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Equity Futures Slightly Weaker After Yesterday's Strength

|Includes:BPFH, CVBF, FCF, Goldman Sachs Group Inc. (GS), HBAN, KEY, MS, STT
This morning.  U.S. equity futures are lower. Overseas equity markets are mixed.  U.S. equity markets are in a confirmed uptrend, albeit after last Thursday’s weak confirmation signal.  The U.S. dollar is weaker.  Commodity prices are mixed.  After a fair value adjustment of -0.34 points, the June SPX equity futures are at 1322.40, down -1.16 points.  The SPX opens at 1328.26, -1.10% below its February 18th post-Lehman high and +1.93% above its 50-day moving average. Next resistance is at 1332.70.  Next support is at 1322.85. 
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Wednesday, U.S. equity markets gapped higher, with the Nasdaq closing near its intraday high, while the other major indexes gave up some gains in afternoon trading. Volumes rose, but remained unimpressive. Financials were middling performers. Market breath was positive.  Market volatility fell, with the VIX closing at 17.71, down -2.48% on the day, and -39.8% since March 16th.  U.S. equity markets are in a confirmed uptrend after the prior month’s -8.5% correction. Follow-through days occur when indexes post strong gains (greater than +1.0%) on higher volume after setting recent lows.  The March 24th follow-through was not particularly robust as only the Nasdaq rose more than +1.0%, and both the DJI and the NYA indexes rose on lower volume. 
Today, Asian markets are mixed.  The Nikkei and Hang Seng rose +0.48% and +0.32%, respectively, while the Shanghai composite fell -0.94%, its 3rd consecutive daily loss.  SHCOMP volume was lower. The Eurostoxx50, FTSE and DAX are moderately lower, down -0.48%, -0.16%, and -1.41%, respectively.  On the EuroStoxx, financials are the worst performing sector, down -1.60%.
Libor continues to trend lower, despite sovereign debt and inflation concerns. Overnight USD LIBOR is lower at 0.18450%, down from Wednesday’s 0.18550% level and compared to 0.25188% at year-end. USD 3- month LIBOR is lower at 0.30300%, compared to 0.30450% the prior day’s 0.30700%, and 0.30950% at year-end.  In early trading, the dollar is weaker against the euro, pound, and yen.  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$1.4220, compared to US$1.4127 Wednesday and US$1.4196 the prior day. The Euro trades above its 50-, 100-, and 200-day moving averages. The dollar trades at ¥82.75, compared to ¥82.89 Wednesday and 82.48 the prior day. Treasury yields are slightly higher at the longer maturities, with 2- and 10-year maturities yielding 0.782% and 3.426%, respectively, compared to 0.782% and 3.435% Wednesday. The yield curve narrowed to +2.644% from +2.653% from 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 mixed, with higher petroleum and natural gas, higher precious metals, lower copper and aluminum, and mixed agricultural prices.
U.S. news and economic reporting.  At 8:30, the latest week’s initial and continuing jobless claims were 388K, compared to 380K survey and 394K prior revised. At 9:45, March Chicago purchasing manager and at 10:00, March NAPM (Milwaukee) and February factory orders are released.
Overseas news.  In March, the Euro-zone consumer price index rose +2.6% over the prior year’s level, above forecasts of a +2.4% increase and reinforcing expectations for a European Central Bank rate hike at the April 7th meeting.  Today, the Irish government announces its bank stress test results.  In 2010, Portugal reported a budget deficit worth 8.6% of GDP, higher than estimates.  Today, Standard & Poor’s downgraded Portuguese banks.  Today, two-year yields on Portugal’s sovereign debt rose above 10-year yields for the first time since 2006.  In March, U.K. home prices rose +0.5% over the prior month, beating estimates for no change.  Last evening, Libya’s foreign minister defected, marking the highest level defection since the revolt began. 
Company news/research:
·         GS – 1Q11 EPS estimates reduced to $3.95 from $4.02 at Deutsche Bank
·         MS - 1Q11 EPS estimates reduced to $0.50 from $0.68 at Deutsche Bank
4Q2010 Earnings.  The latest quarterly earnings results have exceeded EPS and revenue expectations.  Of the 496 S&P500 companies that reported earnings to date, 71% (356 of the 496) beat operating EPS estimates, versus the historical average of 62%.  Companies beat by an average of +5.6% (versus a historical average of +2%).  EPS is up +36.3% over the prior year.  Though challenged in the current operating environment, 386 companies (78%) reported increased revenues and 327 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, all the major indexes closed moderately higher. The DJI, Nasdaq, NYSE Composite, and SPX advanced +0.58%, +0.72%, +0.85%, and +0.67%, respectively.  All indexes gapped higher at the open, with most posting their intraday highs at 1:00 The Nasdaq Composite set its intraday high at 3:45.  During the afternoon, the DJI, SPX and NYSE composite gave back some of gains during the afternoon and ended the day off their highs.  Economic news flow was positive with Challenger Gray’s report on planned firings showing a 39% decrease versus March 2010 and 18% lower than last month.  The ADP Employer Services report showed that employment increased by 201,000 workers in March after a revised gain of 208,000 in February.  Macro news flow was light, as markets look beyond the 3 big overhangs (Middle East, Japan nuclear situation, and European sovereign debt). Trading desks reported light volume with mutual funds largely uninvolved in the recent higher move. The VIX closed at 17.71, down -2.48%.
