the prior month's 46.0 number and with the largest misses coming from Italy (43.8 vs. 47.1 forecast and 47.9 prior) and France (46.9 vs. 47.3 forecast and 47.3 prior). In April, Germany's manufacturing PMI also disappointed estimates for no change, falling to 46.2 from 46.3 prior and below the 50.0 expansionary threshold. In March, Italy's unemployment rate increased to 9.8% from 9.3% prior, and more than expectations of 9.4%. In April, China's preliminary PMI rose to 49.3 compared to 48.3 in March.

    Company News:

    · COF - completed the acquisition of HSBC's U.S. card portfolio

    · GNW - upgraded to outperform at BofA/ML, $8 price target

    1Q2012 Earnings. The first quarter's earnings reports have so far exceeded expectations. Of the 321 S&P500 companies that reported earnings to date, 73% (233 out of 321) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat EPS expectations by an average of +6.6% (versus a historical average of +2%). Aggregate EPS is up +5.9% over the prior year. Though challenged in the current operating environment, 73% of companies reported increased revenues over the prior year and 66% beat revenue estimates. 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 BKX members reporting first quarter earnings, 79% beat operating EPS estimates and 79% beat revenue estimates. In the first quarter, the BKX earned $1.18 per share, compared to $0.77 and $0.99 per share in 4Q11 and 1Q11, a +54.1% and +18.6% change, respectively, and beat consensus estimates by +19.5%.

    Valuation. The SPX trades at 13.3x estimated 2012 earnings ($105.29) and 11.8x estimated 2013 earnings ($118.36), compared to 13.3x and 11.8x 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 -3.1%, and +0.5%, respectively. Analysts expect 2012 and 2013 earnings to exceed 2011 earnings ($94.97) by +10.9% and +24.6%, respectively.

    Large-cap banks trade at a median 1.43x tangible book value, and 11.7x and 10.2x 2012and 2013 consensus earnings, respectively, compared to 1.41x tangible book value and 11.6x/10.2x 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 $4.58 per share, compared to $4.22 and $3.13 in 2011 and 2010, a +7.1% and +46.1% 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 0.90, compared to 0.88 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 1.51, compared to 1.18 the prior day, above the 5- and 10-period moving averages of 1.23 and 1.27, respectively. The equity put/call ratio closed the day at 0.68, compared to 0.65 the prior day, above its 5- and 10-period moving averages of 0.61 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 March 26st on the SPX and March 21st and 16th on the BKX. The SPX recorded a weekly price exhaustion signal during the week of its 2012 high in early April. 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. April 11th's rebound in the SPX and BKX came off important support levels near 1350 and 46.80, respectively. A breakdown below those support levels may accelerate a reversal. The BKX successfully tested this support on April 23rd's open. Upward resistance rests near 1412 and 50.25, respectively, a level on the SPX which provided resistance during yesterday's rally.

    NYSE Indicators. Volume fell -9.99% to 766.84 million shares, 0.95x the 50-day moving average, from 851.91 million shares Monday. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by +906 (compared to -665 the prior day), or 1.86:1. Up volume led down volume by 2.61:1.

    SPX. On lower volume, the SPX rose +7.91 points, or +0.57%, to 1405.82, the 72nd straight close above 1300 and the 2nd close above 1400 in the last 3 sessions. Volume fell -6.88% to 565.75 million shares, down from 607.57 million shares Monday and below the 615.40 million share 50-day moving average. For the fifth straight session, the SPX closed above its 50-day moving average (1385.04)and remained above its 200-day moving average (1275.51) for the 86th time in the past 87 sessions. The SPX closed above its 200-week moving average (1134.35) for the 142nd straight session.

    From its prior close at 1397.91, the SPX opened flat, and fluctuated at the break-even line, setting the intra-day low of 1395.73 at 9:59, just prior to the ISM manufacturing index release. The release surprised positively, and the SPX rallied through noon, reaching the intra-day high of 1415.32. Through the close, the index lost momentum and arched downward, falling below 1410 at 3:15 and reaching 1405 at the close to finish in the middle of the day's largely positive range.

    Technical indicators are positive. The SPX closed above 1200 for the 104th straight session, above 1300 for the 70th session, and above 1400 for the 2nd time in the last 3 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. The 20-day moving average fell. For fifth straight session, the SPX closed (by +1.45%) above its 20-day moving average (1385.77). The index closed (by +1.50%) above its 50-day moving average for the fifth straight session. The index closed (by +5.02%) above its 100-day moving average (1338.64) for the 105th straight session. The SPX closed +10.22% above its 200-day moving average for the 86th time in the past 87 sessions. The directional momentum indicator is positive for the fourth session, and the trend is weak and declining. Relative strength rose to 57.83 from 54.99, a neutral range. Next resistance is at 1415.52; next support is at 1395.93.

    BKX. On lower volume, the KBW bank index rose +0.61 points, or +1.26%, to 48.89, its 79th straight close above 40 but its 20th straight close below 50. Volume fell -12.60% to 53.80 million shares, down from 61.55 million shares Monday and below the 77.78 million share 50-day average. The BKX closed +13.75% above its August 30, 2010, closing low of 42.98, the trough of the 2010's correction, but -15.63% and -12.12% 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 outperform regional banks' losses. From its prior close of 48.28, the BKX opened lower to 48.26, immediately setting the intra-day low. Through 10:00, the index traded mostly sideways until the ISM release provided a strong buying catalyst. The index surged +2% in 30 minutes, and reached the intra-day high of 49.30 at 1:00. The index traded mostly sideways at 49.20 through 2:45 when gains began retracing through the close. The BKX fell under 49.00 at 3:45 but still ended towards the higher end of the day's largely positive range.

    Technical indicators are mostly positive. On a percentage basis, bank stocks have outperformed the broader market's rebound from the October lows, rising +50.15% from the 32.56 October 4th intra-day low compared to a +30.90% rebound in the SPX. However, the BKX has yet to recapture its 2011 high, whereas the SPX did so in February 2012. 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 84th straight session, the 20-day closed (by +0.52 points) above the 50-day, but the gap shrank. The 50-day moving average closed (by +5.84 points) above the 200-day moving average for the 49th straight session, and the gap widened. The 100-day moving average closed (by +2.90 points) above the 200-day moving average for the 31st straight session, and the gap widened. For the fourth straight session, the BKX closed (by +1.42%) above its 20-day moving average, which fell for the 13th straight day. The index closed (by +2.53%) above its 50-day moving average for the 89th straight session. The index closed (by +9.27%) above the 100-day moving average for the 90th straight session. The index closed (by +16.82%) above its 200-day moving average for the 72nd time in 73 sessions. The directional movement indicator switched back to positive, and the trend is weak and stable. Relative strength rose to 55.14 from 51.20, a neutral range. Next resistance is 49.37; next support at 48.33.

    Stocks: COF, GNW
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