Koreas' Skirmish Hurt Equities, Futures Rebound Today

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 |  Includes: DIA, EWY, KEF, QQQ, SPY
by: Gary Townsend

This morning. Major equity markets closed about -1.5% lower yesterday, as the Koreas’ military skirmish, FBI investigations of insider trading, and eurozone sovereign concerns hurt confidence and pushed buyers to the sidelines. Volume rose, but not impressively so, suggesting that the sell-off lacked significant institutional participation and may reflect some pre-holiday impact.

Markets remain in correction. Equity futures are higher this morning, despite moderate dollar strength and continued sovereign weakness in Portugal and Spain. Commodities are were mixed, but have moved higher after US economic reporting at 8:30. December SPX futures are at 11186.80, up +7.82 points after fair value adjustment. Next resistance is at 1189.86; next support is at 1174.26.

Technical indicators are increasingly negative. All major indexes are higher on the year, but closed below their respective April highs and 20-day moving averages. The SPX and NYSE closed below their respective 200-week moving averages. Directional movement indicators are negative, with weak trend strength. On the other hand, all major indexes closed above their 50-, 100-, and 200-day moving averages. Also, their respective 50-day moving averages are above 200-day moving averages. Relative strength indicators suggest that markets are moving toward an short-term oversold range.

Asian equity markets closed mixed, with the Nikkei -0.84% and Hang Seng +0.56%. European equity markets are higher, with the Eurostoxx50 +0.41%, FTSE +0.58%, and DAX +1.26%. On the EuroStoxx, financials are up +0.04%, rebounding slightly from the prior two day’s dreadful performance. Eurozone sovereign CDS spreads are wider today, with Portuguese 5-year CDS notable at 486.19, up another +29 bps on the day. Spain is above 300 for the 1st time.

LIBOR trends remain unremarkable. Overnight USD LIBOR is 0.23313%, ticking up for the 3rd consecutive day, from 0.23188% the prior day. USD 3-month LIBOR rose to +0.28750% from 0.28438%, its 1st changed since November 11th. The dollar is largely unchanged. The euro trades at US$1.3378, compared to US$1.3367 the prior day. The dollar trades at ¥83.42, compared to ¥83.16 Tuesday. U.S. Treasury yields are higher compared to Tuesday, with 2- and 10-year maturities yielding 0.476% and 2.828%. respectively, compared to 0.453% and 2.773%. The yield curve spread widened to +2.352% compared to +2.320% Monday. In the past year, the 2- and 10-year spread has varied from a low of +1.959% on August 26, 2010, and a high of +2.90% on January 11, 2010. Commodities are mixed, with higher petroleum, lower precious metals, aluminum and copper, and higher agricultural prices.

3Q2010 Earnings. Earnings results have generally exceeded EPS and revenue expectations. Of the 466 S&P500 companies that reported earnings to date, 76% (354 of 466) beat operating EPS estimates, versus the historical average of 62%. Companies beat by an average of +6.5% (versus a historical average of +2%). EPS is up +31.5% over the prior year. Though challenged in the current operating environment, 371 companies (80%) reported increased revenues and 287 companies (61%) beat revenue estimates. With all 24 BKX members reporting, 79% (19 out of 24) beat operating EPS estimates, with a +25.3% average operating EPS surprise. Bank revenues disappointed slightly, missing expectations by -0.30% on average.

U.S. news. Due to Thanksgiving holiday, it is one of the year’s lightest weeks for economic releases. This morning, the latest week’s initial jobless claims beat at 407K versus 435K survey. Durable goods disappointed with a -3.3% move in October. Equity markets close Friday at 1:00.

Overseas news. Last night, S&P downgraded Ireland’s short and long term credit ratings to A and A-1, respectively, from AA- and A-1+. Today, Portugal’s two largest unions held their first general strike since the late 1980’s. November German Ifo business confidence rose to a record 109.3, up from 107.7 in October and beating estimates of a decline to 107.5. Responding to North Korea’s hostile engagement, the U.S. sent an aircraft carrier group to South Korea to participate in joint naval exercises. China and Russia will drop the U.S. dollar for bilateral trade and will use their own currencies for settlement instead.

Company news/research:

  • MTB – rated new market perform at BMO Capital Markets, price target of $85

Tuesday’s equity markets. Major indexes closed lower on increased if unimpressive volume. After the Korean military skirmish, risk-free assets outperformed as the dollar and Treasuries soared. Despite forbidding international news, trading desks reported that selling pressure wasn’t particularly acute, with the weakness more attributable to reluctant buyers and reduced liquidity in front of the Thanksgiving holiday. Market breadth was negative. All market segments closed lower. Telecommunication, utilities, and consumer goods were the best performers. Financials, basic materials, and oil and gas were the worst performers.

Market sentiment has turned negative, as markets moved into correction after November 16th. Major indexes are at least +3.98% higher in 2010, but the SPX closed -1.60% below its April 23rd close, the high point prior to the May-August correction. While the broader indices have recovered most of their correction losses, financial stocks have not, closing -23.2% below their April highs and mired well into bear market territory.

