This morning. U.S. equity futures are higher, but lost ground after Libyan news reports indicated continued turmoil. Asian equity markets closed mixed on lower volume. European markets are also mixed, but financials are performing well. The SPX opens at 1315.44, -2.05% lower than the prior week’s close. March SPX futures are at 1316.20, up +2.46 points after fair value adjustment. Next SPX resistance is at 1332.12. Next support is at 1305.54. The market is in a confirmed uptrend, but additional distribution days could put the market under pressure.
Yesterday, world equity markets sold off on Libyan-related concerns, which were particularly evident in a surge in petroleum spot prices. U.S. equity markets suffered their worst sell-off since August 11th, led by the Nasdaq, which declined -2.74%. Notably, volumes were mixed, up only +2.0% on the SPX and +12.6% on the NYSE, but -3.69% and -12.3% lower on the Nasdaq and DJI, respectively. Trading desks report that market action was steady, but without any panic; mostly, that after a mid-day rally failed, the dip buyers stayed on the sidelines and never showed up. Still other recent themes remained in evidence; profit taking was modest, short positioning was limited, though it picked up late in the day. Market breadth was extremely negative, and volatility spiked, though it ended below its intraday high. The SPX ended below support levels at 1333 and 1320. Next important support levels are 1311 and 1295.
The distribution day count rose to 5 on the NYSE and 4 on the SPX, but were unchanged at 4 on the Nasdaq and one on the DJI. Distribution days infer institutional selling by tracking declines of more than -0.25% on increased volume, in the past 25 trading days. Market uptrends come under pressure as the frequency of distribution days increases. On the SPX, the most recent distributions were on February 15th and 9th. Both were mild losses on unimpressive volume. The January 28th distribution grows stale in another 8 trading days. The current market uptrend has persisted since last September.
After Tuesday’s sell-off, world equity markets are mixed. In Asia, the Nikkei and Hang Seng closed down -0.80% and -0.36% respectively, but the Shanghai composite ended up +0.25%, ending 2 consecutive days of declines. Volume declined -27.2% on the SHCOMP. Trading desks cited increased energy costs for the weakness, which hit transportation stocks particularly hard. An intraday reversal on February 10 confirmed a new SHCOMP uptrend, but yesterday the uptrend suffered its first distribution day. The SHCOMP and other Asian markets experienced a steep correction since early November, and recent previous uptrends have failed. Asian markets have yet to establish a clear and sustainable uptrend. In Europe, the Eurostoxx50, FTSE, and DAX are mixed, +0.22%, -0.45%, and -0.24%. On the EuroStoxx, financials are 2nd best performing market segment, up +0.88%. Sovereign debt spreads are slightly wider today.
LIBOR trends remain unremarkable. For the 4th consecutive day, overnight USD LIBOR declined, edging lower to 0.22700%, from 0.22800% Tuesday and comparing to 0.25188% at year-end. USD 3-month LIBOR declined to 0.31150% from 0.31250% Tuesday, and compares to 0.30281% at year-end. In early trading, the dollar is weaker against the euro, yen, and pound. The euro trades at US$1.3731, compared to US$1.3650 Tuesday and US$1.3678 the prior day. The euro trades above its 50-, 100-, and 200-day moving averages. The dollar trades at ¥82.81, compared to ¥82.77 Tuesday and ¥83.14 the prior day. Treasury yields are higher, with 2- and 10-year maturities yielding 0.767% and 3.490%, respectively, compared to 0.690% and 3.453% Tuesday. The yield curve spread narrowed to +2.723% compared to +2.763% the prior day. 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 +2.91% on February 3, 2011. Commodities prices are mixed, with higher petroleum and natural gas, lower precious metals, mixed aluminum and copper, and lower agricultural prices.
U.S. news and economic reporting. Economic reporting is light today. The latest week’s mortgage applications rose +13.2%, up from -9.5% in the prior week. Congress is out of session. There are two Fed governor speakers today.
