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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 Move Lower After April Employment Disappoints, Uptrend Under Pressure 0 comments
    May 4, 2012 8:57 AM | about stocks: AIG

    This morning. After yesterday's distributions, the U.S. equity market uptrend, confirmed on April 25th, is under pressure. Yesterday, the SPX and DJI closed above their respective 20-, 50-, 100-, and 200-day moving averages, but the Nasdaq closed below its 20- and 50-day moving averages, and the NYSE composite closed below its 50-day moving average. The SPX closed -1.94% below its recent April 2nd 1419.04 high. The SPX's 20-day moving average moved lower, as it has in 17 of the past 18 trading days, and closed below its 50-day moving average for a 2nd consecutive day. The 50-, 100-, and 200-day moving averages continue to trend higher. The SPX is in bull market territory, closing up +29.5% above the 1074.77 October 4th intraday low. Financial stocks have outperformed, with the BKX up +47.9% in the same period.

    Today's focus is the April U.S. employment report. In Asia, Japan is closed for a two day holiday. In China, equity markets closed mixed, with better strength in Shanghai. Commentary focused on mixed U.S. economic reports and an improved Chinese services PMI. In Europe, equity markets are mixed. The London mayoral election went poorly for the Tories. The French election run-off is scheduled for May 6th. Also, Greek parliamentary elections are May 6th. The dollar is mixed. U.S. options markets suggest a bullish short-term outlook. Commodities prices are mixed. U.S. Treasury yields are slightly lower, with the 10-year at 1.928%, down from 1.931% the prior day. U.S. repo rates are at 16 bps.

    This morning's change in non-farm payrolls was below expectations, but last month's revisions were positive. After a fair value adjustment of +1.87 points, June SPX equity futures are at 1382.20, down -6.57 points. The SPX opens at 1391.57, +0.49% and +0.36% above its respective 20- and 50-day moving averages, and +3.72% and +9.03% above its respective 100- and 200-day moving averages. Next resistance is at 1400.19. First support is at 1385.83.

    Thursday. Equities were lower, but largely held through the 11:30 European close, then selling off at mid-day and again at mid-afternoon to end with a second consecutive distribution. Economic news was generally negative, with a worse than expected services April ISM, but a slightly better than expected weekly initial jobs claims. At the close, the Nasdaq lost -1.16%, followed by the NYSE composite, SPX, and DJI, which traded off -0.92%, -0.77%, and -0.47%, respectively. NYSE volume rose +8.20% to +1.05x the 50-day moving average. The SPX closed +0.49% and +0.36% above its respective 20- and 50-day moving averages. Market breadth was negative. Market segments were mixed. Leaders were telecommunications, which rose +0.05%, and consumer goods and health care, which fell -0.39%. Laggards were financials, basic materials, and oil and gas, which fell at least -0.99%.

    The DJ transports underperformed the industrials, falling -0.94% to close at 5284.33, up from 5334.52 the prior day, and -1.58% below its 5368.93 February 3rd closing high. The index closed +0.82% and +1.06% 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 -0.55% above its previous May 1st high.

    The SPX opened below 1400 and traded by 10:30 to its 1393.92 intraday low. Finding support, the SPX reversed course and traded back through 1400 shortly after noon, and traded above 1403 late in the session. Technical indicators weakened at the SPX' 20-day moving average closed below its 50-day moving average. All major indexes closed above their respective 20- and 50-day moving averages for a 6th consecutive day. Also, all closed above their respective 100- and 200-day moving averages. Volatility rose +1.69%, with the VIX ending at 16.88 at the close. The CBOE put/call skew fell to 119.94, down -0.20% from 120.18 the prior session, and within a neutral 115-120 range.

    Immediate SPX support is 1386 (the 50-day moving average), 1385 (the 20-day moving average), 1375 (a -23.6% Fibonacci retracement), 1357 (the April low), 1348 (a -38.2% Fibonacci retrace), 1343 (the March low), 1325 (the February low), 1304 (a -61.8% Fibonacci retrace), 1297 (the January 12th high), and 1293 (the October 27th high). Immediate resistance is 1400, then 1409, and 1419 (the April high).

