This morning. U.S. equity markets are in correction. After fair value adjustment, U.S. equity futures are modestly higher. Asian equity indexes closed mixed. European markets are moderately higher. Commodity prices are mostly higher. The dollar is slightly lower. U.S. Treasury prices are mixed. After a fair value adjustment of +0.18 points, June SPX equity futures are at 1343.70, up +4.92 points. The SPX opens at 1340.68, -1.69% below the recent April 29 multi-year high and +1.25% above its 50-day moving average. Next resistance is at 1346.14. Next support is at 1330.91.
On Wednesday, U.S. equities rose for the first time in the four trading days. All major indexes rose, with Nasdaq turning in the best performance with a +1.14% gain. The SPX, NYSE composite, and DJI rose +0.88%, +0.85%, and +0.65%, respectively. Markets extended the rally that commenced in the mid-day Tuesday, completing the positive reversal and rising through the day to end near the day’s highs. Volume disappointed, however, falling more than 9.0% on the NYSE. Commodities stocks rebounded, and basic materials were the best performing segment, up +2.05%, followed by oil and gas, and industrials. Financials rose, but were among the day’s laggards. Market breadth was positive. The distribution day count is 6 on the NYSE, 5 on the SPX and Nasdaq, and 4 on the DJI in the past 25 trading days. Distribution days indicate institutional selling. Volatility declined -7.52%, and the VIX closed at 16.23, from 17.55 at Tuesday’s close.
Asian equity markets are also in correction, and ended lower on slightly increased volume. The Nikkei declined -0.43%. Financials were the 3rd best performing segment, down -0.21%. Japanese economic authorities reported a contraction in the country’s 1Q2011 GDP, though expansion is expected to resume in the year’s second half. In China, the Hang Seng and Shanghai composite closed mixed, +0.66% and -0.46%, respectively. The SHCOMP traded higher in early trading, to intraday highs before 11:00, but lost ground through the end of the day, and ended near the intraday low. Volume rose +0.79%. The index closed -6.47% below its recent April 18th high close of 3057.33 and below its 50- and 100-day moving averages. Consumer goods, oil and gas, and basic materials were the best performing segments. Financials were middling performers, ending -0.35% lower. In Europe, equity markets gapped lower on Eurozone concerns, but rallied back to breakeven at mid-day. The EuroStoxx 50, FTSE, and DAX are up +1.18%, +1.04%, and +0.86%, respectively. On the EuroStoxx, financials are the 3rd best market segment, up +1.36%.
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 declined to 0.13025%, compared to 0.13050% Wednesday and 0.25188% at year-end. USD 3-month LIBOR rose to 0.25850%, compared to 0.26000% Wednesday and 0.30950% at year-end. The U.S. dollar is slightly weaker against the euro, yen, and pound. The dollar, which has trended lower since last June, trades below its 50- and 100-day moving averages, but has rallied back above its 200-day moving average. The euro trades at US$1.4251, compared to US$1.4250 Wednesday and US$1.4237 the prior day. The Euro trades well above its 100- and 200-day moving averages, but is now below its US$1.4335 50-day moving average. The dollar trades at ¥81.88, compared to ¥81.68 Wednesday and ¥81.42 the prior day. The yen trades better than its 50-day moving average ¥81.97, which is trending lower. U.S. Treasury yields are mixed, with 2- and 10-year maturities yielding 0.556% and 3.191%, respectively, compared to 0.552% and 3.180% Wednesday. The yield curve narrowed to +2.635% from +2.628% 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 energy, mixed precious metals, higher aluminum and copper, and mixed agriculture.
U.S. news and economic reporting. Economic releases focus on weekly initial and continuing jobless claims. At 10:00, reports include 1Q2011 mortgage delinquencies and foreclosures, existing home sales for April, leading indicators for April, and the May Philadelphia Fed.
Overseas news. Spain sold €3.22 billion of 10- and 30-year bonds, finding lighter demand than the prior auction and with 10-year yields falling, but 30-year yields rising. In the first quarter, Japan’s real GDP contracted at a -3.7% seasonally adjusted annual rate over the prior quarter, worse than the -1.9% consensus estimate. Today, a deal collapsed in which Yemen’s president would have resigned from power.