Technical indicators are generally positive. The SPX, which closed at 1328.26, up +0.67%, extended the best 1st quarter rally since 1998 for the index, up +5.62%.  The next resistance point for the SPX is 1332.70 with support at 1322. 85.  All the major indices closed above their 200-week and 50-, 100-, and 200-day moving average. The Bloomberg NYSE new net highs were +100 versus Tuesday’s +101, below the 50-, 100-, and 200-day moving average.  The relative strength index finished at 58.72, higher than Tuesday’s 55.13, and in the middle of a neutral range.
All market segments were positive. Telecommunications, utilities, and basic materials led all segments, up at least +1.09%. The laggards were technology, industrials, and consumer goods.
Financials were middling performers. The BKX, XLF, and KRX all finished higher, up +0.66%, +0.80%, and +1.55%, respectively.  Smaller regional banks had the best returns, with FCF, BPFH, and CVBF up at least +3.28%.  Among the larger banks, STT, KEY, and HBAN set the pace, up at least +1.66%.  The BKX and XLF closed below their 20- and 50-day moving averages, but above their 200-week and 100- and 200-day averages.  The KRX closed above all its key moving averages for the first time since February 28th, 2011.  While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -10.0% below its April 2010 high and -36.9% below its best level of 82.55 in September 2008.
NYSE Indicators.  Volume rose +11.8% to 899.14 million shares, compared to 804.39 million shares Tuesday, but only 0.86x the 50-day moving average.  Market breadth was positive, and up volume led down volume.  Advancing stocks led decliners by +1338 (compared to +965 Tuesday), or 2.59:1.  Up volume led down volume by 3.51:1.
Valuation.  The SPX trades at 13.7x estimated 2011 earnings ($96.93) and 12.1x estimated 2012 earnings ($109.97), compared to 13.6x and 12.0x 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 +5.6%, 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 1.54x tangible book value and 13.1x 2011 consensus earnings, compared to 1.52x tangible book value and 12.8x 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 +28.3% and 72.0%, respectively. 
SPX.  On higher volume, the SPX rose +8.82 points, or +0.67%, to 1328.26.  Volume rose +15.0% to 680.4 million shares, up from 591.9 million shares Tuesday and below the 821.0 million share 50-day moving average.  For the 111th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1307.30 versus 1193.15, respectively).  The SPX closed above its 200-week moving average (1174.37).
The SPX gapped higher at the open, immediately crossing resistance at 1324.   The index broke through 1326 just before 10:00, but fell back to an intra-day low of 1324.23 at 10:10.  From 10:10 until 1:06, equities rallied to an intra-day high of 1331.74.  Through the afternoon, the SPX retraced back to 1330 and struggled to hold that level.  A 3:45 sell-off sent the SPX below 1330 to support at 1328, where it closed.
Technical indicators are positive.  The index closed above 1300 for the fifth straight session.  The index closed above its April 2010 highs for the 82nd straight session.  The SPX closed above its 20-day moving average (1303.13) for the fifth straight session.  The index closed +1.60% above its 50-day moving average, closing above that average for the fifth straight session.  The index closed (by +4.49%) above its 100-day moving average for the ninth straight session.  The SPX closed +11.32% above its 200-day moving average.  All moving averages increased.  The directional momentum indicator switched to positive, and the trend is declining.  Relative strength rose to 59.15 from 56.32, a neutral range.  Next resistance is at 1332.70; next support is at 1322.85. 
BKX.  On higher volume, the KBW bank index rose +0.34 points, or +0.66%, to 52.13.  Volume rose +40.0% to 101.36 million shares, up from 72.93 million shares Tuesday, but below the 129.27 million share 50-day average.  The index closed +21.3% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -10.0% and -6.11% below its April 23,  2010 and February 15, 2011 closing highs, respectively. 
Financials outperformed the market, and regionals outperformed large-cap banks.  The BKX gapped higher at the open, immediately crossing first resistance of 51.94.  Two sell-offs at 9:45 and 10:05 pushed the index back near break-even, but a strong rally took hold after 10:10.  By 10:40, the index breached 52.00 and by 11:00, the BKX crossed 52.20.  The index traded sideways until early afternoon, setting the intra-day high at 12:15 on a small tick higher to the 52.33 level.  A 3:30 sell-off retraced gains back to 52.20 and by 3:50, the index hit 52.10.  Finding support there, the index’s retrea halted, and it closed just above this level. 
Technical indicators are trending positive.  The index closed above 50 for the 70th straight day.  The BKX closed above its 100- and 200-day moving averages (51.45 and 49.21) for the 10th and 77th straight sessions, respectively.  The index crossed above its 20-day moving average (52.03) for the first time since February 22nd, closing above that average by +0.19%.  The index closed below 50-day moving average (53.17), closing below that average 22nd straight session.  The 50-day moving average fell while the 20-day moving average increased for the first time since February 23rd.  The 20-day closed (by -1.14 points) below the 50-day for the 12th straight day, but the negative divergence contracted.  The 50-day moving average closed (by +3.96 points) above the 200-day moving average for the 53rd straight session, with the positive divergence contracting.  The 100-day moving average closed (by +2.24 points) above the 200-day moving average for the 36th straight session, with the positive divergence expanding.  The directional movement indicator is negative but contracting, and the trend is declining.  Relative strength rose to 48.44 from 45.40, a neutral range.  Next resistance is 52.38; next support at 51.85.