    Trading desks focused on the sell-off, but reported a generally quiet session without pronounced direction. Traders note that equities held up well through the 11:30 European close, and that the afternoon's weakness occurred without any especial trigger. Essentially, equities remain range-bound with 1370, tending to sell-off over 1400 and ahead of weekends and important economic releases. Conviction remains challenged, with trading dominating investing activity, and a continued focus on Eurozone and economic strength developments.

    (click to enlarge)

    Since the April 24th confirmation of a new market uptrend, the distribution day count is 2 on the Nasdaq, SPX, and 3 NYSE composite. The BKX count is two.

    In Asia, Japanese equity markets reopen Monday, May 7th. Hong Kong and Shanghai closed mixed on mixed volume. Commentary focused on yesterday's disappointing non-manufacturing ISM report. The April HSBC services PMI rose to 54.1 from 53.3, a six month high. The HSI fell -0.77% on a -80.8% decrease in volume. The SHCOMP rose +0.49 on a +0.03% volume increase.

    In Japan, the NKY closed Tuesday 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 21,086.00, down from 21,249.53 at the prior close. The index gapped lower to open just above 21,100 and traded narrowly through the day, finding resistance at 21,150 and support at 21,050. The index weakened modestly into the close. The index closed -2.74% below its February 29th high. Volatility rose +1.51% as the VHSI closed -5.46% below its 20-day moving average. The HSI closed +1.73% and +0.55% above its respective 20- and 50-day moving averages. Most market segments closed lower. Leaders were consumer goods and industrials, which rose at least +0.23%, and utilities, which closed off -0.04%. Financials lost -0.90%. Laggards were oil and gas, basic materials, and technology, which lost at least -1.38%.

    In Shanghai, the SHCOMP closed at 2,452.01, up from 2,440.08 at the prior close. After initially moving modestly higher, the index sold off to a 2,428.06 mid-morning intraday low before reversing and rallying through the session's remainder. The index closed just shy of its2,453.54 intraday high. The index closed -0.89% below its recent 2,474.07 March 14th high. The index closed +3.89% and +2.97% above its respective 20- and 50-day moving averages. Most market segments closed higher. Leaders were technology, consumer goods, and consumer services, which closed up at least +1.10%. Financials rose +0.34%. Laggards were utilities, which rose +0.07%, and oil and gas and telecommunications, which closed off at least -0.31%.

    In Europe, equity markets are modestly mixed. After yesterday's negative reversal, equities opened lower, but have rallied at mid-day to modest gains on the Euro Stoxx50 and FTSE100, while the CAC and DAX are modestly lower. Commentary focuses on this morning's U.S. employment report, results of mayoral elections in London, and this weekend's elections in France and Greece. The Euro Stoxx50 is up +0.01%, while the FTSE 100, CAC, and DAX are down -0.69%, -0.23%, and -0.51%, respectively. The Euro Stoxx50 gapped lower to open near 2,270, but rallied in late morning to a 2295.74 intraday high. The index trades -1.45% and -6.43% below its respective 20- and 100-day moving averages. Both the CAC and DAX lost their respective 20-day moving averages, now off -0.62% and -0.79%. All trade below their respective 50-day moving averages. The DAX trades -2.81% below its 50-day moving average. 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 32.09, down from 32.28 bps the prior day, and compares to the recent January 6th high of 50.05 bps. Euribor-OIS is 37.80 bps, down from 37.90 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 -41.25, up from -42.75 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 16 bps, compared to an August 2nd high of 33 bps.
    • U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.262% and 1.933%, respectively, compared to 0.258% and 1.931% Thursday. The yield curve narrowed to +1.671%, from +1.673% 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 and Japanese yen, but is slightly weaker compared to the British pound. The dollar trades at US$79.277, compared to a US$79.150 intraday low and US$79.221 the prior close, and mixed compared to its US$79.408 50-day, US$79.612 100-day, and US$78.235 200-day averages. The euro trades at US$1.3128, compared to an intraday high of US$1.3163 and its US$1.3152 close the prior day. The euro compares to its US$1.3200 50-day and $1.3121 100-day averages. In Japan, the dollar trades at ¥80.26, compared to ¥80.18 at the prior close. The yen trades better than its 50-day moving average ¥81.71.
    • Commodities prices are mixed, with lower energy, lower precious metals, aluminum, and copper, and higher agriculture prices.