1Q2011 Earnings. The first quarter’s earnings results have so far exceeded EPS and revenue expectations. Of the 448 S&P500 companies that reported earnings to date, 72% (322 of the 424) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies have beat by an average of +7.1% (versus a historical average of +2%). EPS is up +20.0% over the prior year. Though challenged in the current operating environment, 336 companies (75%) reported increased revenues and 299 companies (67%) 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 ($99.09) and 11.9x estimated 2012 earnings ($112.44), compared to 13.4x and 11.8x 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 +4.7%, and +4.8%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +16.9% and +32.6%, respectively.
Large-cap banks trade at a median 1.53x tangible book value and 13.0x 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 +32.8% and 70.9%, respectively.
Wednesday’s equity markets. On lighter volume, the equity markets closed higher. The Nasdaq, NYSE, SPX and DJI closed up +1.14%, +0.89%, +0.88% and +0.65%, respectively. Markets extended Tuesday’s gains, but leadership swung back toward the commodities and basic materials segments, while financials lagged. Markets trended higher throughout the day, and finished just off their session highs. Economic news included the release of the FOMC minutes, which provided a brief, positive bounce at 2:00. Corporate news was relatively light, but included earnings that beat analyst’s estimates from DE, BJ, TGT and LTD. DELL released earnings Tuesday after the closing handily beating analyst’s estimates on higher sales to businesses.
Trading desks noted the light trade and reported a lack of conviction from either direction with short sellers quickly covering and long buyers not chasing names. They also noted a lack of market moving news, that seems to have left customers with a “wait and see” attitude toward equities. Cited issues include the Greece debt crisis, the end of quantitative easing, ECB monetary policy (we will next hear from Trichet and “strong vigilance” on June 9th). The VIX finished the day at 16.23, off -7.52%.
Technical indicators improved. Since bouncing off of 1319 at midday Tuesday, the SPX has recovered 20 points. Technical analysts favor a technical bounce with short-term resistance at 1346. This level represents the channel or average between highs and lows of the last 20 trading sessions and includes the last new high on May 2nd. Wednesday’s volume was light, raising concerns as to the rally’s strength. All major averages closed above their 50-, 100-, and 200-day and 200-week moving averages. The Investment Company Institute (NYSEARCA:ICI) reported that net outflows had continued for a third week, with domestic equity funds losing -$2.251mm for the week ended May 11th. The Bloomberg NYSE new net highs were +65 versus Tuesday’s +10. The relative strength indicator rose 47.74 from Tuesday’s reading of 42.12 and is in the lower end of a neutral range. The latest AAII Investor Bullish Sentiment Report (May 19th) declined to 26.69 from 30.77, its lowest reading since the end of August 2010, precisely when the bull market resumed last Fall.
Market segments were mixed. Basic materials, oil and gas and utilities led the segments, while financials, telecommunications and utilities were the laggards.
Financials were positive. The KRX, XLF, and BKX all finished higher, up +0.53%, +0.44%, and +0.32%, respectively. The banking indices saw some profit taking early, but rallied through the morning session and turned positive just after lunch. A spike coinciding with the release of the Fed minutes was short-lived; however, the indexes rallied into the close to finish at their highs. The BKX had 17 names up and 7 down. The KRX had 39 names advance, 9 finish lower and 1 unchanged. In the broader financial realm, CBG (+3.84%), JNS (+3.35%), and WY (+3.30) were the leaders. Among larger banks, MTB (+1.6%), FNFG (+1.51%) and STT (+1.44%) were the leaders. The BKX, KRX and XLF finished below their respective 50- and 100-day moving averages, but above their 200-day moving averages. While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -12.8% below its April 2010 high and-38.8% below its best level of 82.55 in September 2008.
NYSE Indicators. Volume fell -9.02% to 883.79 million shares, from 971.43 million shares Tuesday, 0.93x the 50-day moving average. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by +1698 (compared to -483 Tuesday), or 3.55:1. Up volume led down volume by 3.65:1.
