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U.S. Equity Futures Rebound, Markets Still In Correction

|Includes:CBSH, FCF, HBAN, HIG, JNS, PNC, The Charles Schwab Corporation (SCHW), STT, TCB, WFC
This morning.  U.S. equity futures are up +1.50% this morning, rebounding after 3 consecutive days of losses. U.S. equity markets are in correction. Following yesterday’s poor U.S. equity market performance, Asian markets closed about -1.5% lower, unable to repeat Wednesday’s rebound. News regarding Japan’s Fukushima Daiichi nuclear complex continues to develop poorly, as spent fuel in uncontained “cooling” ponds burns.  A widespread release of nuclear contamination suggests the near-permanent loss of productive assets in Japan’s northeast, and a corresponding reduction in Japan’s potential GDP.  Bahrainian developments continue with the arrest of Shia-haq movement leaders. European equities are moderately higher, perhaps on news reports that a G-7 meeting will meet tomorrow in order to reach agreements to limit the Japanese yen’s advance. After reaching historic highs yesterday, the yen is trading off -1.3%. Gadhafi continues to prosecute his civil war, moving toward Benghazi, his opponents’ stronghold. Commodity prices are higher.  After a fair value adjustment of -2.12 points, June SPX equity futures are at 1272.10, up +0.80%, or +20.02 points.  The SPX opens at 1256.88, -6.41% below its February 18th post-Lehman high and -3.52% below its 50-day moving average.  Next SPX resistance is at 1275.51.  Next support is at 1243.65.
Wednesday, U.S. equity markets closed about -2% lower, in volatile trading. Volume increased. As opposed to prior day’s trading, markets lost strength as the day progressed, finally bouncing mid-afternoon off key support levels. Market breadth was negative.  Volatility spiked on news of worsening conditions in Japan, ending at levels last seen this past July. The U.S. dollar weakened, Treasury yields fell.  U.S. equity markets are in correction.  Market corrections typically end on an intraday reversal on increased volume, when confirmed in subsequent trading.
Today, in Asia, equity markets ended lower, but in Europe, equity markets are moderately higher. In Japan, the Nikkei fell -1.44% as news on the recent catastrophes grew worse. In China, the  Hang Seng and Shanghai composite closed down -1.83% and -1.14%, respectively.  On the SHCOMP, volume rose +5.15%.  The SHCOMP opened lower. An early attempted reversal failed, and the index closed just above late intraday lows, -3.49% below its March 9th high. The spate of recent distribution days has put the index back into correction. In Europe, equity indexes initially rose, gave up most gains, but are now again rallying. The Eurostoxx50, FTSE, and DAX are up +1.12%, +0.97%, and +1.31%, respectively.  On the EuroStoxx, financials are middling performers, but up a respectable +1.07%.
LIBOR trends are remarkable for their steadiness.  Overnight USD LIBOR is lower at 0.2650%, down from 0.21150% Wednesday, and compared to 25188% at year-end.  USD 3-month LIBOR is unchanged at 0.30900% and compares to 0.30950% at year-end.  In early trading, the dollar is stronger against yen, but weaker against the euro and pound.  The dollar has trended lower since last June and now trades well below its 50-, 100-, and 200-day moving averages.  The euro trades at US$1.4020, compared to US$1.3900  Wednesday and US$1.3998 the prior day.  The euro trades above its 50-, 100-, and 200-day moving averages.  The dollar trades at ¥78.55, rebounding from an intraday low of 76.36 early this morning, compared to ¥79.59 Wednesday, and compares to ¥80.72 the prior day.  Treasury yields are lower, with 2- and 10-year maturities yielding 0.544% and 3.246%, respectively, compared to 0.544% and 3.170% Tuesday.  The yield curve spread narrowed to +2.661% compared to +2.626% 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 +2.889% on February 3, 2011.  Commodities prices are higher, with higher petroleum, natural gas, precious metals, but lower aluminum and higher copper, and higher agricultural prices.
U.S. news and economic reporting.  At 8:30, economic reporting begins with the latest weeks initial jobless claims, February consumer prices, industrial production, and capacity utilization. At 10:00, February leading indicators are released along with the March Philadelphia Fed manufacturing report.
Overseas news.  Elevated radiation near the troubled Japanese nuclear facility thwarted some efforts to cool core uranium elements.  Japanese officials said outside-source power cables should reach the nuclear plant as early as this afternoon. Some of Mizuho Bank’s ATMs in Japan shut down a number of times due to high withdrawals.  Spain sold €4.2 billion of 10- and 30-year bonds, less than the targeted maximum but with heavier demand than the prior auction.  Today, Taiwan said it would consider cutting electronic product component tariffs if supply shortages result from the Japan earthquake.  Overnight, Bahrain arrested six opposition activists, including leaders of the Shi’ite Haq movement and a political opposition group. 
