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Gary Townsend - Founding partner 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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  • Spain Brings Weakness To U.S. Futures 0 comments
    Jul 20, 2012 8:47 AM | about stocks: STI

    This morning. Though market breadth was narrow, stocks advanced for a 3rd consecutive day, reconfirming the U.S. equity market uptrend. All the major indexes are higher on the week and higher in July and in 2012. The SPX, DJI, and Nasdaq closed above their respective 20-, 50-, 100-, and 200-day moving averages. The NYSE composite closed -0.16% below its 100-day moving average. The SPX closed -3.00% below its recent April 2nd 1419.04 high, but up +9.46% in 2012. The SPX's 20-, 50-, 100-, and 200-day moving averages are moving higher. Its 20-day moving average has closed above its 50-day moving average since July 9th. The SPX is +28.1% above the 1074.77 October 4th intraday low. Financial stocks have outperformed, with the BKX up +40.5% in the same period, though financial stocks have underperformed since the April 3rd market top.

    There are no scheduled economic reports. Other headlines focus on 2Q2012 earnings and policy stimulus probabilities. In Europe, equity markets are moderately lower and near their intraday lows. Spanish and Italian 10-year debt yields higher at 7.11% and 6.06%, respectively. The dollar is stronger compared to the euro and British pound, and slightly weaker compared to the Japanese yen. U.S. options markets suggest a neutral to bullish short-term outlook. Commodities prices are mostly lower. U.S. Treasury yields are lower, with the 10-year at 1.482%, down from 1.508% the prior day. U.S. repo rates are at 6 bps, down from 19 bps the prior day.

    In pre-market futures trading, September SPX equity futures have traded between 1363.00 and 1370.00. After a fair value adjustment of -0.19 points, September SPX equity futures are at 1363.60, down -8.31 points. The SPX opens at 1376.51, +2.07%, +3.26%, +1.22%, and +4.91% above its respective 20-, 50-, 100-, and 200-day moving averages. Next resistance is at 1380.86. First support is at 1371.68.

    Thursday. On improved but still below average volume, equity markets closed moderately higher though caution seemed to inform the day's trade. Market breadth was a narrow 1.08x gainers over losers. Equities opened higher, but at 10:00 had to fend off a weak Philadelphia Fed report, which took most indexes slightly lower. Equities reversed higher before 11:00 and traded to an early afternoon intraday high, when a Spanish bank recapitalization headline took equities back to test breakeven. Equities rallied again through the final two hours. For a 2nd consecutive day, the Nasdaq led other major indexes, closing up +0.79%, followed by the DJI, SPX, and NYSE composite, all with coincident +0.27% gains. Also, DJ Transports again outperformed the DJI. Market breadth was narrowly positive, with gainers just 1.07x the day's losers. Most SPX market segments closed higher. Leaders were technology, basic materials, and consumer services, which rose at least +0.49%. Laggards were health care, financials, and telecommunications, which closed off at least -0.04%. Financials fell -0.78%, hurt by mixed earnings reports. Small cap stocks underperformed, as the Russell 2000 (RTY) closed down -0.36%.

    Despite a jump in weekly jobless claims, futures indicated a moderately higher open, and the SPX rose to 1378 in the session's first half hour. The July Philadelphia Fed report improved to -12.9 from -16.6 in June, but still missed the -8.0 survey, spurring a retreat that took the SPX back to 1372 within minutes. Still, the SPX steadied and then rallied back to better 1380 shortly after noon. European concerns took hold, taking the SPX back to 1371 at 2:00, but it rallied back to 1378 in the session's final half-hour, before closing at 1376.51, a new monthly closing high.

    Transports rose +0.91%, outperforming the DJI, and closed at 5,186.89, up from 5,140.17 the prior day. The TRAN closed -3.39% below its 5368.93 February 3rd closing high. The index closed +0.00%, +1.01%, %, and +2.89% above its respective 20-, 50-, 100-, and 200-day moving averages. The TRAN has not confirmed multiple DJI new highs (the most recent May 2nd) subsequent to February 3rd. The DJI closed -2.53% below its recent May 1st high.

