This morning. SPX equity futures are up +0.84% this morning, extending yesterday’s +1.34% rebound. U.S. equity markets remain in correction. Asian markets closed higher, with better strength in Japan. 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. In Bahrain, the government’s crackdown on mostly Shi’ite protestors appears to have restore a semblance of quiet. S&P downgraded the country’s credit rating. European equities are moderately higher, perhaps on the BOJ intervention and UN approval of a “no fly” zone over Libya. Gadhafi continues to prosecute his civil war, moving toward Benghazi, his opponents’ stronghold. Commodity prices are higher. After a fair value adjustment of -0.13 points, June SPX equity futures are at 1278.60, up +9.67 points. The SPX opens at 1273.72, -5.16% below its February 18th post-Lehman high and -2.23% below its 50-day moving average. Next SPX resistance is at 1281.20. Next support is at 1263.93.
Thursday, U.S. equity markets closed about +1.0% higher, gapping immediately higher, and trending sideways throughout the day’s remainder. Financials participated, but lagged through most of the day, until a news report shortly after 2:00, that the Fed would approve common equity dividend increases for “some” U.S. banks. Volume decreased. Market breadth was positive. Volatility fell markedly, but remains elevated. The U.S. dollar weakened, and Treasury yields fell. Despite the better result, there was no indication in the day’s action of any change to our assessment that 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 closed higher, with particular strength in Japan, where in coordination with other world monetary authorities, the BOJ sold about ¥2 trillion at the market open. The yen is significantly weaker today. in a move . In Europe, equity markets are moderately higher. In Japan, the Nikkei rose +2.72%. In China, the Hang Seng and Shanghai composite closed up +0.07% and +0.33%, respectively. The SHCOMP gapped higher, but couldn’t press its gains, and closed near the day’s lows. Volume fell -26.9%. The recent spate of recent distribution days moved the index back into correction. In Europe, equity indexes gapped higher, weakened mid-morning, but are strengthening again approaching mid-session. Volumes are lower. The Eurostoxx50, FTSE, and DAX are up +0.60%, +0.52%, and +0.59%, respectively. On the EuroStoxx, financials are among the worst performers, up +0.15%.
LIBOR trends are remarkable for their steadiness. Overnight USD LIBOR is lower at 0.20550%, down from 0.2650% Thursday, and compared to 0.25188% 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$1.4134, compared to US$1.4021 Thursday and US$1.3900 the prior day. The euro trades above its 50-, 100-, and 200-day moving averages. The dollar trades at ¥81.52, compared to ¥78.89 Thursday, and ¥79.59 the prior day. Treasury yields are virtually unchanged, with 2- and 10-year maturities yielding 0.576% and 3.250%, respectively, compared to 0.585% and 3.255% Wednesday. The yield curve spread widened to +2.674%, compared to +2.670% 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 aluminum and copper, and agricultural prices.
U.S. news and economic reporting. Economic reporting is light today. There are no scheduled reports. Activity picks up on Monday, with the release of the Chicago Fed National Activity Index at 8:30, followed by February existing home sales at 10:00.
Overseas news. At the Asian markets’ open, G-7 countries intervened in foreign currency markets to devalue the yen. Last evening, the U.N. Security Council approved a no-fly zone over Libya, with 10 member countries approving and 5 member countries abstaining. In response, Colonel Qaddafi threatened retaliatory strikes on passenger aircraft over the Mediterranean. Standard & Poor’s downgraded Bahrain’s short and long term sovereign credit ratings to BBB and A-3 from A- and A-2, respectively. Today, Saudi King Abdullah announced the construction of 500,000 new homes to pacify growing unrest over economic conditions. Today, the People’s Bank of China raised the bank reserve requirement ratio by 50 basis points, the third increase this year and bringing the ratio to 20%.
· FITB – upgraded to buy at KBW, price target of $16
4Q2010 Earnings. The latest quarterly earnings results have exceeded EPS and revenue expectations. Of the 479 S&P500 companies that reported earnings to date, 71% (338 of the 479) 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 +36.9% over the prior year. Though challenged in the current operating environment, 369 companies (77%) reported increased revenues and 314 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.
Thursday’s equity markets. All the major indexes rose, but on lower, unimpressive volume. The DJI led the way, ending up +1.34%, with the SPX, Nasdaq, and NYSE gaining at more than +0.75%. All gapped higher and maintained most of their gains through the day, but only the DJI closed near its intraday high. Positive corporate and economic news set the tone. FDX reported a strong 4Q2010 beat and upped its profit outlook for the current quarter. Consumer Price Index and initial jobless claims were in line with forecasts. The Philadelphia Fed manufacturing index rose to 43.4 versus consensus of 28.8, as manufacturing expanded at the fastest pace since 1984 and factory orders jumped. On the macro front, Tokyo Electric Power said that it expects to restore power to its nuclear power facilities, enabling it to cool its reactors. In New York, oil rose +3.5% to $101.42 per barrel, as commodities rallied the most since September 2009. Trading desks report reactionary trading , with investors still focused on the headlines from Japan and the Middle East. The VIX closed down -10.3%, at 26.37 compared to Wednesday’s close of 27.40.
Technical indicators are negative, though markets continue to appear oversold. The Nasdaq closed below its 20-, 50-, and 100-day moving averages. The DJI, NYSE, and SPX are below their 20- and 50-day moving averages. All the indices are above their 200-week and 100-day average. Relative strength index ended at 40.81, up from Wednesday’s 32.38, in the low end of a neutral range. The AAII Investor Sentiment Bullish reading was +8.49 versus last week’s reading of +35.98. The Bloomberg NYSE new net highs were +2.00 versus the previous day’s -52.
