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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 Advance After Bundesbank Policy Change 0 comments
    May 10, 2012 9:04 AM

    This morning. U.S. equity markets are in correction. All major indexes closed below their respective 20- and 50- moving averages. The NYSE composite also closed below its 100-day moving average. All closed above their respective 200-day moving averages. The SPX closed -4.54% below its recent April 2nd 1419.04 high. The SPX's 20-day moving average is trending lower, and its 50-day moving average closed lower for a 2nd consecutive session. Its 20-day moving average closed below its 50-day moving average for a 5th consecutive day. The 100- and 200-day moving averages continue to trend higher. The SPX is in bull market territory, closing up +26.0% above the 1074.77 October 4th intraday low. Financial stocks have outperformed, with the BKX up +42.8% in the same period.

    Today's key economic report is the latest week's initial jobless claims, which is accompanied by the March trade report. In Asia, equity markets closed modestly mixed after a disappointing Chinese export report. In Europe, the focus is on Spain, where Bankia's bailout (Spain's largest property lender) was confirmed overnight and the government's bank recapitalization plan will be released tomorrow. In Italy, Unicredit reported better than expected 1Q2012 earnings results. The FT reports that the Bundesbank has signaled acceptance of higher inflation to stimulate European economic growth. Equity markets and the euro are rallying strongly, having reversed earlier losses. The dollar is lower. U.S. options markets suggest a bullish short-term outlook. Commodities prices are lower, but have firmed as European equity markets rallied. U.S. Treasury yields are higher, with the 10-year at 1.888%, up from 1.823% the prior day. U.S. repo rates are at 15 bps.

    After a fair value adjustment of +0.28 points, June SPX equity futures are at 1360.20, up +8.92 points. The SPX opens at 1354.58, -2.01% and -2.29% below its respective 20- and 50-day moving averages, and +0.57% and +6.09% above its respective 100- and 200-day moving averages. Next resistance is at 1364.50. First support is at 1343.90.

    Wednesday. With Europe on center stage, U.S. equity markets repeated the week's refrain, in which early losses are narrowed by but not reversed by an afternoon rally. The Nasdaq fared best, closing off another -0.39%, followed by the SPX, DJI, and NYSE composite, which closed down -0.67%, -0.75%, and -0.85%, respectively. For a 2nd consecutive day, smaller cap stocks outperformed, with the RTY (Russell 2000) off -0.52%.

    NYSE volume rose +4.18%, to +1.15x the 50-day moving average. Market breadth was negative. All market segments closed at least -0.04% lower. Leaders were technology, utilities, and consumer services. Laggards were health care, industrials, and financials, which fell at least -0.92%.

    The SPX gapped lower to open at 1353 and trended lower to a 1343.13 intraday low at 10:30. In a change, the day's rally didn't wait for the 11:30 European close, when the SPX had already rebounded to 1355. By mid-afternoon, the SPX reached its 1363.73 intraday high and threatened a positive reversal, but the upside momentum could not be sustained and the index trended lower again into the close. The SPX closed -2.01% and -2.29% below its respective 20- and 50-day moving averages.

    The DJ transports underperformed the industrials, falling -1.43% to close at 5159.33, down from 5234.19 the prior day, and -2.51% below its 5368.93 February 3rd closing high. The index closed -1.71% and -1.42% below its respective 20- and 50-day moving averages. The TRAN has not confirmed multiple DJI new highs subsequent to February 3rd. The DJI closed -3.35% below its recent May 1st high.

    Technical indicators weakened as all the major averages closed below their respective 20- and 50-day moving averages. For a 2nd consecutive day, the NYSE composite closed below its 100-day moving average. All others are above their respective 100- and 200-day moving averages. Volatility rose +5.41%, with the VIX ending at 20.08, its first close above 20 since April 11th. The CBOE put/call skew fell to 115.05, down -1.86% from 117.23 the prior session, and within a neutral 115-120 range.

    Immediate SPX support is 1343 (the March low), then 1327 (a -61.8% Fibonacci retrace), 1325 (the February low), 1297 (the January 12th high), and 1293 (the October 27th high). Immediate resistance is 1365, then 1374, 1382 (the 20-day moving average), then 1386 (the 50-day moving average), and 1419 (the April high).

    Trading desks reported a volatile session in which "macro" factors ruled the day, as earnings season has largely concluded and the more important economic data is still weeks away. Early selling pressure was seen as an opportunity to cover shorts and pick up bargains. Selling pressure was never particularly acute. Market focus remains on economic growth prospects and European sovereign developments, including new Greek elections and Spanish government moves to bolster bank capital levels. Economic reports suggest a decline in economic momentum in April, so markets are now focused on indications of how momentum may develop in May.

