U.S. Futures Follow Asia, Europe Higher, CBOE Skew Spikes To Multi-Year High

Mar. 13, 2012 8:54 AM ETTCF
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Long/Short Equity, Short-Term Horizon, Medium-Term Horizon

Contributor Since 2008

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 banking, regulatory, and investment experience. He started his business career in 1978, as a consultant and advisor on anti-dumping trade issues primarily to foreign manufacturers based in Asia. In 1982, he began a 15 year career as a U.S. government banking regulator. In 1990, he was recruited to build out a new, independent federal regulatory agency, the Federal Housing Finance Board, regulator of the Federal Home Loan Bank System. As Chief Examiner and Director of Supervision and Examination, Mr. Townsend organized and implemented supervisory examinations of the 12 FHLBanks and Office of Finance with particular emphasis on their funding activities, use of derivatives, safety and soundness and regulatory compliance. In 1998, Townsend joined FBR Capital Markets as a sell-side analyst, applying his banking and regulatory experience to the investment analysis of commercial banks of all market capitalizations. In 2007, Forbes.com named him as "Best Brokerage Analyst" for commercial banks; also Starmine ranked him the #2 earnings estimator (out of 109 analysts) and in the top 10% of analysts for stock picking and earnings accuracy. Townsend left FBR in November 2007 to launch Hill-Townsend Capital LLC. He holds a CPA designation (1999) and a MBA from George Washington University (1979).
This morning. U.S. equity markets are in a confirmed uptrend. The uptrend began on November 28th, when the SPX opened at 1158.67, but the SPX 50-day moving average has trended higher since October 13th. Technical indicators are generally positive, as the DJI closed above its 20-day moving average after closing below that level Tuesday. All major indices are above their respective 20-, 50-, 100-, and 200-day moving averages. The SPX is in bull market territory, closing Tuesday up +27.6% above the 1074.77 October 4th intraday low.

In Asia, equity markets closed higher with greater strength in Hong Kong. Commentary focused on today's FOMC meeting. In Europe, stock exchanges are moderately higher. The dollar is somewhat stronger against the euro, pound, and Japanese yen. U.S. options markets suggest a neutral short-term outlook. Commodities prices are mixed. U.S. Treasury yields are slightly higher, with the 10-year at 2.049%, up from 2.033% the prior day. U.S. repo rates are at 19 bps.

The ECB's bank LTRO lending facilities are credited with easing interbank lending and associated liquidity problems. Overnight and 3-month LIBO and Euribor-OIS spreads are trending lower. The 3-month Euro basis swap fell to its best level since early August and less than half its worst level of late December.

After a fair value adjustment of -1.76 points, March SPX equity futures are at 1374.90, up +9.86 points. The SPX opens at 1371.09, -0.50% below its February 29, 2012, multi-year 1378.04 intraday high, and +0.70% and +3.10% above its respective 20- and 50-day moving averages, and +6.89% and +8.85% above its respective 100- and 200-day moving averages. Next resistance is at 1373.86. First support is at 1367.51.

Monday. In the absence of material news or market developments, indexes ended mixed in the year's quietest session. The DJI and SPX closed up +0.29% and +0.02%, respectively, while the NYSE composite and Nasdaq, closed off -0.20% and -0.16%, respectively. Indexes initially moved higher, but reversed within the first half hour and trended lower through mid-day before they found support and rallied. NYSE volume fell -10.4% to 0.82x its 50-day moving average. Market breadth was negative.

Technical factors are generally positive. All major exchanges closed above their respective 20-, 50-, 100-, and 200-day moving averages. Volatility fell -8.59%, with the VIX closing at 15.64, down from 17.11 the prior day. The CBOE put/call skew spiked to 139.25, its highest level since 2006, perhaps a notable divergence of short-term bullishness and longer-term bearishness. DJ transports fell -0.34% to close at 5144.28, down from 5,161.93 the prior day, and -0.53% and -1.13% below its 20- and 50-day moving averages. The TRAN reached its recent peak of 5,368.93 on February 3rd and has not confirmed subsequent DJI new highs.

From its prior 1370.87 close, the SPX rose immediately to a 1373.04 intraday high. The index reversed lower by 10:00 and fell by mid-day to the 1366.69 intraday low. The SPX rallied through the early afternoon, testing resistance at 1372 through the afternoon. Market segments closed mixed. Leaders were utilities, telecommunications, and consumer goods, which gained at least +0.37%. Laggards were financials, oil and gas, and basic materials, which lost at least -0.29%.

Trading desks reported another quiet day with some early selling of financials ahead of today's FOMC meeting and CCAR bank stress test results, which are expected by Thursday. Debates as to the market's "fatigue" or "exhaustion" remain active and unresolved. Some desks reported surprise at the market's rebound since Tuesday.

