This morning. U.S. equity markets are in correction, but after several consecutive days’ losses, U.S. equity futures are moderately higher. After yesterday’s gains, the dollar is slightly stronger. In continuation of the past days’ and especially yesterday’s trend reversals, commodity prices are lower. U.S. Treasury prices are slightly higher. The April non-farm payrolls surprised positively. After a fair value adjustment of -3.40 points, June SPX equity futures are at 1346.90, up +14.70 points. The SPX opens at 1335.10, -2.09% below the April 29 multi-year high and +1.16% above its 50-day moving average. Next resistance is at 1345.68. Next support is at 1326.85.
On Thursday, U.S. markets experienced one of the more volatile trading days as several catalysts dislocated several crowded trades, especially in the Forex and commodities spaces. Commodities sold off especially hard, as at 3:00, the CME announced increased margin requirements in select commodities. Equities generally held up better, but sold off to raise cash to cover or de-risk other market positions and satisfy margin requirements. All market segments closed lower. Market breadth was negative, but not to the prior day’s degree. Economic reports surprised negatively, initial and continuing jobless claims worse than expected. All major indexes closed lower, on mixed volume. The DJI, SPX, NYSE, and Nasdaq closed down -1.10%, -0.91%, -1.28%, and -0.48%, respectively. DJI volume fell. The SPX, NYSE, and Nasdaq added distribution days, which now number 6 on the NYSE, 4 on the Nasdaq and SPX, and 3 on the DJI in the past 25 trading days. Distribution days, which indicate institutional selling, pressure uptrends and push markets back into correction. Volatility rose +6.56%, though the VIX ended at 18.20, well off its 19.11 intraday high at 3:30.
Earlier today, Asian equity markets closed mixed. The Nikkei opened after several days’ holiday, falling -1.45%. Financials outperformed, ending -0.09% lower. In China, the Hang Seng and Shanghai composite closed down -0.44% and -0.30%, respectively. On the SHCOMP, volume fell -0.10% from the prior day. Chinese equity markets are correction, but for the 3rd time this week, the index staged a reversal, gapping lower, trading higher in mid-afternoon, before weakening to close at 2863.89. The index closed -6.33% below its recent April 18th high close 3057.33. Utilities, health care, and technology were the strongest sectors, while financials, basic materials, and oil and gas were the worst performers. European equity markets are lower. The EuroStoxx 50, FTSE, and DAX, are mixed, -0.19%, -0.34%, and +0.44%, respectively. On the EuroStoxx, financials are 4th best performing segment, up +0.71%.
Despite sovereign debt and other macro-concerns, LIBOR levels are well below those seen prior to last year’s sovereign debt crisis. Overnight USD LIBOR rose to 0.13225% from 0.13150% Thursday and 0.25188% at year-end. USD 3-month LIBOR is 0.26700%, compared to 0.26825% Thursday and 0.30950% at year-end. After yesterday’s trend reversal, the U.S. dollar is slightly stronger against the euro, pound, and yen. The dollar, which trended lower since last June, and now trades well below its 50-, 100-, and 200-day moving averages, moved significantly higher after the ECB’s decision to leave interest rates unchanged. The euro trades at US$1.4517, compared to US$1.4539 Thursday and US$1.4827 the prior day. The Euro trades well above its 50-, 100-, and 200-day moving averages. The dollar trades at ¥80.30, compared to ¥80.07 Thursday and ¥80.61 the prior day. The yen trades better than its 200-day moving average ¥82.19, which is trending lower. U.S. Treasury yields are lower, with 2- and 10-year maturities yielding 0.585% and 3.161%, respectively, compared to 0.573% and 3.150% Thursday. The yield curve narrowed to +2.576%, from +2.577% 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. In a continuation of yesterday’s move lower, commodities prices are lower, with lower petroleum, natural gas, precious metals, aluminum and copper, and agricultural prices.
U.S. news and economic reporting. Economic releases focus on April non-farm payrolls, with an expected gain of 185K and 200K gain in private payrolls. The actual surprised positively, with gains of 224K and 268K, respectively. The unemployment rate rose to 9.0% from 8.8%.
Overseas news. Today, Italy’s largest union held a strike protesting for lower taxes and more jobs. In April, the U.K. producer price index increased +5.3% over the prior month, higher than estimates for a +5.2% increase but lower than March’s +5.6% rate. Today, Syrian protesters held a Day of Defiance against the ruling regime, as local press reports indicate growing military insubordination and political fractioning.