    The distribution day count rose on the SPX, DJI, and NYSE composite, with a count of 3 on the Nasdaq, 4 on the DJI, and 5 on the SPX and NYSE composite. The BKX count rose to 5.

    In Asia, equity markets closed mixed, with slightly better strength in Shanghai. Volumes were mixed. Commentary focused on disappointing Chinese exports and European sovereign debt developments with a focus on Spain. In Japan, the NKY closed off -0.39% on a +7.52% increase in volume. In Hong Kong, the HSI fell -0.51% on a -4.28% decrease in volume. In Shanghai, the SHCOMP rose +0.07%, on a -11.2% decrease in volume. Economic reporting was light.

    In Japan, the NKY closed at 9,009.65, down from 9,045.06 at the prior close and its lowest close since early February. The index opened below 9,020, and traded to an early session 8,985.90 intraday low. The index then rallied to a mid-day 9,075.63 intraday high, but weakened into the afternoon, when it traded narrowly through the close. The index closed -12.2% below its recent March 27th high, and -4.76% and -7.42% below its respective 20- and 50-day moving averages. Market segments were mixed. Leaders were utilities, financials, and basic materials, which fell at least -0.13%. Laggards were consumer goods, consumer services, and telecommunications, which closed off at least -0.67%.

    In China, the Hang Seng closed at 20,227.28, down from 20,330.64 at the prior close. The index opened slightly above 20,300 and traded narrowly, setting a mid-morning 20,375.04 intraday high. The index sold off sharply on the Chinese trade report to a mid-day 20,091.68 intraday low, but subsequently narrowed the day's loss with a modest rally through the afternoon session. The index closed -6.70% below its February 29th high. Volatility rose +1.12% as the VHSI closed +12.3% above its 20.12 20-day moving average. The HSI closed -2.45% and -3.23% below its respective 20- and 50-day moving averages. Most market segments closed lower. Leaders were consumer goods, telecommunications, and utilities, which closed at least +0.01% higher. Financials lost -0.46%. Laggards were industrials, basic materials, and oil and gas, which lost at least -1.01%.

    In Shanghai, the SHCOMP closed at 2,410.23, up from 2,408.59 at the prior close. The index opened slightly higher and rallied to a late morning 2,419.02 intraday high, then reversed and sold off after the disappointing Chinese trade report. The index found support at 2,402.47 in early afternoon, reversed high to 2,416, reversed lower back to 2,405 late in the session, and rallied to end with the day's modest gain. The index closed -2.58% below its recent 2,474.07 March 14th high. The index closed +0.83% and +0.99% above its respective 20- and 50-day moving averages. Market segments closed mixed. Leaders were health care, telecommunications, and basic materials, which rose at least +0.55%. Financials rose +0.16%. Laggards were industrials, consumer services, and oil and gas, which fell at least -0.26%.

    In Europe, equity markets are mixed, with strong gains in Spain, more modest gains in Germany, and modest losses in the United Kingdom and France. The Spanish IBEX 35 is up +2.02%, in anticipation of the government's bank recapitalization proposals tomorrow. The Euro Stoxx50 and DAX are up +0.52% and +0.60%, respectively, while the CAC and FTSE 100, are down -0.08% and -0.10%, respectively. Commentary focused on today's BOE actions, largely that the current benchmark rate was held at +0.5%, as expected. Greece. Compared to its prior 2,225.63 close, the Euro Stoxx50 opened higher, but reversed lower late in the morning session to a 2,206.41 intraday low. The index reversed again, and currently traded at a 2,243.52 intraday high. The index trades -2.41% and -7.45% below its respective 20- and 50-day moving averages. The FTSE100, CAC, Euro Stoxx50, and DAX all trade below their respective 20-, 50-, and 100-day moving averages. Only the DAX trades above its 200-day moving average.

    Libor, LOIS, Currencies, Treasuries, Commodities:

    • USD LIBOR is 0.14800%, up 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 0.46685%, unchanged from 0.46685% the prior day, but down from the January 4th peak of 0.58250%.
    • The US Libor-OIS (LOIS) spread is 31.69, down from 32.19 bps the prior day, and compares to the recent January 6th high of 50.05 bps. Euribor-OIS is 37.72 bps, down from 38.80 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 improved to -45.375 bps, from -48.210 bps the prior day, and 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 15 bps, compared to an August 2nd high of 33 bps.
    • U.S. Treasury yields are mixed, with 2- and 10-year maturities yielding 0.254% and 1.865%, respectively, compared to 0.254% and 1.823% Wednesday. The yield curve widened to +1.611%, from +1.569% 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 slightly stronger compared to the euro and Japanese yen, but weaker compared to the British pound. The dollar trades at US$80.142, compared to a US$80.190 intraday high and US$80.080 the prior close, and mixed compared to its US$79.516 50-day, US$79.609 100-day, and US$78.345 200-day averages. The euro trades at US$1.2929, compared to an intraday low of US$1.2925 and its US$1.2929 close the prior day. The euro compares to its US$1.3168 50-day and $1.3118 100-day averages. In Japan, the dollar trades at ¥79.66, compared to ¥79.64 at the prior close. The yen trades better than its 50-day moving average ¥81.62.
    • Commodities prices are mixed, with lower energy, mixed precious metals, lower aluminum and copper, and higher agriculture prices.

    Volatility, Skew:

    • The VIX ended at 20.08, up +5.41% from 19.05 at the prior close. The VIX is +11.2% above its 18.05 20-day moving average.
    • The Euro Stoxx 50 volatility index (V2X) is down -1.50% to 30.74 from 31.21 at the prior day's close. The V2X index trades +8.66% above its 28.29 20-day moving average, -7.63% below the 33.28 30-day high, and +50.2% above the 20.46 30-day low.
    • The Hang Seng volatility index (VHSI) closed at 22.60, up +1.12% from 22.35 the prior day. The VHSI index trades +12.3% above its 20.12 20-day moving average.
    • CBOE skew fell -1.86% to 115.05 from 117.23 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:

    · Initial jobless claims for the week ended May 5 were 367K, compared to 368K survey and 368K revised prior.

    · Continuing claims for the week ended April 28 were 3229K, compared to 3275K survey and 3290K revised prior.

    · The March trade balance was -$51.8 billion, compared to -$50.0 billion survey and -$45.4 billion revised prior.

    Overseas News. Press reports indicate the German Bundesbank may allow for lower European Central Bank rates and higher inflation than previous policy stances. In March, Italy's industrial production rose more than expected, climbing +0.5% over the prior month compared to +0.1% estimates. Last evening, the Spanish government injected capital into Bankia, the largest property lender in Spain, and now controls a 45% stake in the company. In April, Chinese merchandise exports rose a weaker-than-expected +4.9% over last year's level, missing estimates for a +8.5% rise. Today, the Bank of England left its benchmark interest rate and accommodation portfolio unchanged.

    Company News:

    · Unicredit - reports 1Q2012 net income of €914 million beating estimates of €832 million

    1Q2012 Earnings.

    The first quarter's earnings reports have so far exceeded expectations. Of the 449 S&P 500 companies that reported earnings to date, 70% (315 out of 449) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat EPS expectations by an average of +6.4% (versus a historical average of +2%). Aggregate EPS is up +6.9% over the prior year. Though challenged in the current operating environment, 72% 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% increase, respectively, and beat consensus estimates by +19.5%.

    Valuation. The SPX trades at 12.9x estimated 2012 earnings ($105.20) and 11.4x estimated 2013 earnings ($118.66), compared to 13.0x and 11.5x 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 -3.2%, and +0.7%, respectively. Analysts expect 2012 and 2013 earnings to exceed 2011 earnings ($94.97) by +10.6% and +24.9%, respectively.

    Large-cap banks trade at a median 1.44x tangible book value, and 11.1x and 9.7x 2012and 2013 consensus earnings, respectively, compared to 1.47x tangible book value and 11.2x/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 $4.59 per share, compared to $4.22 and $3.13 in 2011 and 2010, a +7.2% and +46.2% increase, respectively.

    Options. Options markets are bullish. Composite options markets are neutral, index options markets are neutral, and equity options markets are bullish. The composite put/call ratio closed at 0.99, compared to 1.13 the prior day, in between its 5- and 10-period moving averages of 1.01 and 0.95 respectively. The index put/call ratio closed at 1.31, compared to 1.41 the prior day, above the 5- and 10-period moving averages of 1.26 and 1.28, respectively. The equity put/call ratio closed the day at 0.83, compared to 0.98 the prior day, in between its 5- and 10-period moving averages of 0.91 and 0.80 respectively.

    Price Exhaustion/Trend Reversal. 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 and during yesterday's sell-off. The SPX rebounded off the 1350 support level yesterday. Upward resistance rests near 1412 and 50.25, respectively, a level on the SPX which reversed May 1st's rally. On May 7th, the SPX recorded a downward price exhaustion reading on an hourly basis, signaling a potential short term positive bias.

