This morning. U.S. equity markets remain in correction. After fair value adjustment, U.S. equity futures are modestly lower, weakening after a economic reports. World equity markets are mixed. U.S. Treasuries prices are higher. The U.S. dollar is off slightly. Commodities markets are mixed. After a fair value adjustment of +2.12 points, June SPX equity futures are at 1317.70, down -0.92 points. The SPX opens at 1320.47, -3.16% below its recent April 29 multi-year closing high and -0.48% below its 50-day moving average. The SPX is +1.17% above April’s lowest closing low of 1305.14. Next resistance is at 1326.95. Next support is at 1312.89.
On Tuesday, U.S. equities ended higher, on mixed volume. The Nasdaq managed the best gain, up 0.55%, while the NYSE composite, SPX, and DJI closed +0.52%, +0.32%, and +0.31% higher, respectively. Volume was lower on the DJI. Indexes traded within a narrow range. The most impressive aspect of the trade was that markets overlooked additions to the recent spate of poor economic reports. Early weakness faded quickly, and markets turned positive by 10:30 and remained in positive territory through the day’s remainder. Trading was quiet until 3:00, when a rare buy program triggered a strong rally; disappointingly, the buying didn’t trigger any follow-on, and these late gains were erased by the close. Most market segments closed higher, with basic materials, oil and gas, and industrials best, while utilities, consumer goods, and telecommunications ended lower. Market breadth was positive. The distribution day count was unchanged at 6 on the NYSE, but were unchanged at 6 on the SPX and Nasdaq, and 5 on the DJI in the past 25 trading days. BKX has seen 4 distribution days. Distribution days indicate institutional selling. Volatility mirrored equities’ performance, falling at the open, trending higher until the afternoon rally ensued, weakening and then strengthening into the close. The VIX ended at 17.07, down -4.21% from 17.82 at Tuesday’s close.
Asian and Eurozone equity markets are also in correction. Earlier today, the Nikkei closed +1.48% higher. Volume was unchanged at 1.17 billion shares. Technology, oil and gas, and basic materials were the best performers. Only utilities closed lower. Financials were middling performers, but added +0.92%. Gains were attributed to firming commodity prices. In China, the Hang Seng and Shanghai composite closed mixed, +0.67% and -0.19%, respectively. On the SHCOMP, volume rose +5.68% from the prior day’s quiet trade. The SHCOMP closed at 2736.53, -10.5% below its recent April 18th high 3057.33 and now -2.55% below its 2010 close and below the 2840.89 200-day moving average. The SHCOMP opened higher, lost ground at mid-day, rallied through mid-afternoon, but weakened into the close to end with a small loss just above the 2734.54 intraday low. Financials, oil and gas, and consumer goods closed higher; all other market segments closed lower. Financials were the best performing segment, up +0.48%. Trading desks cited slowing economic growth and more restrictive credit conditions. In Europe, equity markets are modestly higher, with better strength in oil and gas, financials, and health care. Basic materials, consumer services, and technology are the laggards, with the latter segment particularly weak, off -1.33%. The EuroStoxx 50, FTSE, and DAX are mixed, +0.07%, +0.55%, and -0.17%, respectively. On the EuroStoxx, financials are the 2nd best performing segment, up +0.90%. Financials benefited on views that the Greece would meet IMF tests.
Despite sovereign debt and other macro-concerns, LIBOR levels are at their lowest levels since early 2009, well below those seen prior to last year’s sovereign debt crisis. Overnight USD LIBOR wash unchanged at +0.12900%, compared to 0.12900% Wednesday and 0.25188% at year-end. USD 3-month LIBOR declined to 0.25400%, compared to 0.25450% Wednesday and 0.30950% at year-end. The U.S. dollar is slightly lower, 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 above its 200-day moving average. The euro trades at US$1.4187, compared to US$1.4088 Wednesday and US$1.4100 the prior day. Since early May, the Euro has trended lower. After bouncing off its US$1.3998 100-day moving average, it still trades well above its 200-day moving average, but is below its US$1.4351 50-day moving average. The dollar trades at ¥81.57, compared to ¥81.97 Wednesday and ¥81.95 the prior day. The yen trades better than its 50-day moving average ¥82.10, which is trending lower. U.S. Treasury yields are lower, with 2- and 10-year maturities yielding 0.520% and 3.111%, respectively, compared to 0.535% and 3.130% Wednesday. The yield curve narrowed to +2.591% from +2.595% 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 mixed energy, lower precious metals, higher aluminum and copper, and higher agriculture.