· C – raised to overweight at Morgan Stanley
· C – reverse 10 for 1 split occurs after today’s close.
· CIM – cut to hold at Cantor Fitzgerald, price target of $3.95
1Q2011 Earnings. The first quarter’s earnings results have so far exceeded EPS and revenue expectations. Of the 415 S&P500 companies that reported earnings to date, 73% (302 of the 415) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies have beat by an average of +7.7% (versus a historical average of +2%). EPS is up +21.9% over the prior year. Though challenged in the current operating environment, 307 companies (75%) reported increased revenues and 280 companies (68%) 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 13.5x estimated 2011 earnings ($98.83) and 11.9x estimated 2012 earnings ($111.86), 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 2011, analysts increased 2011 and 2012 earnings estimates by +4.5%, and +4.2%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +16.6% and +31.9%, respectively.
Large-cap banks trade at a median 1.53x tangible book value and 12.9x 2011 consensus earnings, compared to 1.54x tangible book value and 13.0x 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 +32.7% and 71.6%, respectively.
Thursday’s equity markets. On mixed volume, the equity markets closed sharply lower. The NYSE, DJI, SPX, and Nasdaq finished down -1.28%, -1.10%, -0.91%, and -0.48%. Thursday’s markets began the day markedly lower, but by noon, most had recovered, and the SPX even turning positive briefly. In early afternoon, spurred by losses in commodities, the markets began to sell off. At 3:00, the CME raised margin requirements on several commodities, and markets responded with accelerating declines as traders raised cash from whatever convenient source and de-risked positions. The CME raised margin requirements on silver contracts to $21,600 per contract beginning May 9th, up from $11,745 two weeks ago. In the past four days, silver prices fell 25%, marking its biggest slump since 1980. Oil fell -8.79% Thursday, the most in two years, ending at $99.90 per barrel. Coffee and cotton declined as well. Equities were sold to monetize assets to cover positions and post margin. Traders report orderly selling among equities, with some short sellers creating new positions.
Economic news, both macro and micro, was negative. Initial jobless claims (474k vs. 410k est.) and continuing claims (3733K vs. 3649 est.) were higher than anticipated and reinforced views of a sub-par labor market and economic weakness in April. U.S. consumer confidence, as measured by the Bloomberg Consumer Comfort Index (-46.2 vs. -45.1 pp), dropped to a five week low, primarily on higher gasoline prices. On the macro-side, European Central Bank President Jean-Claude Trichet said the bank will continue to monitor upside inflation risks “very closely” suggesting it may wait until after June to raise rates. The Bank of England kept its benchmark rate at a record low of 0.5%. The VIX rallied again, finishing at 18.20, up +2.54%, but traded to 19.11 intraday.
Technical indicators are negative. The major indices broke through multiple support levels. The SPX seemed to find support at 1337 in the morning, only to break through to new lows in late afternoon. The next important level is 1323, the March-April trend line, with next support at the 1313-1319 April lows. The AAII US Investor Sentiment reading for May 5th is 35.46, lower than the previous reading of 37.90 for April 28th. The Bloomberg NYSE new net highs were +44, lower than Wednesday’s +87 and below the moving averages. The relative strength indicator is 45.22 down from the previous 52.75, and in the low end of a neutral range.
All market segments were negative. Oil and gas, basic materials, and telecommunications led all markets down, off at least -1.31%. Industrials, technology and consumer services were off the least.
Financials followed the broad market sharply lower. The BKX, XLF, and KRX were off -1.33%, -1.29%, and -0.86%, respectively. The BKX and XLF began the day lower, flat lined through the middle of the day, but then sold off at 3 pm, managing only a small bounce in the last half hour. The KRX began the day off, fell sharply in mid-morning and bounced to positive territory by midday. Those gains were short-lived, as the index sold off sharply after 3 pm. The KRX did manage a small bounce off its lows in the last half hour. On the BKX all 24 names were down. Among larger financials, GNW, RF, and HIG were down the most, off at least -3.39%. On the KRX, 7 names were up with 43 down. Among the smaller regional banks, VLY, WTFC, and SUSQ led, up at least +0.43%. BXS, PACW, SBNY were down the most, off at least -2.38%. The BKX, KRX, and XLF all finished below their 20-, 50-, and 100-day moving averages. While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -12.6% below its April 2010 high and -38.7% below its best level of 82.55 in September 2008.