    Volatility, Skew:
     

    • The VIX ended at 17.56, up +4.03% from 16.88 at the prior close. The VIX is -2.38% below its 17.99 20-day moving average.
    • The Euro Stoxx 50 volatility index (V2X) is up +0.26% to 27.75 from 27.68 at the prior day's close. The V2X index trades +1.04% above its 27.47 20-day moving average, -10.5% below the 31.02 30-day high, and +44.0% above the 19.02 30-day low.
    • The Hang Seng volatility index (VHSI) closed at 18.79, up +1.51% from 18.51 the prior day. The VHSI index trades -5.46% below its 19.98 20-day moving average.
    • CBOE skew fell -3.13% to 116.18 from 119.94 at the prior day's close, and within 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:

    · The April change in nonfarm payrolls was 115K, compared to 160K survey and 154K revised prior.

    · The change in private payrolls was 130K, compared to 165K survey and 166K revised prior.

    · The change in manufacturing payrolls was 16K, compared to 20K, and 41K revised prior.

    · The unemployment rate fell to 8.1%, compared to 8.2% survey and 8.2% revised prior.

    Overseas News. Today's press reports indicate Socialist candidate Francois Hollande will likely unseat French President Sarkozy in this weekend's election. In April, the Eurozone services sector purchasing managers index unexpectedly declined, falling to 46.9 compared to estimates for no change from March's 47.9 number. In April, U.K. home prices unexpectedly declined, falling -0.2% over last year's level compared to estimates for a +0.4% increase. In April, the preliminary China services PMI rose to 54.1 from 53.3 in March, and the highest level since October 2011.

    Company News:

    · AIG - reports 1Q12 EPS of $1.65 compared to estimates of $1.12

    1Q2012 Earnings.

    The first quarter's earnings reports have so far exceeded expectations. Of the 415 S&P 500 companies that reported earnings to date, 71% (293 out of 415) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat EPS expectations by an average of +6.47% (versus a historical average of +2%). Aggregate EPS is up +5.9% over the prior year. Though challenged in the current operating environment, 72% of companies reported increased revenues over the prior year and 67% 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% increase, respectively, and beat consensus estimates by +19.5%.

    Valuation. The SPX trades at 13.2x estimated 2012 earnings ($105.05) 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 -3.4%, and +0.5%, respectively. Analysts expect 2012 and 2013 earnings to exceed 2011 earnings ($94.97) by +10.6% and +24.6%, respectively.

    Large-cap banks trade at a median 1.44x tangible book value, and 11.5x and 10.1x 2012and 2013 consensus earnings, respectively, compared to 1.42x 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 bullish. Composite options markets are neutral, index options markets are neutral, and equity options markets are extremely bullish. The composite put/call ratio closed at 1.01, compared to 1.00 the prior day and above its 5- and 10-period moving averages of 0.93 and 0.88 respectively. The index put/call ratio closed at 1.12, compared to 1.34 the prior day, below the 5- and 10-period moving averages of 1.25 and 1.27, respectively. The equity put/call ratio closed the day at 0.98, compared to 0.95 the prior day, above its 5- and 10-period moving averages of 0.77 and 0.69 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, with the SPX level holding during May 1st's rally.

    NYSE Indicators. Volume rose +8.20% to 844.17 million shares, 1.05x the 50-day moving average, from 780.19 million shares Wednesday. Market breadth was negative, and up volume lagged down volume. Advancing stocks lagged decliners by -1,194 (compared to -377 the prior day), or 0.43:1. Up volume lagged down volume by 0.27:1.