U.S. news and economic reporting. Today’s focus is the latest week’s initial jobless claims as well as revised 1Q2011 GDP, personal consumption, and price deflators. Reports disappointed. Initial jobless claims were 424K versus 404K survey. GDP was +1.8%, unchanged from initial.
Overseas news. In Yemen, the power transition deal’s collapse has pushed the political situation towards civil war, further escalated by President Saleh’s order to arrest a top dissident tribal chief.
· CMA – raised to outperform at Oppenheimer, price target of $43
· FITB – raised to outperform at Bernstein, price target remains at $16
1Q2011 Earnings. The first quarter’s earnings results have so far exceeded EPS and revenue expectations. Of the 465 S&P500 companies that reported earnings to date, 72% (334 of the 465) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies have beat by an average of +7.0% (versus a historical average of +2%). EPS is up +19.7% over the prior year. Though challenged in the current operating environment, 350 companies (75%) reported increased revenues and 313 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 13.3x estimated 2011 earnings ($99.08) and 11.8x estimated 2012 earnings ($112.22), compared to 13.3x and 11.7x 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 +4.6%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +16.9% and +32.4%, respectively.
Large-cap banks trade at a median 1.45x tangible book value and 12.5x 2011 consensus earnings, compared to 1.45x tangible book value and 12.5x 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 +32.4% and 70.9%, respectively.
Wednesday’s equity markets. On mixed volume, equity markets finished higher. The Nasdaq, NYSE, SPX, and DJI finished higher, up +0.55%, +0.52%, +0.32%, and +0.31%, respectively. The markets began the day lower after poor economic news. Durable goods orders fell the most since October, off -3.6% versus estimates of -2.5% and April’s +4.4% increase. Markets traded lower through the early morning, but improved after release of the March House Price Index, which showed home prices -0.3% lower versus estimates of -0.5%. Markets continued their upward momentum through lunch, but the rally stalled. Markets traded sideways through most of the afternoon, but shortly after 3:00, rallied on a rare buying programmed trade. Others didn’t join in, and once the program played out or pulled back, markets weakened into the close. In addition to mixed economic news, there was some relief in European markets after Fitch did not downgrade Germany’s banks on their Greek debt holdings. Contagion concerns diminished as Spain’s 5-year credit default swaps tightened 20 basis points since Monday. Oil based commodities increased in value after a report Wednesday morning showed increased demand and distillate fuel supplies reached their lowest level in two years. The VIX finished the day at 17.07, off -4.21%.
Technical indicators are mixed. The SPX traded in a tight 9 point range. The SPX held support of 1312 this morning and bounced nicely in the afternoon almost reaching the first resistance level of 1322. Technicians are watching 1312, 1308 and 1298 as support levels. Important resistance levels are 1322 and then 1327-1337. The NYSE and Nasdaq finished the day below their 50- and 100-day moving averages, but above the 200-day moving average. The SPX and DJI finished below their respective 50-day averages but above their 100- and 200-day moving averages. The Investment Company Institute (NYSEARCA:ICI) reported that domestic equity funds experienced outflows of $1.5 billion for a 4th consecutive week. The AAII US Investor Sentiment index was reported at 25.61 versus last week’s reading of 26.69. The Bloomberg NYSE new net highs were 8 versus Tuesday’s -25. The relative strength indicator rose to 42.68 from 39.26 Tuesday.
Market segments were mixed. Basic materials, oil and gas, and industrials led all segments, while utilities, consumer goods, and telecommunications were the laggards.
Financials finished with mixed results. The XLF ended up +0.06%, while the BKX an KRX were lower, off -0.08% and -0.06%, respectively. The BKX opened lower, but spiked higher in the first half hour, before selling off sharply in the second half hour to its intraday low. Subsequently, the BKX bounced nicely, seeing its high just before noon. The index couldn’t press its gains, however, and spent the early afternoon wavering between positive and negative. In late afternoon, the BKX tried one last run to a new intraday high, but sputtered in the last half hour and closed lower. The BKX had 10 names up, 13 down and 1 unchanged. The KRX had 27 names up, 21 down and 2 unchanged. Leaders in the BKX included BBT (+1.67%), HBAN (+0.94%), and STI (+0.92%). Laggards were CMA, COF, and CBSH. Among the broader financial universe, leaders included CBG (+2.28%), SLM (+1.84%), and MA (+1.63%). The laggards were AIG (-4.01%) after its secondary 300 million share sales of U.S. Treasury-owned shares, CMA (-1.73%), and CME (-1.28%). The BKX and XLF finished below their respective 50-, 100-, and 200-day moving averages. The KRX finished below its 50- and 100-day moving average, but above its 200-day average. The BKX has fallen for 4 straight sessions and finished at its lowest level since December 7th, 2010. While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -15.7% below its April 2010 high and -40.8% below its best level of 82.55 in September 2008.
