This morning. U.S. equity futures are modestly higher this morning, though Japanese and British markets are closed. U.S. equity markets are in a confirmed uptrend, having closed yesterday, for the 3rd consecutive day, at new multi-year highs. The dollar is lower. Commodity prices are generally higher. U.S. Treasury prices are slightly stronger. After a fair value adjustment of 1.83 points, June SPX equity futures are at 1357.60, up +0.69 points. The SPX opens at 1360.48, a new 2011 and multi-year high and +3.28% above its 50-day moving average. Next resistance is at 1363.59. Next support is at 1355.48.
On Thursday, U.S. equity markets surprised by pressing through resistance and closing moderately higher on mixed volume. After mixed economic reports, markets briefly lagged in early trading, and traded without much direction through the morning, but strengthened through the afternoon and ended near their closing highs. The NYSE composite posted the best gain (+0.99%), followed by the DJI (+0.57%) and SPX (+0.36%). The Nasdaq lagged with a gain of +0.09%. Market breadth was positive. Volatility fell through the day to its lowest level since April 2010. Distribution days number 3 on the NYSE, 2 on the DJI, and 1 on the Nasdaq and SPX. Distribution days, which indicate institutional selling, pressure uptrends and push markets back into correction.
Earlier today, Asian equity markets closed mixed. The Nikkei was closed for holiday. In China, the Hang Seng and Shanghai Composite closed -0.36% and +0.85%, respectively. Analysts attributed the mixed result to slowing U.S. economic growth. On the SHCOMP, volume fell -16.7% from the prior day. On an intraday reversal, the index closed at 2911.51, rising for the 1st time in six days, rising back above the 2954.55 50-day moving average. The index initially traded lower, but reversed after the first hour, and trended higher to end at the intraday high. Financials were the worst performing market segment, down -0.58%. Chinese equity markets are in a confirmed uptrend, but have lost ground in five of the past six days, with a distribution day Wednesday. The index is up +8.74% since it correction-low close on January 25th. European equity markets are mostly higher. The EuroStoxx 50 and DAX, are up +0.15% and +0.34%, respectively. On the EuroStoxx, financials are a middling performing market segment, up +0.37%. The FTSE is closed for the Royal wedding.
Despite sovereign debt and other macro-concerns, LIBOR levels are below those seen prior to last year’s sovereign debt crisis. Due to the wedding, Libor markets are closed. Overnight USD LIBOR is 0.13375%, down from 0.13475% the prior day and compared to 0.25188% at year-end. USD 3-month LIBOR is 0.27300%, compared to 0.27325% the prior day and compared to 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$1.4863, compared to US$1.4822 Thursday and US$1.4788 the prior day. The Euro trades well above its 50-, 100-, and 200-day moving averages. The dollar trades at ¥81.20, compared to ¥81.54 Thursday and ¥82.16 the prior day. The yen trades better than its 200-day moving average ¥82.36, which is trending lower. U.S. Treasury yields are slightly lower, with 2- and 10-year maturities yielding 0.617% and 3.296%, respectively, compared to 0.617% and 3.311% Thursday. The yield curve narrowed to +2.679%, from +2.694% 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 mostly higher, with higher petroleum, natural gas, precious metals, aluminum, lower copper, and mixed agricultural prices.
U.S. news and economic reporting. Economic releases focus on personal income and spending for March, April Chicago purchasing, the April University of Michigan confidence, and NAPM-Milwaukee.
Overseas news. In April, China’s preliminary purchasing managers’ index was unchanged from the prior month. In April, Euro-zone inflation accelerated to a +2.8% increase over last year, up from +2.7% in March and above estimates for no change. In the first quarter, Spain’s unemployment rose to 21.3%, higher than expectations and the highest level since 1997.
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1Q2011 Earnings. The first quarter’s earnings results have so far exceeded EPS and revenue expectations. Of the 281 S&P500 companies that reported earnings to date, 77% (217 of the 281) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies have beat by an average of +8.1% (versus a historical average of +2%). EPS is up +21.8% over the prior year. Though challenged in the current operating environment, 219 companies (78%) reported increased revenues and 200 companies (71%) beat revenue estimates. In the first quarter of 2011, analysts estimate the SPX will earn $24.32 per share, compared to $22.47 and $19.49 per share in 4Q10 and 1Q10, a +8.2% and +24.8% increase, respectively.