Immediate support is 1368, then 1362 (the 20-day moving average), followed by 1339 (a -23.6% Fibonacci retracement, 1330 (50-day moving average), 1315 (a -38.2% Fibonacci retrace), and then 1297 (the January 12th high), and 1293 (the October 27th high). Immediate resistance is 1374, then 1378 (the February 29th intraday high), and 1382. Possible macro catalysts include the FOMC meeting on March 13th, and U.S. bank stress tests by March 15th.

The distribution day count is 3 on the DJI, 4 on the SPX and Nasdaq, and 5 on the NYSE composite. The BKX count rose to 6.

In Asia, equity markets closed moderately higher, with greater strength in China and Hong Kong in particular. Volumes were mixed. Commentary cited greater optimism on Eurozone economic and financial conditions and prospects of continued monetary ease in the U.S. In Japan, the NKY closed up +0.09% on a +34.2% increase in volume. In China, the HSI closed up +0.97% on a +20.4% increase in volume. The SHCOMP closed up +0.86% on a -0.77% decrease in volume.

In Japan, the NKY closed at 9,889.08, down from 9,889.86 the prior day. The index gapped higher to open above 9,920 and several times threatened to break through resistance at the 10,000 level, reaching a 10,011.88 intraday high in early afternoon. Ultimately, equities sold off when resistance proved too tough, threatening a loss late in the session, but closing with a modest gain. The index closed +3.25% and +9.35% above its respective 20- and 50-day moving averages. Market segments closed mixed. Leaders were telecommunications, consumer services, and oil and gas, which rose at least +0.38%. Financials gained +0.34%. Laggards were basic materials, consumer goods, and technology, which lost at least -0.05%.

In China, the Hang Seng closed at 21,339.70, up from 21,134.18 at the prior close. The index gapped higher to open above 21,280 and rallied to find resistance at 21,400 several times through the morning and early afternoon, setting an intraday high of 21,427.12. Resistance spurred profit taking through most of the afternoon, though a late rally tried, then failed, to push the index back to test 21,400. For a first time in the past week, the index closed above its 20-day moving average, by +0.30%, and +4.81% above its 50-day moving average. Most market segments closed higher. Leaders were basic materials, oil and gas, and financials, which rose at least +1.29%. Laggards were technology and industrials, which rose at least +0.16%, and telecommunications, which lost -0.95%. In Shanghai, the SHCOMP closed at 2,455.80, up from 2,434.86 at the prior close. The SHCOMP initially traded lower to a 2,428.78 intraday low, but commenced a rally that extended through the day, closing just short of the 2,457.12 late session intraday high. All market segments closed at least +0.16% higher. Leaders were technology, oil and gas and basic materials, which rose at least +0.97%. Financials added +0.82%. Laggards were telecommunications, consumer services, and health care, which gained at least +0.66%.

In Europe, equities are moderately higher and near intraday highs. Commentary focuses on today's FOMC meeting. The prior two days' Eurozone finance ministers' meeting produced little of market moment. The Euro Stoxx 50 and FTSE 100 are up +1.02%, +0.88%, and +0.96%, respectively. Each is above their respective 20-day 50-day, 100-, and 200-day moving averages. Compared to the prior day's 2,514.97 close, the Euro Stoxx 50 trades at 2,540.39, compared to the 2,544.58 intraday high and 2,524.15 intraday low. The index is +1.11% and +3.46% above its respective 20- and 50-day moving averages. All market segments are at least +0.33% higher. Leaders are financials, industrials, and basic materials, which are up at least +1.11%. Laggards are oil and gas, telecommunications, and consumer goods.

Libor, LOIS, Currencies, Treasuries, Commodities:

  • USD LIBOR is 0.14250%, up from 0.14150% the prior day, but down from the December 30th 0.15400% high. USD 3-month LIBOR is 0.47355%, unchanged from 0.47355% the prior day and down from the January 4th peak of 0.58250%.
  • The US Libor-OIS (LOIS) spread fell to 34.10 bps, from 34.65 bps the prior day, and compares to the recent January 6th high of 50.05 bps. Euribor-OIS fell to 52.35 bps from 53.80 bps 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 improved to -62.750 bps, down from -63.500 bps the prior day, at their lowest levels since August 1st, and up from a trough of -147.00 bps on December 14th.
  • The U.S. government overnight repo rate is 19 bps, down from an August 2nd high of 33 bps.
  • U.S. Treasury yields are generally higher, with 2- and 10-year maturities yielding 0.326% and 2.047%, respectively, compared to 0.322% and 2.033% Monday. The yield curve widened to +1.721%, from +1.711% 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 +2.77% on April 8, 2011.
  • The U.S. dollar is stronger against the euro, British pound, and Japanese yen. The dollar trades at US$80.025, compared to a US$80.058 intraday high and US$79.890 at the prior day's close, and worse against its US$79.634 50-day, US$79.109 100-day, and US$77.354 200-day averages. The euro trades at US$1.3114, compared to an intraday low of US$1.3109 and compares to a close of US$1.3155 the prior day. The euro trades better than its US$1.3094 50-day, but worse than its US$1.3243 100-day averages. In Japan, the dollar trades at ¥82.66, compared to ¥82.232 the day prior. The yen trades worse than its 50-day moving average ¥78.50.
  • Commodities prices are mixed, with higher energy, lower precious metals, lower aluminum and copper, and mostly higher agriculture prices.