NYSE Indicators. Volume rose +10.7% to 961.3 million shares, from 868.40 million shares Tuesday, 1.02x the 50-day moving average. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by +934 (compared to -238 Tuesday), or 1.90:1. Up volume lagged down volume by 1.44:1.
SPX. On higher volume, the SPX rose +4.19 points, or +0.32%, to 1320.47. Volume rose +13.41% to 745.76 million shares, up from 658.48 million shares Tuesday but below the 750.08 million share 50-day moving average. For the 150th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1326.79 vs. 1240.98, respectively). The SPX closed above its 200-week moving average (1167.18).
The SPX gapped lower at the open to first-level support at 1312. At 9:35, the index set its intra-day low of 1311.80 before bouncing off of support and nearly retaking the break-even line by 9:45. By 10:15, that small rally was sold back to the 1313 level. At 10:20, another rally took the index through the break-even line at 10:30 and up to 1322-level resistance at 11:45. Momentum waned, and the SPX traded in a narrow 1319-1321 range through 3:00. Just after 3:00, a sharp rally took the index back up through 1322 resistance and to the intra-day high of 1325.86 at 3:12. That rally was sold, and by 3:55, the index retraced gains back to the middle of the afternoon’s trading range and closed at the 1320 level.
Technical indicators are turning negative. The index’s failure at 1370 and subsequent fall placed equity markets in correction. The index broke down through its 50-day moving average but has found support at the 100-day moving average (1314.89), which is -11.89 points below the 50-day average. 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 in early June. The index closed above 1300 for the 44th straight session. The index closed above its April 2010 highs for the 120th straight session. The SPX closed (by -1.56%) below its 20-day moving average (1341.33) for the ninth straight session. The index closed (by -0.48%) below its 50-day moving average for third straight session. The index closed (by +0.42%) above its 100-day moving average for the 49th straight session. The SPX closed +6.40% above its 200-day moving average. The 20-day moving average fell for the fourth straight session. The directional momentum indicator is negative for the 11th straight session, and the trend is weak but increasing. Relative strength rose to 43.25 from 40.86, the lower end of a neutral range. Next resistance is at 1326.95; next support is at 1312.89.
BKX. On lower volume, the KBW bank index fell -0.04 points, or -0.08%, to 48.88. Volume fell -12.31% to 59.09 million shares, down from 67.38 million shares Tuesday and below the 102.10 million share 50-day average. Recent low volume levels versus historical averages relates to Citigroup’s May 6th 10-1 reverse split. The BKX closed +13.73% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -15.65% and -12.13% 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 modestly lower to the 49.80 level. Early trading fluctuated rapidly between gains and losses. By 9:40, the index climbed to a +0.3% intra-day gain above the 49.0 level, but by 10:15, the index retreated to a -0.5% intra-day loss at the 48.60 level. At 10:20, a rally tookt he index back through the break-even line by 10:40 and to the intra-day high of 49.13 at 11:45. The BKX lost momentum, retraced gains back to break-even, and by 1:30, reached 48.85, in negative territory. A second rally at 2:10 lasted through 3:15 and nearly retook the day’s high. The rally was sold, and gains retraced to break-even. The index fell into negative territory just before the close and finished with a modest lost.
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 51.15 and falling) and closed below the 200-day moving average (49.75) for the fourth straight day. The 20-day moving average (50.43) has remained below the 50-day moving average since March 11th and crossed below the 100-day moving (52.33) 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-, 100-, and 200-day moving averages for the 11th, 34th, 30th, and fourth consecutive sessions, respectively. The index closed below 50 for the fourth straight session. The 20-, 50-, and 100-day moving averages fell. The 20-day closed (by -0.72 points) below the 50-day for the 51st straight day, and the gap expanded. The 50-day moving average closed (by +1.40 points) above the 200-day moving average for the 92nd straight session, but gap narrowed. The 100-day moving average closed (by +2.59 points) above the 200-day moving average for the 74th straight session, but gap narrowed. The directional movement indicator is negative for the 14th straight session, and the trend is strong and increasing. Relative strength fell to 33.27 from 33.54, the lower end of a neutral range. Next resistance is 49.11; next support at 48.66.