    Technical factors improved. The SPX, DJI, and Nasdaq closed above their respective 20-, 50-, 100-, and 200-day moving averages. The NYSE composite closed -0.16% below its 100-day moving average. Earnings are mixed, clearly off the prior quarter's pace, but better than lowered expectations. Volatility fell -2.48%, as the VIX closed at 15.76, down from 16.16 at the prior close. The CBOE put/call skew fell -0.54% to 116.59, from 117.22 the prior day, and within a neutral 115-120 range.

    Trading desks reported a "cautiously confused" market, in which participants are deeply skeptical of today's multi-month index highs, attributed mostly to short-covering, QE speculation, and market chasing. However, earnings continue to generally surprise positively, the Eurozone has gone quiet, and market multiples remain low. Bullishly, technology and basic materials led the markets. Bearishly, traders noted that financials closed lower in each of the past two days. A further index rise requires their participation.

    Immediate SPX support is 1364 (the June high), then 1360 (the 100-day moving average), 1349 (the 20-day moving average), 1333 (the 50-day moving average), 1312 (the 200-day moving average), 1307 (the 30-day intraday low), 1304 (a 50% retrace from the 1267 June 4th low), 1278 (June's low close), and 1223 (the October 27th high). Immediate resistance is 1372, then 1395 and 1419 (the respective April and 2012 highs).

    Distribution day count. Since the market uptrend began on June 29th, the distribution count is 4 on the Nasdaq, 3 on the NYSE composite, 2 on the DJI and SPX. The BKX count rose to 4.

    In Asia, on mixed volume, Asian equity markets closed mixed, with a moderate gain in Hong Kong, but a distribution in Tokyo. For the week, the NKY and SHCOMP closed down -0.62% and -0.79%, respectively. The HIS and SHCOMP rose +2.87%. The NKY and SHCOMP are in correction, -15.5% and -12.4%, respectively, below recent highs. The HSI closed down -9.41% in 2012. Commentary focused on earnings, monetary policy stimulus likelihood, Chinese housing policy, and economic growth prospects. In Japan, the NKY closed down -1.43% on a +3.27% volume increase. In Hong Kong, the HSI rose +0.42% on a -23.3% volume decrease. In Shanghai, the SHCOMP fell -1.42% on a -18.6% volume decrease. The NKY and SHCOMP closed below their 20-, 50-, 100-, and 200-day moving averages. The HSI closed above its 20- and 50-day moving averages.

    In Japan, the NKY closed at 8,669.87, down from 8,669.87 at Thursday's close and its 10th consecutive close below 9,000. The index closed down -15.5% from its March 27th high, but up +2.54% in 2012. The index opened slightly lower, but traded narrowly around 8,765 through the morning session. The index moved lower in early afternoon and trended lower to a late afternoon 8,662.72 intraday low. All market segments closed at least -0.06% lower. Leaders were consumer services, oil and gas, and telecommunications. Laggards were utilities, health care, and financials, which fell at least -2.53%.

    In China, the Hang Seng closed at 19,640.80, up from 19,559.05 at the prior close, its best close since July 6th. The index has closed above 19,000 since June 28th. The index last closed above 20,000 on May 10th. The index closed -9.41% below its February 29th high, but +6.54% higher in 2012. The index opened higher, but traded around breakeven until a late rally carried the index to a last minute 19,656.11 intraday high. Volatility fell -1.78%, as the VHSI closed at 18.759, -6.51% below its 20.06 20-day moving average. The HSI closed +1.61% and +2.61% above its respective 20- and 50-day moving averages. Most market segments closed higher. Leaders were technology, telecommunications, and oil and gas, which closed up at least +1.06%. Financials rose at least +0..28%. Laggards were utilities, , consumer services, and consumer goods, which fell at least -0.04%..