    NYSE Indicators. Volume rose +4.18% to 940.15 million shares, 1.15x the 50-day moving average, from 902.47 million shares, 1.11x the 50-day moving average, the prior day. Market breadth was negative, and up volume lagged down volume. Advancing stocks lagged decliners by -1,080 (compared to -613 the prior day), or 0.47:1. Up volume lagged down volume by 0.46:1.

    SPX. On higher volume, the SPX fell -9.14 points, or -0.67%, to 1354.58, the 76th straight close above 1300 but the 22nd close below 1400 in the last 25 sessions. Volume rose +5.82% to 714.55 million shares, up from 675.26 million shares Tuesday and above the 621.28 million share 50-day moving average. For the fourth straight session, the SPX closed below its 50-day moving average (1386.28)but remained above its 200-day moving average (1276.85) for the 92nd time in the past 93 sessions. The SPX closed above its 200-week moving average (1135.40) for the 148th straight session.

    From its prior close at 1363.72, the SPX opened lower to 1352 and fell to the intra-day low of 1343.13 at 10:30, below its 100-day moving average. Through 11:45, the index rallied back to 1360 before pausing, then resumed its rally at 12:45 to set the intra-day high just above the break-even line at 1363.73 at 1:50. The rally lost momentum and the index fell to 1360 at 2:00 and further to 1355 by 3:15, near where the index closed.

    Technical indicators are mostly positive. The SPX closed above 1200 for the 110th straight session, above 1300 for the 76th session, but below 1400 for the 22nd time in the last 25 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. Bearishly, the 20-day moving average crossed below the 50-day on May 2nd, the first negative cross since December 15th, 2011. The 20-day moving average fell for the 21st time in 22 sessions, and the 50-day moving average fell for the second straight session after remaining positively sloped since November 29th, 2011. For fourth straight session, the SPX closed (by -2.01%) below its 20-day moving average (1382.32). The index closed (by -2.29%) below its 50-day moving average for the third straight session. The index closed (by +0.57%) above its 100-day moving average (1346.91) for the 111st straight session. The SPX closed +6.09% above its 200-day moving average for the 92nd time in the past 93 sessions. The directional momentum indicator is negative for the fourth straight session, and the trend is weak and increasing. Relative strength fell to 37.88 from 40.91, the lower end of a neutral range. Next resistance is at 1364.50; next support is at 1343.90.

    BKX. On higher volume, the KBW bank index fell -0.74 points, or -1.57%, to 46.50, its 85th straight close above 40 but its 26th straight close below 50. Volume rose +17.04% to 74.81 million shares, up from 63.92 million shares Tuesday but below the 76.64 million share 50-day average. The BKX closed +8.19% above its August 30, 2010, closing low of 42.98, the trough of the 2010's correction, but -19.8% and -16.4% below its April 23, 2010 (the post-2008 high point), and February 14, 2011 (the most recent high point) respective closes.

    Financials were the market's worst performing sector, and large-cap banks underperformed regional banks. From its prior close of 47.24, the BKX opened lower to 46.80 and fell to the intra-day low of 46.11 at 10:30. From 11:00 through 11:45, the index rallied strongly, retaking the opening level before momentum reversed. Through 12:45, the index fell and reached 46.35, setting a higher low. Another rally at 1:00 to the index to the intra-day high of 46.86 at 1:50. The rally lost momentum, and the index sold off into the bell, falling to 45.60 at 3:00 and closing at 46.50, in the middle of the day's 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 +42.8% from the 32.56 October 4th intra-day low compared to a +26.1% rebound in the SPX. However, the BKX has yet to recapture its 2011 high, whereas the SPX did so in February 2012 and the index is below its 20- and 50-day moving averages. Moving average alignment is bullish, though the 20-day moving average fell and crossed under the 50-day moving average for the first time since December 1st, 2011. 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. The 20-day closed (by -0.03 points) below the 50-day, and the gap widened. The 50-day moving average closed (by +6.11 points) above the 200-day moving average for the 55th straight session, and the gap widened. The 100-day moving average closed (by +3.43 points) above the 200-day moving average for the 37th straight session, and the gap widened. For the fourth straight session, the BKX closed (by -3.01%) below its 20-day moving average. The index closed (by -3.06%) below its 50-day moving average for the fourth straight session. The index closed (by +2.66%) above the 100-day moving average for the 96th straight session. The index closed (by +11.07%) above its 200-day moving average for the 78th time in 79 sessions. The directional movement indicator is negative for the fourth straight session, and the trend is weak and increasing. Relative strength fell to 40.06 from44.36, a neutral range. Next resistance is 46.87; next support at 46.12.

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