    SPX. On higher volume, the SPX fell -10.74 points, or -0.77%, to 1391.57, the 74th straight close above 1300 but the 18th close above 1400 in the last 21 sessions. Volume rose +6.47% to 581.76 million shares, up from 546.38 million shares Wednesday but below the 614.23 million share 50-day moving average. For the seventh straight session, the SPX closed above its 50-day moving average (1386.52)and remained above its 200-day moving average (1276.32) for the 88th time in the past 89 sessions. The SPX closed above its 200-week moving average (1134.93) for the 144th straight session.

    From its prior close at 1402.31, the SPX opened flat and set the intra-day high of 1403.07 at 9:50. At 10:00, a disappointing services purchasing managers index initiated a sell-off, and the index fell to 1396 by 10:30. A reflexive rebound to 1400 by 11:00 was sold at 11:30, and the index fell to 1396 again by noon and further to 1390 by 1:45. The SPX set the intra-day low of 1388.71 at 2:50 before rallying back above 1390 at 3:00. The rally was weak, and the index closed at the bottom of the day's mostly negative range.

    Technical indicators are positive. The SPX closed above 1200 for the 106th straight session, above 1300 for the 72nd session, but below 1400 for the 18th time in the last 21 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 the 18th straight session. For seventh straight session, the SPX closed (by +0.49%) above its 20-day moving average (1384.85). The index closed (by +0.36%) above its 50-day moving average for the seventh straight session. The index closed (by +3.72%) above its 100-day moving average (1341.63) for the 107th straight session. The SPX closed +9.03% above its 200-day moving average for the 88th time in the past 89 sessions. The directional momentum indicator is positive for the sixth session, and the trend is weak and stable. Relative strength fell to 51.20 from 56.14, a neutral range. Next resistance is at 1423.17; next support is at 1385.83.

    BKX. On higher volume, the KBW bank index fell -0.30 points, or -0.62%, to 48.14, its 81st straight close above 40 but its 22nd straight close below 50. Volume rose +21.31% to 57.43 million shares, up from 47.34 million shares Wednesday but below the 76.48 million share 50-day average. The BKX closed +12.01% above its August 30, 2010, closing low of 42.98, the trough of the 2010's correction, but -16.9% and -13.5% 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 outperformed regional banks. From its prior close of 48.44, the BKX opened flat and rallied to the intra-day high of 48.59 at 9:50. The 10:00 sell-off dropped the index to 48.05 before a rally retook the break-even line by 11:30. Two further sell-offs, at 11:35 and 12:45 dropped the index to the intra-day low of 47.93 at 1:45. The BKX traded at the 48.00 level through 3:15 when a rally lifted the index up to 48.10. The BKX closed at the lower end of the day's mostly negative range.

    Technical indicators are mostly positive. On a percentage basis, bank stocks have outperformed the broader market's rebound from the October lows, rising +47.85% from the 32.56 October 4th intra-day low compared to a +29.57% 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 86th straight session, the 20-day closed (by +0.28 points) above the 50-day, but the gap shrank and will likely cross early next week. The 50-day moving average closed (by +5.94 points) above the 200-day moving average for the 51st straight session, and the gap widened. The 100-day moving average closed (by +3.06 points) above the 200-day moving average for the 33rd straight session, and the gap widened. For the sixth straight session, the BKX closed (by +0.11%) above its 20-day moving average, which fell for the 15th straight day. The index closed (by +0.69%) above its 50-day moving average for the 91st straight session. The index closed (by +7.14%) above the 100-day moving average for the 92nd straight session. The index closed (by +14.97%) above its 200-day moving average for the 74th time in 75 sessions. The directional movement indicator is positive for the third straight day, and the trend is weak and stable. Relative strength fell to 49.67 from 51.82, a neutral range. Next resistance is 48.51; next support at 47.85.

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