This morning. With yesterday’s bullish follow-through, U.S. equity markets moved back into a confirmed uptrend, ending a correction that began on May 4th. Volume more than doubled on the NYSE, albeit from Friday’s slow pre-holiday trade, but still 1.65x the 50-day average. However, the strength of yesterday’s follow-through was suspect, as the gains were sufficient to confirm recent bullish market signals, but not strong enough to assuage doubts that equity markets have truly turned. The Nasdaq posted a +1.37% gain, followed by respective NYSE composite, SPX, and DJI gains of +1.08%, +1.06%, and +1.03%. World equity markets have not extended yesterday’s gains. After a disappointing ADP employment report, U.S. equity futures weakened. After fair value adjustment, U.S. equity futures are moderately lower. U.S. Treasury yields moved lower. The U.S. dollar is weaker. Commodities markets are higher. After a fair value adjustment of +0.05 points, June SPX equity futures are at 1338.40, down -5.55 points. The SPX opens at 1345.20, -1.35% below its recent April 29 multi-year closing high and +1.09% below its 50-day moving average. The SPX is +3.07% above April’s lowest closing low of 1305.14. Next resistance is at 1349.90. Next support is at 1335.80.
On Tuesday, markets again shrugged off disappointing economic reports and ended higher, on much greater volume. The Nasdaq posted the best gain, ending up +1.37%, but all the major averages closed up more than +1.0%. As follow-throughs go, the gains were not particularly convincing, suggesting a higher than average probability (about 40%) that the new uptrend might fail. Nonetheless, all the major indexes rallied impressively through the afternoon, and ended encouragingly at the day’s highs. Market breadth was positive. Volatility fell, with the VIX ending at 15.45, down -3.32% from 15.98 the prior day. The new uptrend resets distribution day counts. Distribution days indicate institutional selling.
Eurozone equity markets also moved into a confirmed uptrend, as the Euro Stoxx 50 index closed up +1.69%, following-on last Wednesday’s +0.56% gain. Asian equity markets remain in correction despite yesterday’s gains, which included a +1.37% gain on the Shanghai composite. Earlier today, the Nikkei closed up +0.27% on -13.4% decrease in volume. Consumer services, industrials, and oil and gas were the best performing segments. Financials were middling performers, closing down -0.04%. In China, the Hang Seng and Shanghai composite closed mixed, -0.24% and +0.00%, respectively. Chinese PMI for May was 52.0, slightly better than survey 51.6. On the SHCOMP, volume fell -7.20% from the prior day. The SHCOMP closed at 2743.57, -10.3% below its recent April 18th 3057.33 high, -2.30% below its 2010 close, and below the 2842.90 200-day moving average. However, the SHCOMP closed +3.09% above its 2011 low of 2661.45, set on January 25. On the day, the SHCOMP gapped lower, but generally strengthened through the day to end with a +0.01% gain. Consumer goods, technology, and consumer services were the best performing segments. Financials were a laggard, losing -0.67%. In Europe, equity markets are modestly lower, with better strength in consumer goods, industrials, and oil and gas. Financials, health care, and technology are the laggards. The EuroStoxx 50, FTSE, and DAX are lower, down -0.28%, -0.17%, and -0.05%, respectively, as several large-cap names went ex-dividend. On the EuroStoxx, financials are 7th worst performing segment, down -0.74%.
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 fell to 0.12700% from 0.12800% Tuesday and 0.25188% at year-end. USD 3-month LIBOR was unchanged at 0.25288% from 0.25288% Tuesday and 0.30950% at year-end. The U.S. dollar is 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$1.4410%, compared to US$1.4396 Tuesday and US$1.4282 the prior day. After a sharp decline in early May, the Euro has risen back above its 50-day moving average. The dollar trades at ¥80.96, compared to ¥81.52 Tuesday and ¥80.94 the prior day. The yen trades better than its 50-day moving average ¥82.11. U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.468% and 3.052%, respectively, compared to 0.469% and 3.061% Tuesday. The yield curve narrowed to +2.584% from +2.592% 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 lower, with lower energy, precious metals, higher aluminum and copper, and lower agriculture.
U.S. news and economic reporting. Today’s focus is the latest week’s MBA mortgage applications (-4.0% versus +1.1% prior), May ADP Employment at 8:15, revised April construction spending and May ISM manufacturing at 10:00. The ADP report disappointed with a 38K gain in May private employment, below 175K survey and 179K in April, revised from 177K.
Overseas news. In May, China’s purchasing managers index fell less than expected and remained above the 50.0-level expansionary threshold. In May, the Euro-zone’s manufacturing purchasing managers index fell more than estimated. Tomorrow, Japan’s parliament will hold a no-confidence vote against Prime Minister Kan.