Overseas news. The Bank of England’s most recent meeting minutes showed growing support for an interest rate hike. In Saudi Arabia, an internet campaign calling for a ‘Day of Rage” on March 11 has attracted followers. Today, hundreds of thousands of workers held a strike in Greece, halting commerce. In the fourth quarter, China’s consumer confidence declined, marking the second consecutive quarterly drop.
· SNV – press reports indicate that the company is exploring strategic options, including a sale, raising capital, or staying the course.
· ZION – upgraded to outperform at Macquarie, price target raised to $28 from $25
4Q2010 Earnings. The latest quarterly earnings results have so far exceeded EPS and revenue expectations. Of the 416 S&P500 companies that reported earnings to date, 71% (294 of the 416) beat operating EPS estimates, versus the historical average of 62%. Companies beat by an average of +5.4% (versus a historical average of +2%). EPS is up +32.6% over the prior year. Though challenged in the current operating environment, 324 companies (78%) reported increased revenues and 284 companies (68%) beat revenue estimates. In the fourth quarter of 2010, the SPX earned $22.47 per share, a +4.9% and +28.3% increase over 3Q10 and 4Q09 EPS of $21.42 and $17.51, respectively.
With all 24 BKX members reporting, 75% (18 out of 24) beat operating EPS estimates. Bank revenues disappointed slightly, missing estimates by -0.59% on average. Fifteen banks (63%) reported increased revenues over the prior year’s quarter and 17 banks (71%) beat revenue estimates. In the fourth quarter of 2010, the BKX earned $0.93 per share, a +31.0% increase over 3Q10 EPS of $0.71, and compared to 4Q09 EPS of -$0.52.
Tuesday’s equity markets. All the major U.S. indexes retreated, responding to overbought market conditions and escalating turmoil in Libya, the 16th largest oil producer. The DJI, SPX , Nasdaq, and NYSE composite declined at least -1.41% and experienced their greatest declines since August 11th. At 10:00, the markets briefly reacted positively to an upbeat Consumer Confidence report (70.4 vs. 65.5 expected), before continuing a steady progression lower and ending near the intraday lows. Volumes were mixed, an indication that selling pressure was not extraordinary; rather, buyers stepped to the sidelines. Volatility rose markedly, as the VIX rose the most since May 2010, up +26.6% to end at 20.80, off its intraday 21.45 high.
Technical indicators are mixed. The SPX broke through support at 1325 and 1316, to an intraday low of 1312.33, just above next support level at 1311. All major indexes closed above their respective 200-week and 20-, 50-, 100-, and 200-day moving averages. Markets remain in a bullish configuration, with the 50-day moving averages above their respective 200-day moving averages. The NYSE new net highs (day delayed) was +325.00, above its 10-day moving average of 269.20. The relative strength indicator retreated to a neutral 54.22 down from Friday’s 73.40 close.
All market segments ended the day lower, led by basic materials and financials, down -3.29% and -3.04% respectively. Utilities and oil and gas were the best performers, losing ~0.60%.
Financials were sharply lower. Regional banks were among the largest losers led by RF, HBAN, and CMA. JNS was also notable, down -6.40% as analysts expect slower growth. The XLF, BKX and KRX were down -3.06%, -3.50%, and -2.50% respectively. While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -8% below its April 2010 highs and -35.5% below its best level of 82.55 in September 2008.
NYSE Indicators. Volume rose +13.4% to 1.323 billion shares, from 1.162 billion shares Friday, or 1.35x the 50-day moving average. Market breadth was very negative, and up volume trailed down volume significantly. Advancing stocks lagged decliners by -2378 (compared to +458 Friday), or 0.13:1. Up volume trailed down volume by 0.10:1.