Company news/research:
·         BAC, C – U.S. regulators investigating the banks, among others, over potential LIBOR manipulation
·         FITB – repurchased TARP warrants from the Treasury for $6.42 per warrant, or $280 million total
·         CMA – upgraded to outperform at BMO Capital, price target raised to $44 from $40
4Q2010 Earnings.  The latest quarterly earnings results have exceeded EPS and revenue expectations.  Of the 476 S&P500 companies that reported earnings to date, 71% (338 of the 476) beat operating EPS estimates, versus the historical average of 62%.  Companies beat by an average of +5.3% (versus a historical average of +2%).  EPS is up +37.1% over the prior year.  Though challenged in the current operating environment, 366 companies (77%) reported increased revenues and 312 companies (66%) 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.    
Wednesday’s equity markets. On heavier volume, the major indexes extended their decline, ending lower for a 3rd consecutive day as concerns mounted that Japan’s nuclear reactor crisis was worsening. The DJI, Nasdaq, NYSE composite, and SPX all closed lower, down -2.04%, -1.89%, -2.00%, and -1.95%, respectively.  Markets began the day lower, then consolidated through the morning, but sold off sharply after release at 10:55 of an over-the-top statement from EU Energy Commissioner Oettinger that Japan’s nuclear plants risk an “Armageddon”.  After a brief recover, markets began a gradual sell-off through the early afternoon. The markets sold off again around 2 p.m., followed by a quick snap back after the AP reported that Tokyo Power could have a power line to the nuclear plants “soon” that would help resolve the crisis. Corporate news remains light and investors are highly attuned to developments in Japan and the Middle East reactive to every headline.  Yesterday’s economic news, especially February housing starts, was much worse than expected and provided no support to equities. Trading desks reported more activity from faster trading accounts and hedge funds than from larger vanilla accounts.  Shorting activity remains low, and while elevated, there’s been no panicked selling of equities, despite much higher volatility. The VIX ended the day at 29.40, up +20.9%. The VIX has not been above 29 since July 6th, 2010.
Technical indicators are negative. The SPX closed at 1256.88, off -1.95%, with 1250 remaining a key support.  The SPX bounced off that level at 2:19, when all markets reached their intraday lows within a minute of each other. Other vital support levels for the SPX are 1238 (-61.8% retracement), 1227 (retracement to the November 2010 high), 1220 (April 2010 peak), and 1217 (July 2010 -38.2% retracement).  The DJI, SPX and Nasdaq closed below their 20-, 50-, and 100-day moving average.  The NYSE traded through its 100-day average and closed above the 100-day, but below the 20-, and 50-day moving averages.  All the major averages finished above their 200-week moving average.  Reflecting the current correction, the Bloomberg NYSE new net highs were a -52 versus the previous day’s +8.  The relative strength indicator closed at 32.38, down from Tuesday’s 38.50, and at the bottom of the neutral range.
Market segments were all negative. Telecommunications, consumer services, and basic materials were down the least. Technology, industrials and oil and gas were down the most, all down at least -1.94%.
Financials were down with NDAQ leading the way, off -5.11%. Brokerage names and insurers also helped the financial indexes lower with SCHW, JNS, and HIG all off at least -3.3%.  Among regional banks, WFC, HBAN, and PNC were the worst performers, lower by -3.22%, -2.26% and -2.21%, respectively.  Four financials were in the green today, STT, TCB, FCF, and CBSH. The XLF, BKX and KRX all finished the day lower, down -1.85%, -1.63%, and -1.22%, respectively.  The BKX and KRX are below their 20-, 50-, and 100-day moving averages. The XLF is below its 20- and 50-day averages, but just above its 100-day average.  While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -12.3% below its April 2010 high and -38.4% below its best level of 82.55 in September 2008.
NYSE Indicators.  Volume rose +13.4% to 1.461 billion shares, from 1.288 billion shares Tuesday, 1.38x the 50-day moving average.  For the 5th day in the past 8 sessions, market breadth was negative, and up volume trailed down volume by a large margin.  Advancing stocks lagged decliners by -1636 (compared to -1742 Tuesday), or 0.30:1.  Up volume lagged down volume by 0.10:1.
Valuation.  The SPX trades at 13.0x estimated 2011 earnings (increased to $96.92 from $96.81) and 11.5x estimated 2012 earnings ($109.75), compared to 13.2x and 11.7x respective 2011-12 earnings yesterday.  The 10-year average median Price/Earnings multiple is 20.0x.  Since the beginning of 2010, analysts increased 2011 and 2012 earnings estimates by +4.8%, and +5.4%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +14.3% and +29.5%, respectively.