The latest week’s (November 18th) AAII Investor Bullish Sentiment index fell -30.5% to 40.00 from 57.56 on November 11th. This is a neutral reading, but also the lowest since September 2nd, just after the commencement of the latest confirmed uptrend. Sentiment indicators are highly variable, but this reading is probably best read as somewhat bullish.

Technical indicators are trending negative. The SPX joined the NYSE composite below their respective 200-week moving averages (1189.78 and 7720.42). All major indexes closed below the respective 20-day moving averages. All closed above their respective 50-, and 100-, 200-day averages. Markets are in a generally bullish configuration, with 50-day moving averages above respective 200-day moving averages. Directional movement indicators are negative, with a strengthening trend. Short-term relative strength indicators moved down into the lower end of a neutral range. Market volatility moved up. The VIX closed up +12.3% to 20.63 from 18.37 at Monday’s close, above 20.0 for the 1st time in 4 trading days.

Financials generally underperformed the SPX, though the regionals outperformed. The XLF, BKX, and KRX closed down -1.57%, -1.72%, and -0.58%, respectively.

NYSE Indicators. Volume rose +11.4% to 1.023 billion shares, from 918.82 million shares the prior day, but well below the 1.057 billion shares 50-day moving average. Market breadth was negative, and up volume lagged down volume. Advancing stocks trailed decliners by -1697 (compared to +58 Monday), or 0.28:1. Up volume lagged down volume by 0.10:1.

Valuation. The SPX trades at 13.9x estimated 2010 earnings ($85.13) and 12.2x estimated 2011 earnings ($96.51), compared to 14.1x and 12.4x respective 2010-11 earnings yesterday. The 10-year average median Price/Earnings multiple is 20.0x. Since the beginning of the year, analysts increased 2010, 2011, and 2012 earnings estimates by +11.7%, +4.4%, and +5.3%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings by +13.4% and +28.7%, respectively.

Large-cap banks trade at a median 1.36x tangible book value and 12.1x 2011 earnings, compared to 1.39x tangible book value and 12.2x 2011 earnings Friday. These compare to the 10-year average median multiples of 3.08x tangible book value and 15.9x earnings. Analysts expect 2011 large-cap bank earnings to exceed 2010 earnings by +34.3%. In 3Q2009, large-cap banks earned a combined $5.91 per share while the BKX Index earned -$1.24 per share. In 3Q2010, large-cap banks earned $13.78 and the BKX earned $0.71 per share.

SPX. On increased volume, the SPX fell -17.11 points, or -1.43% to end at 1180.73. Volume rose +12.4% to 827.63 million shares, from 736.20 million shares the prior day and above the 862.0 million share 50-day moving average. For the 24rd consecutive day, its 50-day moving average closed above its 200-day moving average (1173.31 versus 1131.34, respectively). The SPX closed below its 200-week moving average (1189.78), after closing above that average the prior two days.

The SPX gapped 12 points lower and trended lower to an intraday low of 1176.91 just after the 11:30 close of European markets. The SPX rallied to the 1182 level by 1:30, but retested support at 1180 around 2:30 before strengthening mildly into the close. The SPX closed +0.63% above its 50-day moving average (1173.31), closing above that average for the 57th consecutive day, and +4.35% above its 200-day moving average (1131.54), which trended higher on the day. The SPX closed -3.00% below its April 23rd closing high of 1217.28. The 20-day moving average trended lower. The 50-, 100-, and 200-day moving averages rose.

Technical indicators are negative as the SPX closed below its April highs for the 10th consecutive day. The directional momentum indicator is negative, and the trend has begun to strengthen. Relative strength fell to 45.89 from 54.54, moving into the lower end of a neutral range. Next resistance is at 1189.86; next support is at 1174.26.

BKX. On heavy volume, the KBW bank index closed at 44.52, down -0.78 points, or -1.72%. The index closed +3.58% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -23.2% below its April 23rd closing high, well into bear market territory.

Financial stocks generally underperformed the broader indexes, though regionals performed better than the large cap financials. The BKX gapped lower to 44.70, where it found support, rallying back to 45.0 at around 1:00. A downgrade of Region Financial’s long-term debt sent financials lower in the final two trading hours, closing just above the intraday low of 44.50. Volume was 155.76 million shares, up +35.8% from 115.05 million shares the prior day, and compares to 153.5 million share 50-day average.

Technical indicators are negative. The BKX closed below its 20-, 50-, 100-, and 200-day moving averages (46.51, 46.59, 46.81, and 48.87, respectively). The 20-, 50-, 100, and 200-day averages trended lower. The 50-day moving average closed (by -2.28 points) below the 200-day moving average, as it has since August 16. The directional movement indicator is negative, with a stable trend. Relative strength fell to 37.52 from 41.49, moving into an oversold range. Next resistance is 45.04; next support at 44.25.

Disclosure: No positions