Volatility, Skew:
  • The VIX ended at 15.64, down -8.59% from 17.11 at the prior close. The VIX is -14.3% below its 18.25 20-day moving average.
  • The Euro Stoxx 50 volatility index (V2X) is down -6.00% to 21.63, compared to 23.10 at the prior day's close. The V2X index trades -12.1% below its 24.60 20-day moving average, -25.6% below the 29.07 30-day high, and +0.64% above the 21.49 30-day low.
  • The Hang Seng volatility index (VHSI) closed at 20.66, down -2.27% from 21.14 the prior day. The VHSI index trades -7.54% below its 22.35 20-day moving average.
  • CBOE skew rose +11.6% to 139.25 from 124.78 at the prior day's close, and well above a neutral (115-120) range, the highest since March 16, 2006. 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 February NFIB small business optimism report was 94.3, compared to survey 94.5 and prior 93.9.

· February advance retail sales rose +1.1%, in line with survey +1.1% and compared to +0.6% revised prior.

· Ex auto and gas, retail sales rose +0.6%, compared to survey +0.5% and +1.0% revised prior.

· The FOMC completes its one-day meeting with its news release at 2:15. There is no subsequent news conference.

Overseas News. Today, the Bank of Japan left its benchmark interest rate and quantitative easing programs unchanged, but increased the size of its bank lending facility by +66% to ¥5 trillion. Following pressure from Eurozone Finance Ministers, Spain reduced its 2012 deficit target to around -5.3% from the prior stated -5.8%, a level which had been above Eurozone-approved targets. In March, the German ZEW economic surveys recorded lower current condition sentiment than expected, falling to 37.6 from 40.3 prior and 41.5 estimates, but the forward looking economic sentiment survey recorded a larger beat than expected, rising to 22.3 from 5.4 and 10.0 estimates.

Company News

· TCB - repositions balance sheet, prepays $3.6 billion of long term debt, sells $1.9 billion of MBS, and will take a $1.85 per share charge in 1Q12.

4Q2011 Earnings. The fourth quarter's earnings reports have so far exceeded expectations. Of the 473 S&P500 companies that reported earnings to date, 68% (319 out of 473) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat EPS expectations by an average of +3.1% (versus a historical average of +2%). EPS is up +4.9% over the prior year. Though challenged in the current operating environment, 73% of companies reported increased revenues over the prior year and 56% beat revenue estimates. In the fourth quarter of 2011, analysts estimate the SPX will earn $24.34 per share, compared to $25.19 and $22.25 per share in 3Q11 and 4Q10, a -3.4% and +9.4% change, respectively.

With all 24 BKX members reporting fourth quarter earnings, 42% beat operating EPS estimates, with aggregated results disappointing by -16.7%, while 46% beat revenue estimates, with aggregated results missing by -0.9%. EPS is down by -20.4% over the prior year while revenue has decline by -3.8%. In the fourth quarter, the BKX earned $1.25 per share, compared to $1.24 and $0.91 per share in 3Q11 and 4Q10, a +0.8% and +37.4% change, respectively.

Valuation. The SPX trades at 13.1x estimated 2012 earnings ($104.36) and 11.6x estimated 2013 earnings ($117.94), compared to 13.1x and 11.6 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 -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 1.34x tangible book value, and 10.9x and 9.4x 2012and 2013 consensus earnings, respectively, compared to 1.34x tangible book value and 10.9x/9.5x 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 $4.30 per share, compared to $4.30 and $2.96 in 2011 and 2010, a +0.1% and +45.4% increase, respectively.

Options. Options markets are mixed. Composite options markets are neutral, index options markets are neutral to bearish, and equity options markets are neutral to bullish. The composite put/call ratio closed at 1.06, compared to 0.90 the prior day and above its 5- and 10-period moving averages of 0.98 and 0.96 respectively. The index put/call ratio closed at 1.56, compared to 1.16 the prior day, and above the 5- and 10-period moving averages of 1.34 and 1.34, respectively. The equity put/call ratio closed the day at 0.70, compared to 0.64 the prior day, above its 5- and 10-period moving averages of 0.67 and 0.66, 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, and repeatedly through February with the most recent reading on February 21st. 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 indicator coming on March 8th. March 5th's close was below the lowest close in the previous four days and recorded a new four-day, intra-session low, a pattern which may have signaled a reversal's initiation. A reversal could extend as low as 1170 on the SPX but more likely would be confined to a -11% decline.