    In Shanghai, the SHCOMP fell for the 1st time in the past 5 sessions, closing at 2,168.64, down from 2,184.84 at the prior close. The index closed -12.4% below its 2,474.07 March 14th high, and down -1.40% in 2012. The index opened lower, but recovered to breakeven by mid-morning. The index then eased through the day to a late afternoon 2,162.18 intraday low, but narrowed the loss into the close. The SHCOMP closed -1.42% and -5.06% below its respective 20- and 50-day moving averages. Most market segments closed lower. Leaders were telecommunications and health care, which rose at least +0.33%, and oil and gas, which dropped -0.40%. Financials lost -0.76%. Laggards were consumer goods, basic materials, and consumer services, which fell at least -1.02%.

    In Europe, equity indexes are moderately lower. Commentary focuses on earnings developments, Eurozone bank recapitalization, and the probability of policy stimulus. The Euro Stoxx50, FTSE 100, CAC 40, and DAX are down -0.85%, -0.49%, -0.71%, and -0.33%, respectively. All trade above their 20- and 50-day moving averages. The FTSE 100 and DAX are also above their 100- and 200-day moving averages. In 2012, the Euro Stoxx50 is down -1.24%, while the FTSE 100, CAC 40, and DAX are up +2.06%, +2.66%, and +14.3%, respectively.

    From its prior 2,287.73 close, the Euro Stoxx50 opened slightly lower and traded with narrow losses through mid-session. The index sold off to 2,280 in early afternoon, and now trades at 2,279.36, just slightly better than the 2,278.80 intraday low. Most market segments are lower. Leaders are technology and consumer goods, which are up at least +0.10%, and basic materials, down -0.08%. Laggards are financials, telecommunications, and utilities, which are down at least -1.96%.

    Libor, LOIS, Currencies, Treasuries, Commodities:
     

    • USD LIBOR is 0.16650%, unchanged 0.16800% the prior day, and near the highest levels since August 2011. USD 3-month LIBOR is 0.45210%, down from 0.45310% the prior day, but down from the January 4th peak of 0.58250%.
    • The US Libor-OIS (LOIS) spread is 30.68 bps, down from 31.01 bps the prior day, and compares to the January 6th high of 50.05 bps. Euribor-OIS is 34.70 bps, down from 34.90 bps the prior day, and down from the December 27th high of 98.80 bps. Moves in the LOIS indicate changes in intra-bank lending risk premiums.
    • The 3-month Euro basis swap improved to -44.103, from 44.465 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.
    • Spanish 10-year debt yields are 7.11%, up from 7.01% the prior day. Italian debt yields rose to 6.06% from 6.00% the prior day. German 10-year debt yields are 1.19%, unchanged.
    • The U.S. government overnight repo rate is 6 bps, down from 19 bps the prior day.
    • U.S. Treasury yields are lower, with 2- and 10-year maturities yielding 0.210% and 1.482%, respectively, compared to 0.214% and 1.508% Thursday. The yield curve narrowed to +1.273%, from +1.294% the prior day. In the past year, the 2- and 10-year spread varied from a low of +1.206% on June 1, 2012, to a high of +2.61% on July 21, 2011.
    • The U.S. dollar is stronger compared to the euro, British pound, but slightly weaker compared to the Japanese yen. The dollar trades at US$83.121, compared to a US$83.123 intraday high and US$82.883 at the prior close, and better compared to its US$82.347 50-day, US$80.936 100-day, and US$79.917 200-day averages. The euro trades at US$1.2232, compared to a US$1.2227 intraday low and US$1.2281 the prior day. The euro trades worse than its US$1.2504 50-day and $1.2833 100-day averages, and compares to a multi-year low of US$1.1923 on June 7, 2010. In Japan, the dollar trades at ¥78.54, compared to ¥78.59 at the prior close. The yen trades better than its 50-day moving average ¥79.39.
    • Commodities prices are mostly lower, with lower energy, lower precious metals, higher aluminum and copper, and mixed agriculture prices.