Large-cap banks trade at a median 1.52x tangible book value and 12.6x 2011 consensus earnings, compared to 1.52x tangible book value and 12.9x 2011 earnings yesterday.  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 +27.3% and 71.6%, respectively. 
SPX.  On higher volume, the SPX fell -24.99 points, or -1.95%, to 1256.88.  Volume rose +15.1% to 1.173 billion shares, up from 1.019 billion shares Tuesday and above the 830.37 million share 50-day moving average.  For the 102nd consecutive day, its 50-day moving average closed above its 200-day moving average (1302.70 versus 1182.12, respectively).  The SPX closed above its 200-week moving average (1176.31). 
The SPX opened -5 points lower to 1276.  By 9:45, the index tested 1975 and bounced higher off that level.  The SPX rallied to break 1280 by 10:45 when a news report hit that recycled the EU energy commissioner’s previous evening’s comments predicting a Japanese nuclear fallout catastrophe.  Stocks descended sharply, falling through 1275 and 1270 within minutes.  Stocks saw a slight and brief bounce off of first level support at 1265, but the sell-off continued in force to 1260 at 11:07.  Stocks reversed as quickly as they declined, immediately rising to back above 1270.  Between 11:30 and noon, the index drifted lower, falling back to the 1265 support level and staying there through 1:20.  Momentum remained negative, and stocks continued to fall gradually closer to the year’s opening level of 1257.  At 2:00, the index crossed 1260 to the downside, and the sell-off accelerated.  Stocks dropped to their intra-day low of 1249.05 at 2:20.  A 2:21 news report that the Tokyo Electric Company was imminently close to restoring power at the nuclear plants rallied stocks from 1250 back to 1265 by 3:00.  The index failed to hold at this support level again, broke below 1260 into the close, and finished with negative year-to-date performance. 
Technical indicators are negative.  The index closed below 1300 for the fourth time in five sessions.  The index closed above its April 2010 highs for the 72nd straight session.  The SPX closed below its 20-day moving average (1312.46) for the seventh straight session.  The index closed -3.52% below its 50-day moving average, closing below that average for the fourth time in five sessions.  The index crossed below its 100-day moving average for the first time since August 10th.  The SPX closed +6.32% above its 200-day moving average.  The 20- and 50-day averages declined.  The directional momentum indicator is negative, and the trend is increasing.  Relative strength fell to 33.50 from 39.90, a lower end of a neutral range.  Next resistance is at 1275.51; next support is at 1243.65. 
BKX.  On higher volume, the KBW bank index closed at 50.82, down -0.84 points, or -1.63%.  Volume rose +8.4% to 172.85 million shares, up from 159.50 million shares Tuesday and above the 140.84 million share 50-day average.  The index closed +18.24% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -12.30% below its April 23rd closing high. 
Financials outperformed the market, and regionals outperformed large-cap banks.  The BKX opened flat.  By 9:35, the index moved higher to intra-day gains and the day’s high of 51.87.  Gains were short lived, and financials sold off at 9:45, following the broader markets lower.  At 9:50, the index dropped to 51.40 before a 10:45 rally attempted to retake break-even.  The BKX had just reached the prior day’s closing level when the broad market’s steep sell-off hit the index.  By 11:00, financials had dropped through 51.00, bottoming at 51.90 support.  The index quickly reversed the sharp loss and, by 11:15, returned to 51.40.  Like the SPX, negative momentum persisted, and financials drifted lower through 12:20, falling back to the sharp sell-off bottom of 50.90.  Another rally took hold, and by 1:00, financials had returned to 51.30.  Buying was insufficient to turn momentum, however, and financials dropped steadily through 2:20 to the intra-day low of 50.67.  Another rebound retook 51.20 by 3:00, but the BKX trailed off into the close with the SPX, breaking below 51.00 at 3:30 and closing below first-level support.
Technical indicators are negative.  The index closed above 50 for the 60th straight day.  The BKX closed above its 200-day moving average (49.05) for the 67th straight session.  The index closed below its 20-, 50-, and 100-day moving averages (52.94, 53.52, and 50.88, respectively).  The index closed below its 20- and 50-day moving averages for the 16th and 12th straight days, respectively, while moving below the 100-day moving average for the first time since November 16th.  The 20- and 50-day moving averages fell.  The 20-day closed (by -0.57 points) below the 50-day for the fourth straight day with the negative divergence expanding.  The 50-day moving average closed (by +4.47 points) above the 200-day moving average for the 43rd straight session, but the positive divergence contracted.  The 100-day moving average closed (by +1.83 points) above the 200-day moving average for the 26th straight session, with the positive divergence expanding.  The directional movement indicator is negative, and the trend is increasing.  Relative strength fell to 36.71 from 40.80, the lower end of a neutral range.  Next resistance is 51.58; next support at 50.36.

Disclosure: I am long WFC, HBAN, CMA, PNC, STT.