NYSE Indicators. Volume fell -10.5% to 643.71 million shares, 0.82x the 50-day moving average, from 719.04 million shares Thursday. Market breadth was negative, and up volume lagged down volume. Advancing stocks lagged decliners by -365 (compared to +1,202 the prior day), or 0.78:1. Up volume lagged down volume by 0.67:1.

SPX. On lower volume, the SPX rose +0.22 points, or +0.02%, to 1371.09, the 38th straight close above 1300. Volume fell -8.35% to 474.04 million shares, down from 517.26 million shares Friday and below the 608.69 million share 50-day moving average. For the 55th consecutive day, the SPX closed above its 50-day moving average (1329.88) and remained above its 200-day moving average (1259.64) for the 51st time in the past 52 sessions. The SPX closed above its 200-week moving average (1133.05) for the 106th straight session.

From its prior close at 1370.87, the SPX opened flat, quickly rallied to the intra-day high of 1373.04 at 9:45, and then fell into negative territory by 10:00 and set the intra-day low of 1366.69 at noon. Through 1:45, the index rallied, retaking the break-even line and reaching 1372, where momentum stalled. The SPX traded sideways into the close to finish with a marginal gain.

The SPX closed above 1200 for the 70th straight session and above 1300 for the 38th session. The 50-day moving average crossed above the 100-day moving average on December 6th, having been below that average since July 11th. After peaking on June 6th at 1317.97, the 100-day moving average crossed below the 200-day average on September 7th. On December 22nd, the 100-day set a low at 1202.28, and began an upward trend. The 200-day moving average has troughed and is increasing. The 50-day moving average climbed above the 200-day moving average on January 31st, having been below that average since August 11th. For the third straight session, the SPX closed (by +0.70%) above its 20-day moving average. The index closed (by +3.10%)above its 50-day moving average for the 56th straight session. The index closed (by +6.89%) above its 100-day moving average (1282.75) for the 70th straight session. The SPX closed +8.85% above its 200-day moving average for the 51st time in the past 52 sessions. All moving averages increased. The directional momentum indicator is positive for the third straight session, and the trend is strong but declining. Relative strength rose to 61.05 from 60.96, a neutral range. Next resistance is at 1373.86; next support is at 1367.51.

BKX. On lower volume, the KBW bank index fell -0.31 points, or -0.68%, to 45.41, its 47th straight close above 40. Volume fell -8.78% to 51.13 million shares, down from 56.05 million shares Friday and below the 75.53 million share 50-day average. The BKX closed +5.65% above its August 30, 2010, closing low of 42.98, the trough of the 2010's correction, but -21.64% and -18.37% 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 large-cap banks underperformed regional banks. From its prior close of 45.72, the BKX opened lower to 45.59, immediately setting the intra-day high. Through noon, the index fell and set the intra-day low of 44.98. A two-hour rally took hold at noon that lifted the BKX back to 45.50 by 1:50, and the index traded at the 45.40 level into the close to finish at the higher end of the day's range but with an underperforming loss.

Technical indicators are turning positive. On a percentage basis, bank stocks have outperformed the broader market's rebound from the October lows, rising +39.47% from the 32.56 October 4th intra-day low compared to a +27.66% rebound in the SPX. However, the BKX is still -18.4% below its 2011 high, compared to the SPX which recovered its 2011 peak. On February 22nd, the 50-day moving average crossed above the 200-day moving average for the first time in 176 sessions, or since June 15th. Moving average alignment remains mixed, as the 100-day moving average (41.15) is still below the 200-day moving average (41.64), though a bullish cross should occur in the next few weeks. The 20-day (45.07) is above all moving averages and the 50-day (43.82) is above the 100- and 200-day moving averages. For the 51st time in the past 52 sessions, the 20-day closed (by +1.26 points) above the 50-day, but the gap contracted. The 50-day moving average closed (by +2.18 points) above the 200-day moving average for the 15th straight session, and the gap widened. The 100-day moving average closed (by -0.49 points) below the 200-day moving average for the 167th straight session, but the gap is narrowing. The BKX closed +0.74% above its 20-day moving average for the third straight session. The index closed (by +3.64%) above its 50-day moving average for the 54th straight session. The index closed (by +10.35%) above the 100-day moving average for the 55th straight session. The index closed (by +9.06%) above its 200-day moving average for the 37th time in 38 sessions. The index closed below 50.0 for the 196th straight session but above 40.0 for the 48th straight session. The directional movement indicator switched to positive for the second straight session, and the trend is moderate. Relative strength fell to 55.62 from 58.14, a neutral range. Next resistance is 45.73; next support at 45.03.

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