    Volatility, Skew:
     

    • The VIX fell -4.39% to 15.45, from 16.16 at the prior close. The VIX is -13.6% below its 17.88 20-day moving average.
    • The Euro Stoxx 50 volatility index (V2X) is down -2.18% to 20.37 from 20.83 at the prior day's close. The V2X index trades -17.0% below its 24.53 20-day moving average, -42.0% below the 35.11 30-day high, and +2.20% above the 19.94 30-day low.
    • The Hang Seng volatility index (VHSI) closed at 18.75, down -1.78% from 19.09 the prior day. The VHSI index trades -6.51% below its 20.06 20-day moving average.
    • CBOE skew fell -2.06% to 114.19, from 116.59 at the prior day's close, and below 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:

    · Spain - Eurozone finance ministers are expected to approve the EU100B Spanish bank bailout.

    · Ireland - finance minister says that any transfer of its stake in Irish banks to Europe would have to be done at valuations above the current depressed levels.

    · UK property companies are hunting for Continental European bargains.

    · Eurozone - odds of an imminent EMU collapse fall sharply since May but investors anticipate prolonged crisis.

    · Greece - Merkel would reject any effort to ease the terms of Greece's bailout and said they would back a Greek exit from the EMU.

    · Italy - Fitch affirmed Italy's A rating w/a negative outlook.

    Company Ratings/News:

    · SunTrust Banks (STI) reported EPS of $0.50, compared to $0.44 consensus. Revenues were $2.25 billion, compared to $2.18 billion consensus.

    2Q2012 Earnings. The 2nd quarter's earnings reports are mixed, beating on EPS, but falling short on sales/revenues. Of the 117 S&P 500 companies that have reported earnings to date, 72.7% (85 of 117 beat operating EPS estimates, compared to the historical average of 62%. Only 50 companies, or 42.7%, beat on sales/revenues. In aggregate, companies beat EPS expectations by an average of +4.50% (versus a historical average of +2%), led by financials with a +10.5% surprise. In the quarter, analysts estimate the SPX will earn $24.94 per share, compared to $24.24 and $23.03 per share in 1Q2012 and 2Q11, respectively, a +2.89% and +5.10% change.

    Valuation. The SPX trades at 13.4x estimated 2012 earnings ($103.02) and 11.7x estimated 2013 earnings ($116.25), compared to 12.9x and 11.4x respective 2011-12 earnings yesterday. The 10-year average median price/earnings multiple is 15.9x. Since the beginning of 2012, analysts changed 2012 and 2013 earnings estimates by -4.48%, and -1.30%, respectively. Analysts expect 2012 and 2013 earnings to exceed actual 2011 earnings ($94.97) by +9.33% and +22.4%, respectively.

    Large-cap banks trade at an average 1.37x tangible book value, and 10.4x and 9.54x 2012and 2013 consensus earnings, respectively, compared to 1.40x tangible book value and 11.5x/9.73x 2012/2013 earnings yesterday. These compare to the 10-year average median multiples of 3.08x tangible book value and 15.9x earnings. In 2012, analysts expect the BKX to earn $4.32 per share, compared to $4.48 and $2.57 in 2011 and 2010, respectively, a -3.57% and +12.3% increase.

    Options. Options markets are neutral to bullish. Composite options markets are bullish, index options markets are bullish, and equity options markets are neutral. The composite put/call ratio closed at 0.86, compared to 0.86 the prior day, above its 5- and 10-period moving averages of 0.90 and 0.96, respectively. The index put/call ratio closed at 0.86, compared to 0.89 the prior day, below 5- and 10-period moving averages of 1.01 and 1.02, respectively. The equity put/call ratio closed the day at 0.86, compared to 0.84 the prior day and its 5- and 10-period moving averages of 0.86 and 0.84, respectively.