With all 24 BKX members reporting, 75% (18 out of 24) beat operating EPS estimates. Bank revenues disappointed slightly(by -0.78% on average), with 58% of BKX members missing estimates. Eleven banks (46%) reported increased revenues over the prior year’s quarter. In the first quarter of 2011, the BKX earned $0.95 per share, a +4.4% increase over 4Q10 EPS of $0.91 and 180% above 1Q10 EPS of $0.34.
Valuation. The SPX trades at 13.8x estimated 2011 earnings (increased to $98.30 from $98.21) and 12.2x estimated 2012 earnings ($111.43), compared to 13.8x and 12.2x respective 2011-12 earnings yesterday. The 10-year average median Price/Earnings multiple is 20.0x. Since the beginning of 2011, analysts increased 2011 and 2012 earnings estimates by +3.9%, and +3.8%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +15.9% and +31.4%, respectively.
Large-cap banks trade at a median 1.56x tangible book value and 13.0x 2011 consensus earnings, compared to 1.55x 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 +32.5% and 71.6%, respectively.
Thursday’s equity markets. On mixed volume, the markets advanced to new highs. The DJI, SPX, NYSE, and Nasdaq finished the day higher, up +0.57%, +0.36%, +0.35%, and +0.09%, respectively. The markets extended their winning streak to three sessions. The SPX closed higher 9 of the last 11 sessions. The DJI closed higher 10 of the last 13 sessions. Of the major indices, only the SPX posted more volume. Thursday’s markets saw their lows at the open, then steadily advanced throughout the day, consolidating recent gains as all markets closing near their intraday highs. Continued strong earnings announcements undergirded the advance, and at least one M&A deal announced before the open. On the earnings front, XOM, DOW, PEP, APA and TWC beat estimates while PG and KO missed analyst’s expectations. Economic news was mixed, particularly a disappointing U.S. 1Q2011 GDP report, but markets were already looking forward. The GDP (+1.8%) and initial jobless claims (429k) were worse than anticipated, while pending home sales were better at 5.1%. Trading desks reported that many accounts were “caught off-guard” by the recent strong advance. Short seller are reluctant to step in front of this resilient tape. Desks reported strong activity around the open, with activity tapering off throughout the day. The VIX finished the day at 14.62, off -4.76%.
Technical indicators remain positive. The markets’ strength, even on mixed volume, has been impressive. However, the SPX has reached a range where many technicians forecast resistance 1353-1367. First support is at 1338-1344, the recent strong resistance level. All the major indices finished above their 50-, 100-, and 200-day and 200-week moving averages. The Bloomberg NYSE new net highs were +267 versus Wednesday’s +298 and well above the key moving averages. The relative strength indicator rose to 66.29 from Wednesday’s reading of 64.77 and is in the higher end of a neutral range.
Market segments were mixed. Consumer goods, financials, and utilities were the leaders, up at least +0.71%. Telecommunications, technology, and oil and gas were the laggards.
Financials were one of the strongest market segments, as insurance names assume leadership. The XLF, BKX, and KRX were up +0.80%, +0.49%, and +0.42%, respectively. Insurance names ALL (+5.70%), AFL (+4.99%), and LNC (+4.22) were particularly strong, after earnings handily beat analyst estimates. The KRX continues its ascent, with PNFP (+3.34) , PVTB (+2.45%), and HCBK (+2.34%) leading the index higher. Among the larger cap financials, BBT (+1.80%), C (+1.77%) ,and STI (+1.52%) were the standouts. The BKX had 16 names advance and 8 names lower. The KRX had 35 names advance, 14 move lower, and 1 was unchanged. The BKX closed below its 50- and 100-day moving averages, but above the 200-day and 200-week average. The XLF ended below its 50-day average, but above the other major moving averages. The KRX closed above all its major moving averages. While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -10.9% below its April 2010 high and -37.4% below its best level of 82.55 in September 2008.