Valuation. The SPX trades at 13.7x estimated 2011 earnings ($96.24) and 12.1x estimated 2012 earnings ($109.15), compared to 14.0x and 12.3x respective 2011-12 earnings Friday. The 10-year average median Price/Earnings multiple is 20.0x. Since the beginning of 2010, analysts increased 2011 and 2012 earnings estimates by +4.1%, and +4.9%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($83.87) by +14.8% and +30.1%, respectively.
Large-cap banks trade at a median 1.57x tangible book value and 13.4x 2011 consensus earnings, compared to 1.60 tangible book value and 14.0x 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 and 2012 BKX earnings to exceed 2010 operating earnings by +27.1% and 70.6%, respectively.
SPX. On higher volume, the SPX fell -26.57 points, or -2.05%, to 1315.44. The index fell the most since August 11th. Volume rose +1.62% to 1,016.27 million shares, up from Friday’s elevated options expiration-inspired volume of 1,000.1 million shares, and above the 768.96 million share 50-day moving average. For the 86th consecutive day, its 50-day moving average closed above its 200-day moving average (1284.92 versus 1166.50, respectively). The SPX closed above its 200-week moving average (1179.55).
The SPX gapped lower at the open. Middle East protests gripped the oil producing nation of Libya, whose leader vowed the use of force to end the unrest. The index dropped to 1325 by 9:35. Sensing a support level, buyers bought the move lower and rallied equities back above 1335 by 10:15. Geopolitical turmoil proved a risk too great, and the SPX sold off from 1335 at 10:45 down to 1315 at 1:45. The index traded relatively flat through 3:00, when a brief dip to the intra-day low of 1312.33 at 3:30 was bought. The small rally lifted the index back above 1315 into the close. The index closed +2.38% above its 50-day moving average, closing above that average for the 117th consecutive day, and +12.77% above its 200-day moving average. The SPX closed marginally above its 20-day moving average of 1314.52. The 20-, 50-, 100-, and 200-day moving averages rose.
Technical indicators are generally positive. The SPX closed above 1300 for the 15th consecutive day and above its April highs for the 56th straight session. The directional momentum indicator is positive, but only slightly, and the trend is decreasing. Relative strength fell to 53.71 from 74.00, moving into the middle of a neutral range and marking the indicator’s largest one day decline since February 27, 2008. Next resistance is at 1332.12; next support is at 1305.54.
BKX. On higher volume, the KBW bank index closed at 53.27, down -1.93 points or -3.50%. The index closed +23.94% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -8.08% below its April 23rd closing high.
Financials underperformed the market, and large-cap banks underperformed regionals. The BKX gapped lower at the open, dropping over -2.0% by 9:50 to 54.00. A weak Case-Shiller home price index report hurt financials particularly. The broader market rally at 9:45 lifted the BKX in sympathy, and the index reach 54.50 by 10:15. The larger broad-based sell-off dropped financials through 1:00 to 53.25, down -3.50% intra-day. The index traded sideways through 3:00, when a sell-off sent the index to its intra-day low of 53.12 at 3:30. A marginally rally lifted financials just off their lows into the close. Volume rose +62.3% to 222.46 million shares, up from 137.09 million shares Friday, and above the 139.69 million share 50-day average.
Technical indicators are mixed. The index closed above 50 for the 44th straight day. The BKX closed above its 50-, 100-, and 200-day moving averages (53.14, 49.89, and 48.96, respectively), closing above the 200-day average for the 51st straight session. The index closed below its 20-day moving average (54.43) for the first time since January 31st. The 200-day moving average fell. The 50-day moving average closed (by +4.23 points) above the 200-day moving average, closing above it for the 27th straight day. The 100-day moving average closed (by +1.01 points) above the 200-day moving average, closing above it for the 10th straight day. The directional movement indicator switched to negative for the first time since November. Relative strength fell to 43.50 from 59.78, a neutral range. Next resistance is 54.61; next support at 52.53.
Disclosure: I am long SNV, CMA.