    Price and Selling Exhaustion/Trend Reversal. The SPX signaled buying exhaustion the week on March 30th, when it perfected an upward countdown on its higher 1408.47 daily and weekly close. The SPX signaled selling exhaustion the week ended June 8th, during which the SPX traded to an intraday low 1266.74 on June 4th, with a completed downward weekly setup on the 8th. The countdown is an unperfected 5. Subsequently, the SPX rebounded to close at 1374.02 on July 2nd, but closed -0.55% lower on the week. After weakening in the first 4 trading days of the week ended July 13th, the SPX rallied strongly to end up +0.16% on the week, extending its weekly setup count to 5. The SPX's next downward support level is 1202.37. The upward SPX price exhaustion target is 1415.32, +11.7% above the June 4th low.

    Similarly, the BKX closed at 41.00 on June 4, with completion of a downward weekly setup and simultaneous perfection of a downward daily countdown. On June 19th, the index closed at 44.65 and completed a upward daily setup. The daily countdown remains unperfected. The index closed Friday at 45.91, up +1.59% on the week. On a weekly basis, the BKX upward countdown is 5. The upward BKX price exhaustion target is 48.89, +19.7% above its 40.86 June 4th intraday low. Support is at 42.21, a decline of -8.06%.

    NYSE Indicators. Volume rose +3.89% to 755.76 million shares, +0.92x the 50-day moving average, from 727.45 million shares the prior day. Market breadth was narrowly positive, and up volume led down volume by a small margin. Advancing stocks led decliners by +104 (compared to +742 the prior day), or 1.07:1. Up volume led down volume by 1.08:1.

    BKX. On increased volume, the KBW bank index reversed lower in early afternoon, ending down -0.24 points, or -0.52%, to close at 45.75, down from 45.99 the prior day, distributing and underperforming the broader market for a 2nd consecutive day. Large-cap banks outperformed regional banks, as the KRX fell -1.64%.

    The BKX last closed above 50 on April 2nd. It has closed above 40 since January 3rd. Volume rose +14.4% to 61.7 million shares, up from 54.0 million shares the prior day and 1.14x the 54.0 million share 50-day average. The BKX closed -20.6% below its April 23, 2010 close (the post-2008 high point), and -17.3% below its February 14, 2011 (the most recent high point) close, but +41.3% above 2011's low of 32.56 on October 4th. Large-cap bank stocks have outperformed the broader market's rebound, which is up 27.7% in the same period. However, the SPX is only -3.26% below its 2012 high (and new four-year high), while the BKX is -8.50% below its 2012 high mark, which failed to set a 52-week high. The BKX is up +16.8% in 2012, compared to a +9.16% rise in the SPX.

    Technical indicators are weakened somewhat. The BKX closed +1.14%, and +2.81% above its respective 20- and 50-day moving averages. Its 20-day moving average has closed above the 50-day moving average since July 11th. The index closed below its 100-day moving average for a 11th consecutive day, while it held above its 200-day moving average. The 20- 100-, and 200-day moving averages are moving higher. The 50-day moving average declined 3 bps. The index closed +1.14% and +2.81% above its respective 20- and 50-day moving averages, but -1.03% below its 100-day moving average. The index closed +5.71% above its 200-day moving average. The directional movement indicator remains slightly positive. Relative strength fell to 54.26 from 56.07 the prior day, in a neutral range. Next resistance is 46.28; next support at 45.40.

    As to moving average alignment, the 20-day moving average crossed above the 50-day on July 12th, while the 50-day moving average moved below the 100-day moving average on June 13th. All remain above the 200-day moving average. The 20-day closed (by +0.73 points) above the 50-day. The 50-day moving average closed (by +1.22 points) above the 200-day moving average for the 97th straight session, but the gap narrowed. The 100-day moving average closed (by +2.95 points) above the 200-day moving average for the 79th straight session, and the gap narrowed.

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