NYSE Indicators. Volume rose a slight +0.06% to 961.53 million shares, from 960.95 million shares the prior day, 0.96x the 50-day moving average. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by +691 (compared to +832 Wednesday), or 1.60:1. Up volume led down volume by 1.61:1.
SPX. On higher volume, the SPX rose +4.82 points, or +0.36%, to end at 1360.48, the third consecutive multi-year closing high. Volume rose +2.60% to 770.50 million shares, up from 751.34 million shares Wednesday, but below the 783.65 million share 50-day moving average. For the 131st consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1317.31 vs. 1218.60, respectively). The SPX closed above its 200-week moving average (1170.89).
The SPX opened lower, but reversed quickly. At the open, the index set its intra-day low of 1353.60. By 9:50, the index had climbed to breakeven and reached 1357 by 10:15. Between 10:30 and 1:15, the index twice repeated a rally to 1358 followed by a sell-off back to breakeven. At 1:30, a more sustained rally took hold, and the market climbed through 1358 at 3:15 before a sharp move higher at 3:30 lifted the SPX above 1360, it first resistance point. At 3:45, the index set its intra-day high of 1361.71. A small sell-off took the index back to 1360, but it held that level into the close.
Technical indicators are positive. The market set a third consecutive multi-year high. The index closed above 1300 for the 25th straight session. The index closed above its April 2010 highs for the 101st straight session. The SPX closed (by +2.32%) above its 20-day moving average (1329.62) for the sixth consecutive session. The index closed (by +3.28%) above its 50-day moving average for the sixth straight session. The index closed (by +4.91%) above its 100-day moving average (1296.85) for the 29th straight session. The SPX closed +11.64% above its 200-day moving average. All moving day averages increased. The directional momentum indicator is positive for the fifth straight session, and the trend is increasing. Relative strength rose to 68.11 from 66.52, the high end of a neutral range. Next resistance is at 1363.59; next support is at 1355.48.
BKX. On higher volume, the KBW bank index rose +0.25 points, or +0.49%, to 51.65. Volume rose 18.8% to 120.36 million shares, up from 101.34 million shares Wednesday, but below the 122.76 million share 50-day average. The index closed +20.17% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -10.87% and -7.15% below its April 23, 2010, and February 14, 2011 closing highs, respectively.
Financials outperformed the market, and large-cap banks outperformed regionals. The BKX opened lower and set its intra-day low of 51.40 at 9:31. At 9:45 and 11:00, the BKX made two rally attempts back to the break-even line, but both were sold. At 12:00, the index began another, stronger rally that retook the breakeven line by 12:30. Unlike in the morning, the index held that level through 2:00. At 2:15, a sharper rally took the index above 51.50, and a 3:00 rally took the index through 51.63-level resistance at 3:30 and to the intra-day high of 51.68 at 3:48. The BKX closed just below its intra-day high.
Technical indicators are negative, but the broader market’s strength has provided the BKX support. The BKX has remained bound on the upside by the 50-day moving average (now at 52.09 and falling), broke through 100-day moving average support, but has held above the 200-day moving average (49.55). The 20-day moving average (51.56) has remained below the 50-day moving average since March 11th and crossed below the 100-day moving (52.50) average on April 15th. The 50-day moving average crossed below the 100-day moving average on April 21st. The index closed below the 50- and 100-day moving averages for the 15th and 11th consecutive sessions, respectively. The index closed above its 20-day moving average for the first time in 11 sessions. The index closed above 50 for the 89th straight day. The BKX closed above its 200-day moving average for the 95th straight session. The 20- and 50-day moving averages fell. The 20-day closed (by -0.53 points) below the 50-day for the 32nd straight day, but the negative divergence contracted. The 50-day moving average closed (by +2.54 points) above the 200-day moving average for the 73rd straight session, but the positive divergence contracted. The 100-day moving average closed (by +2.96 points) above the 200-day moving average for the 56th straight session, and the positive divergence expanded. The directional movement indicator switched to positive for the first time in 11 sessions and the trend is declining. Relative strength rose to 51.65 from 48.69, a neutral range. Next resistance is 51.82; next support at 51.34.