NYSE Indicators. Volume rose +4.11% to 1.113 billion shares, from 1.070 billion shares the prior day, 1.13x the 50-day moving average. Market breadth was negative, but remarkably less so than the prior day, and up volume lagged down volume. Advancing stocks trailed decliners by -738 (compared to -1138 Wednesday), or 0.61:1. Up volume lagged down volume by 0.37:1.
SPX. On higher volume, the SPX fell -12.22 points, or -0.91%, to 1335.10. Volume rose +0.60% to 836.55 million shares, up from 831.79 million shares Wednesday and above the 780.15 million share 50-day moving average. For the 136th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1319.73 vs. 1225.50, respectively). The SPX closed above its 200-week moving average (1169.93).
The SPX opened lower and by 9:32, crossed first support off 1340. By 9:35, the index had broken through 1337 but promptly reversed. Within minutes, the SPX had retaken 1340 and reached 1343 at 10:10. Through 11:00, the index fluctuated above and below the 1340 level. By 11:15, the index broke back down to 1336 and again sharply reversed. A 10-point, 45 minute rally took the index back to breakeven at noon and set the intra-day high of 1348.00 at 12:05. Unable to hold its gains, the SPX fell back to negative territory in the 1342-1345 level through 2:40. A sharp, 45-minute sell-off took the index from 1346 to the 3:30 intra-day low of 1329.17. Finding support at 1330, stocks rebounded into the close but could only manage to retake the 1335-level by the bell.
Technical indicators are mixed, but the index’s failure at 1370 and its continuing fall from that level placed the equity markets in correction. The index closed above 1300 for the 30th straight session. The index closed above its April 2010 highs for the 106th straight session. The SPX closed (by +0.02%) above its 20-day moving average (1334.87) for the 11th consecutive session. The index closed (by +1.16%) above its 50-day moving average for the 11th straight session. The index closed (by +2.46%) above its 100-day moving average (1303.00) for the 34th straight session. The SPX closed +8.94% above its 200-day moving average. All moving day averages increased, but the market’s stall has halted the 50- and 100-day moving averages’ positive momentum. The directional momentum indicator switched to negative for the first time in 10 sessions, and the trend is declining. Relative strength fell to 50.52 from 57.61, a neutral range. Next resistance is at 1345.68; next support is at 1326.85.
BKX. On higher volume, the KBW bank index fell -0.68 points, or -1.33%, to 50.63. Volume rose +1.2% to 97.81 million shares, up from 96.64 million shares Wednesday and below the 119.28 million share 50-day average. The index closed +17.80% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -12.63% and -8.99% below its April 23, 2010, and February 14, 2011 closing highs, respectively.
Financials underperformed the market, and large-caps underperformed regionals. The BKX opened flat. For the second day, the index immediately set the intra-day high (51.29 yesterday) at the opening bell. Through 11:15, the index steadily lost ground. By 9:50, the index broke through 51.00 and by 11:15, the index had reached 50.69. At 11:15, the broader market’s rally lifted financials, but less aggressively. By 11:50, the BKX had retaken the 51.00, still well into negative territory. Through 2:40, the index traded mostly sideways, but with a negative bias, fluctuating at the 50.90 level. The broader market’s sharp sell-off hit financials at 2:40, and by 3:30, the index retreated to 50.40, the intra-day low. Financials, like the SPX, rallied into the close. The BKX retook 50.60 at 3:50 and had that level into the bell.
Technical indicators are negative. Weakness in the broader markets has removed support for financial stocks. The index has remained bound on the upside by the 50-day moving average (now at 51.83 and falling), has broken through 100-day moving average support, but has held above the 200-day moving average (49.65). The 20-day moving average (51.22) has remained below the 50-day moving average since March 11th and crossed below the 100-day moving (52.56) average on April 15th. The 50-day moving average crossed below the 100-day moving average on April 21st. The index closed below the 20-, 50-, and 100-day moving averages for the second, 20th, and 16th consecutive sessions, respectively. The index closed above 50 for the 94rd straight day. The BKX closed above its 200-day moving average for the 100th straight session. The 20- and 50-day moving averages fell. The 20-day closed (by -0.61 points) below the 50-day for the 37th straight day, and the negative divergence expanded. The 50-day moving average closed (by +2.18 points) above the 200-day moving average for the 78th straight session, but the positive divergence contracted. The 100-day moving average closed (by +2.91 points) above the 200-day moving average for the 61th straight session, but the positive divergence contracted. The directional movement indicator switched to negative for the first time in six sessions, and the trend is increasing. Relative strength fell to 40.82 from 47.56, a neutral range. Next resistance is 51.15; next support at 50.26.