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Bearish Formation: SP500 Levels, Refreshed

POSITION: Short Financials (XLF)

 

I thought the SP500 could easily have tested 1108 on the downside before it tests 1208 on the upside. Evidently I thought wrong.

 

Across all 3 durations in my risk management model (TRADE, TREND, and TAIL), the SP500 remains bearish: 

  1. Long-term TAIL resistance = 1263
  2. Intermediate-term TREND resistance = 1289
  3. Immediate-term TRADE resistance = 1212 

Given generationally high levels of volatility and abnormally low levels of volume (on rallies), I’m going to use an immediate-term TRADE range to sell into of 1. I haven’t shorted the SPY in a while. Expect that to change if these 3 lines hold in the next 3 days (month end).

 

We call this a Bearish Formation (bearish across all 3 durations). I don’t play hero when I see a Bearish Formation and buy everything on “valuation.” That’s primarily because my role as a risk manager is to not blow up in the immediate-to-intermediate-term. If you run money with a duration that’s beyond my long-term TAIL and no one is going to call your capital for 3 years of more, we may have different decision trees.

 

In the immediate-term, Bearish Formations heighten the probability of crashes, big time. We almost had one in August (the drawdown was 18% from April). That doesn’t exempt this market from having one in September or October. The math still supports managing that risk.

 

Immediate-term TRADE support lines are now 1161 and 1110.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bearish Formation: SP500 Levels, Refreshed - SPX


THE HBM: DNKN, SBUX, MCD, DIN, THI, YUM, EAT

Notable macro data points, news items, and price action pertaining to the restaurant space.

 

MACRO

 

Commodities

 

Supply-side uncertainty is said to be the driving force behind the raised net-long positions across eleven agricultural futures and options in the week ended August 23rd, according to Bloomberg.  Speculators increased bullish bets on agricultural commodities to the highest level since early May after adverse weather further eroded yield prospects for corn and soybeans crops in the U.S.

 

Subsectors

 

Quick Service restaurant stocks continue to outperform on all durations and the food processors continue to lag as commodity price uncertainty weighs on sentiment.  SAFM’s recently reported 3QFY11 earnings miss did little to convince investors that the sector is out of the woods.

 

THE HBM: DNKN, SBUX, MCD, DIN, THI, YUM, EAT - subsectors fbr

 

 

QUICK SERVICE

  • DNKN shares are pricy at current levels, according to Barron’s.  Echoing some of what we have been saying for some time, the article points out that DNKN is trading at a premium to SBUX, MCD, DIN, and THI.
  • YUM is lobbying the federal government, using a little-used provision from the 1970’s allowing states to permit restaurants for Supplemental Nutrition Assistance Program (SNAP) benefits.  The provision allows the elderly, disabled, or homeless the option of exchanging food stamps at participating restaurants.  Thus far, only a few states have opted into the program.

 

CASUAL DINING

  • EAT raised its quarterly dividend to 16c per share from 14c.

THE HBM: DNKN, SBUX, MCD, DIN, THI, YUM, EAT - stocks 829

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 

 


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THE M3: MORE CHINESE BANK TIGHTENING; CASH HANDOUT; UNEMPLOYMENT (MAY-JULY);

The Macau Metro Monitor, August 29, 2011

 

 

CHINA EXPANDS BANK RESERVE RULES Channel News Asia, Intelligence Macau

According to Xinhua news agency, the People's Bank of China has ordered commercial lenders to include margin deposits in the reserves they must set aside.  The margin deposit is the collateral used for banks' off-balance sheet and securities transactions.  This move to further restrict bank lending indicates that containing inflation remains a government priority despite signs of a domestic slowdown.

 

IM believes this clamp on liquidity will pull 1 trillion yuan out of the banking system; in context, China is expected to see bank loans rise by ~6x that amount in 2011.

 

CASH HANDOUT TO START THIS WEEK Macau Business

Macau government said the second government cash handout of 2011 will be implemented starting tomorrow.  Each Macau permanent resident will receive MOP3,000 while each non-permanent resident will get MOP1,800.  Earlier this year, the government had already handed out MOP4,000 to each permanent resident while each non-permanent resident got MOP2,400. The cash handout program was first unveiled in 2008, when inflation in Macau peaked.

 

EMPLOYMENT SURVEY FOR MAY-JULY 2011 DSEC

Unemployment rate for May-July 2011 held stable at 2.7%, same as the previous period (April-June 2011).  Total labor force was 340,000 in May-July 2011 and the labor force participation rate stood at 71.8%, with the employed population increasing by about 2,200 over the previous period to 331,000.

 



MONDAY MORNING RISK MONITOR: FRANCE, SPAIN & ITALY CONTINUE TO WIDEN

This week's notable callouts include a new YTD high in the TED spread and continuing widening of US and European financial CDS.


Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Negative / 2 of 11 improved / 6 out of 11 worsened / 3 of 11 unchanged
  • Intermediate-term (MoM): Negative / 2 of 11 improved / 8 of 11 worsened / 1 of 11 unchanged
  • Long-term (150 DMA): Negative / 1 of 11 improved / 8 of 11 worsened / 2 of 11 unchanged

 

MONDAY MORNING RISK MONITOR: FRANCE, SPAIN & ITALY CONTINUE TO WIDEN - summary

 

Margin Debt Flat in July

We publish NYSE Margin Debt every month when it’s released.  This chart shows the S&P 500, inflation adjusted back to 1997, along with the inflation-adjusted level of margin debt (expressed as standard deviations from the long-run mean).  As the chart demonstrates, higher levels of margin debt are associated with increased risk in the equity market.  Our analysis shows that more than 1.5 standard deviations above the average level is the point where things start to get dangerous.  In July, margin debt held close to flat at $306B.  On a standard deviation basis, margin debt fell to 1.21 standard deviations above the long-run average.

 

One limitation of this series is that it is reported on a lag.  The chart shows data through July.

 

MONDAY MORNING RISK MONITOR: FRANCE, SPAIN & ITALY CONTINUE TO WIDEN - margin debt

 

1. US Financials CDS Monitor – Swaps widened across domestic financials last week with 27 of 28 issuers widening.  Only BAC swaps tightened, falling from a high of 387 bps on Tuesday to 334 bps on Friday following the injection of $5B from Warren Buffett.  On a month-over-month basis, not one issuer was tighter. 

Widened the most vs last week: PMI, LNC, PRU

Tightened the most/widened the least vs last week: BAC, WFC, JPM

Widened the most vs last month: PMI, LNC, HIG

Widened the least vs last month: ACE, AON, MMC

 

MONDAY MORNING RISK MONITOR: FRANCE, SPAIN & ITALY CONTINUE TO WIDEN - us cds

 

2. European Financials CDS Monitor – Banks swaps in Europe were wider last week.  35 of the 39 swaps were wider and 4 tightened.   The average widening was 10%, or 40 bps, and the median widening was 3%. 

 

MONDAY MORNING RISK MONITOR: FRANCE, SPAIN & ITALY CONTINUE TO WIDEN - euro cds

 

3. European Sovereign CDS – European sovereign swaps were wider week over week across the continent. We are keeping a close eye on France, which is critical to the EFSF, and where swaps widened by 12 bps to 165 bps week over week. We believe the CDS market is currently pricing in decreased hedge effectiveness in addition to improvement in sentiment around sovereign solvency.  Judging by the Greek bailout, regulators are making a concerted effort to design a bailout that does not trigger CDS.

 

MONDAY MORNING RISK MONITOR: FRANCE, SPAIN & ITALY CONTINUE TO WIDEN - sov 1

 

MONDAY MORNING RISK MONITOR: FRANCE, SPAIN & ITALY CONTINUE TO WIDEN - sov 2

 

4. High Yield (YTM) Monitor – High Yield rates fell last week, ending at 8.13 versus 8.20 the prior week.

 

MONDAY MORNING RISK MONITOR: FRANCE, SPAIN & ITALY CONTINUE TO WIDEN - high yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 14 points last week, ending at 1500. 

 

MONDAY MORNING RISK MONITOR: FRANCE, SPAIN & ITALY CONTINUE TO WIDEN - leveraged loan

 

6. TED Spread Monitor – The TED spread rose to a new YTD high, ending the week at 32.8 versus 30.3 the prior week.

 

MONDAY MORNING RISK MONITOR: FRANCE, SPAIN & ITALY CONTINUE TO WIDEN - ted

 

7. Journal of Commerce Commodity Price Index – Last week, the JOC index was flat at to –5.3.

 

MONDAY MORNING RISK MONITOR: FRANCE, SPAIN & ITALY CONTINUE TO WIDEN - JOC

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields hit a new all-time high before backing off, ending the week at 1786.

 

MONDAY MORNING RISK MONITOR: FRANCE, SPAIN & ITALY CONTINUE TO WIDEN - greek bond

 

9. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps.  We believe this index is a useful indicator of pressure in state and local governments.  Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 14-V1.  After bottoming in April, the index has been moving higher.  Last Friday, spreads closed at 164 bps.

 

MONDAY MORNING RISK MONITOR: FRANCE, SPAIN & ITALY CONTINUE TO WIDEN - mcdx

 

10. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production.  Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion.  Last week the index rose, climbing 79 points to 1541.

 

MONDAY MORNING RISK MONITOR: FRANCE, SPAIN & ITALY CONTINUE TO WIDEN - Baltic dry

 

11. 2-10 Spread – We track the 2-10 spread as a proxy for bank margins.  Last week the 2-10 spread widened 14 bps to 201 bps.   

 

MONDAY MORNING RISK MONITOR: FRANCE, SPAIN & ITALY CONTINUE TO WIDEN - 2 10

 

12. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF suggests bias to the upside as follows:  4.9% upside to TRADE resistance, 7.0% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: FRANCE, SPAIN & ITALY CONTINUE TO WIDEN - XLF

 

 

Joshua Steiner, CFA

 

Allison Kaptur



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