Market segments were all positive. Oil and gas, basic materials and telecommunications led the gainers, up +3.01%, +2.12%, and +2.10%, respectively. Utilities, consumer services, and consumer goods gained the least.
Financials were middling performers, with banks stronger than other financial stocks. A 3:00 WSJ headline that the Fed would release today bank stress tests and approve “some” common dividends spurred the large bank stocks in the final hour. The strength of the rally surprised, not only for its speed but depth as investor took the BKX to its intraday high at the close. The XLF, BKX and KRX all closed higher, up +1.20%, +1.44%, and +0.48%, respectively. Notable gainers were FITB, up +3.06%, along with MTB, KEY, and BAC up more than +2.00%. The BKX, XLF, and KRX all closed beneath their 20- and 50-day moving averages, but above their 200-week and 100-day averages. While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -11.04% below its April 2010 high and -37.55% below its best level of 82.55 in September 2008.
NYSE Indicators. Volume fell -29.0% to 1.037 billion shares, from 1.461 billion shares Wednesday, 0.98x the 50-day moving average. For the 1st time in the past 4 sessions, market breadth was positive, and up volume exceeded down volume. Advancing stocks led decliners by +1401 (compared to -1636 Wednesday), or 2.73:1. Up volume led down volume by 4.21:1.
Valuation. The SPX trades at 13.1x estimated 2011 earnings (increased to $07.03 from $96.92) and 11.6x estimated 2012 earnings (increased to $110.10 from $109.75), compared to 13.0x and 11.5x 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 +4.9%, and +5.8%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +14.4% and +29.9%, respectively.
Large-cap banks trade at a median 1.51x tangible book value and 12.9x 2011 consensus earnings, compared to 1.52x tangible book value and 12.6x 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 lower volume, the SPX rose +16.84 points, or +1.34%, to 1273.72. Volume fell -28.3% to 841.04 million shares, down from 1.173 billion shares Wednesday and below the 830.64 million share 50-day moving average. For the 103rd consecutive day, its 50-day moving average closed above its 200-day moving average (1302.77 versus 1182.99, respectively). The SPX closed above its 200-week moving average (1176.40).
The SPX gapped higher at the open, rising +1.4% with trading’s first five minutes. The SPX struggled with first resistance at 1275 through 10:15 but a rally broke the index above that level and up to the intra-day high of 1278.88 at 10:27. The index lost some momentum and, by 11:20, had fallen back below 1275. At 1:15, the market sold-off more sharply, falling to 1270 by 1:30 and to the intra-day low of 1266.67 at 1:53. Buyers bought the dip, and lifted stocks into the close. By 2:30, the SPX retook 1270 and briefly crossed above 1275 at 3:45 before closing just below that level.
Technical indicators are negative. The index closed below 1300 for the fifth time in six sessions. The index closed above its April 2010 highs for the 73rd straight session. The SPX closed below its 20-day moving average (1309.33) for the eighth straight session. The index closed -2.23% below its 50-day moving average, closing below that average for the fifth time in six sessions. The index closed back above its 100-day moving average, closing +1.02%. above that average. The SPX closed +7.67% above its 200-day moving average. The 20-day average declined. The directional momentum indicator is negative, and the trend is increasing. Relative strength rose to 40.43 from 33.50, a neutral range. Next resistance is at 1281.20; next support is at 1263.93.
BKX. On lower volume, the KBW bank index closed at 51.55, up +0.73 points, or +1.44%. Volume fell 29.7% to 121.56 million shares, down from 172.85 million shares Tuesday below the 140.15 million share 50-day average. The index closed +19.94% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -11.04% below its April 23rd closing high.
Financials performed in-line with the market, and large-cap banks outperformed regionals. The BKX gapped higher at the open, rising +1.5% in trading’s first 10 minutes and reaching first resistance of 51.58 immediately. Trading in financials was volatile through the day. The BKX failed at 51.58-level resistance, and the index retraced to 51.20 at 9:50. By 10:45, the index had rallied back above 51.50, but momentum reversed again. The index dropped straight through 11:45, breaching 51.00 by 11:50. Buyers bought the dip, and by 12:15, the index had returned to the 51.20 level. Through 1:15, the index traded sideways until the broader market sell-off hit financials, retracing the entire day’s gains and sending the index into negative territory briefly. The BKX set its intra-day low of 50.80 at 1:55. Buyers bought the dip, and the index rallied to 51.20 through 3:00. The rally steepened dramatically following reports that the Federal Reserve would announce bank dividend hike approvals on Friday (today), one business day earlier than expected. By 3:05, the index reached 51.40 and continued higher. The BKX set its intra-day high of 51.63 at 3:46 and closed just below that level.
Technical indicators are negative. The index closed above 50 for the 61st straight day. The BKX closed above its 200-day moving average (49.06) for the 68th straight session and back above its 100-day moving average of 50.94. The index closed below its 20- and 50-day moving averages (52.76 and 53.47, respectively), closing below these averages for the 17th and 13th straight days, respectively. The 20- and 50-day moving averages fell. The 20-day closed (by -0.71 points) below the 50-day for the fifth straight day, with the negative divergence expanding. The 50-day moving average closed (by +4.41 points) above the 200-day moving average for the 44th straight session, with the positive divergence contracting. The 100-day moving average closed (by +1.88 points) above the 200-day moving average for the 27th straight session, with the positive divergence expanding. The directional movement indicator is negative, and the trend is increasing. Relative strength rose to 42.14 from 36.71, a neutral range. Next resistance is 51.86; next support at 51.02.
Disclosure: I am long FITB, BAC.