SPX. On lower volume, the SPX rose +11.70 points, or +0.88%, to 1340.68. Volume fell -7.31% to 721.74 million shares, down from 778.66 million shares Tuesday and below the 761.54 million share 50-day moving average. For the 145th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1324.12 vs. 1235.95, respectively). The SPX closed above its 200-week moving average (1167.91).
The SPX opened slightly lower. By 9:40, the index set its intra-day low at 1326.59. A 9:45 rally lifted the index into positive territory, where it would remain through the day. The rally lasted through 11:05, taking the index through 1333-level resistance at 10:30 and to the 1336 level. Through 1:00, the index traded in a narrow 1334-1336 range. A second rally at 1:00 took the index through 1340 by 2:00, but the index failed to hold that level. By 3:00, the index had retraced gains back to 1337. A final-hour rally took the index back through 1340 by 3:30 and to the intra-day high of 1341.82 at 3:45. The index held above 1340 at the close, finishing near the day’s high.
Technical indicators are mixed. The index’s failure at 1370 and subsequent fall placed equity markets in correction, but the index found support at its 50-day moving average. Conversely, the index’s correction has stalled the 50-day average’s positive momentum, and the 50-day will likely cross below the 100-day moving average before month’s end. The index closed above 1300 for the 39th straight session. The index closed above its April 2010 highs for the 115th straight session. The SPX closed (by -0.33%) below its 20-day moving average (1345.08) for the fourth straight session. The index closed (by +1.25%) above its 50-day moving average for the 20th straight session. The index closed (by +2.23%) above its 100-day moving average (1311.50) for the 43rd straight session. The SPX closed +8.47% above its 200-day moving average. All moving day averages increased. The directional momentum indicator is negative for the sixth straight session, and the trend is weak and decreasing. Relative strength rose to 51.76 from 45.88, a neutral range. Next resistance is at 1346.14; next support is at 1330.91.
BKX. On lower volume, the KBW bank index rose +0.16 points, or +0.32%, to 50.55. Volume fell -5.98% to 68.93 million shares, down from 73.31 million shares Tuesday and below the 108.93 million share 50-day average. The recent volume decline relative to historical averages relates to Citigroup’s May 6th 10-1 reverse split. The BKX closed +17.6% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -12.8% and -9.13% below its April 23, 2010, and February 14, 2011 closing highs, respectively.
Financials underperformed the market, and large-cap banks underperformed regionals. The BKX opened flat. Negative momentum immediately sank the index, and by 9:40, the BKX set its intra-day low at 50.16. At 9:30 and 11:00, the index made two rally attempts back to break-even, but both were sold. An 11:30 rally with stronger duration took the index back into positive territory by 12:55. At 2:10, the BKX set its intra-day high at 50.58. Momentum promptly reversed, and gains retraced. By 2:40, the index had fallen back into negative territory and to the 50.30 level. In sympathy with the broader markets, a 3:00 rally lifted financials into the close. The BKX retook its break-even at 3:05 and crossed 50.50 at 3:45. The index closed just shy of its intra-day high.
Technical indicators are negative. Weakness in the broader markets has removed support for financial stocks. The index has been bound on the upside by the 50-day moving average (now at 51.40 and falling), has broken through 100-day moving average support, but found support at the 200-day moving average (49.70). The 20-day moving average (50.76) 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 20-, 50-, and 100-day moving averages for the sixth, 29th, and 25th consecutive sessions, respectively. The index closed above 50 for the second straight session. The 50- and 100-day moving averages fell. The 20-day moving average rose for the first time since April 13th. The 20-day closed (by -0.63 points) below the 50-day for the 46th straight day, but the negative divergence contracted. The 50-day moving average closed (by +1.70 points) above the 200-day moving average for the 87th straight session, but the positive divergence contracted. The 100-day moving average closed (by +2.80 points) above the 200-day moving average for the 69th straight session, but the positive divergence contracted. The directional movement indicator is negative for the 10th straight session, and the trend is stable. Relative strength rose to 46.27 from 44.51, a neutral range. Next resistance is 50.70; next support at 50.28.