· C – initiated at outperform at RBC, price target of $52
· BLK – upgraded to buy at Goldman, price target raised to $240 from $229
1Q2011 Earnings. The first quarter’s earnings results have exceeded EPS and revenue expectations. Of the 468 S&P500 companies that reported earnings to date, 72% (336 of the 468) 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, 353 companies (75%) reported increased revenues and 316 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 13.6x estimated 2011 earnings ($99.18) and 12.0x estimated 2012 earnings ($112.27), compared to 13.4x and 11.9x 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 +4.8%, and +4.6%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +17.0% and +32.4%, respectively.
Large-cap banks trade at a median 1.49x tangible book value and 12.9x 2011 consensus earnings, compared to 1.48x 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 +32.9% and 70.9%, respectively.
Tuesday’s equity markets. On much stronger volume, equity markets closed significantly higher. The Nasdaq, NYSE, SPX and DJI all finished higher, up +1.37%, +1.08%, +1.06%, and +1.03%, respectively. Markets were indicated higher on positive economic news from Japan and optimism that additional aid may be extended to Greece by the European Union. Markets continued to fight negative economic news, e.g., March Case Shiller Home Prices, Chicago PMI, consumer confidence, and the Dallas Fed’s manufacturing index. By early afternoon, markets had digested the economic information and began to reverse direction. The markets slowly gained back lost ground and then in the last hour rallied strongly, closing at the intraday highs. Investors seemed to focus on corporate prospects and possible solutions to global economic problems rather than trailing indicators of the US economy. Trading desks reported a subdued session with some buyers adding to positions, but sellers also taking advantage of higher prices. The VIX finished the day off -3.32% to close at 15.45, down -12.96% for the month of May.
For the month of May, the Nasdaq fell -1.33%, the SPX fell -1.35%, the DJI fell -1.88%, and the NYSE fell -2.24%. Principal themes were commodities price declines, equity market correction, Greece/EU sovereign debt doubts, slowing U.S. economic growth. Despite these headlines, U.S. equity markets remained resilient, though with some rotation into the safety sectors (consumer staples, utilities, health care, and telecommunications).
Technical indicators are generally positive. The SPX broke through resistance at 1335 and 1339 and finished at its high for the day. All of the major indices finished above their 50-, 100-, and 200-day and 200-week moving averages. The SPX finished with the strongest volume since April 29th. A technician we follow indicated that we might reach 1340-1350 short term (which we have), but would not exceed that level until September or October. The Bloomberg NYSE new net highs were +92 versus Friday’s reading of +35. The relative strength indicator rose to 55.29 versus Friday’s reading of 49.42 and is in the upper neutral range.
All market segments were positive. Technology, health care, and oil and gas were the leaders, while utilities, telecommunications, and consumer services were the laggards.
Financials were a middling performer. The KRX, XLF and BKX were all positive, up +1.23%, +1.02%, and +0.76%, respectively. The BKX began the day at its intraday high and during the morning session gave back all the gains, going negative just before 1:00. The afternoon was unremarkable until the last hour, when the BKX began to rally. In the last half hour, the BKX recaptured most of the day’s early gains and finished just short of the morning’s high. The BKX finished with 23 names up and 1 down. The KRX finished with 47 names up, 20 down and 1 unchanged. Among broader financials, WY (+3.21%), MCO (+2.89%), and SCHW (+2.68%) were the leaders. Of the larger banks, CFR, CBSH, and BK were the leaders, up at least +1.41%. Among the smaller regional banks, CATY, FNB, and WBS were the leaders. The BKX, KRX and XLF finished below their 50- and 100-day moving averages, but above the 200-day. The BKX closed above its 200-day average for the first time since May 20th. While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -13.6% below its April 2010 high and -39.3% below its best level of 82.55 in September 2008.
NYSE Indicators. Volume rose +117.2% to 1.504 billion shares, from 692.69 million shares Friday, 1.65x the 50-day moving average. This was the NYSE composite’s best volume day since March 18th. Market breadth was positive, and up volume led down volume, both by significant margins. Advancing stocks led decliners by +1577 (compared to +1261 Friday), or 3.14:1. Up volume led down volume by 4.05:1.
SPX. On higher volume, the SPX rose +14.10 points, or +1.06%, to 1345.20. Volume rose +77.9% to 956.01 million shares, above Friday’s holiday-inspired 537.37 million shares but also well above the 723.79 million share 50-day moving average. For the 153rd consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1330.63 vs. 1244.73, respectively). The SPX closed above its 200-week moving average (1166.80).
The SPX gapped 12 points higher at the open to the 1343 level, above first resistance at 1335. After negative economic reports, investors took profits, and by 10:30, the index retraced gains back to 1338. Through noon, the SPX traded sideways at 1338 before two one-point sell-offs dropped the index to 1336 at 12:05 and to the intra-day low of 1334.66 at 12:35. From 12:35 through 2:00, the index rallied back to the 1340 level, where it traded sideways through 3:45. A sharp closing-bell rally lifted the index by +5 points, and the SPX closed at the day’s intraday high.
Technical indicators are turning positive. The index resumes its uptrend today after a +1.06% gain yesterday’s strong volume. The index’s May 2nd failure at the 1370 level and brief breakdown through the 50-day moving average last week found support at the 100-day moving average (1315.43) before closing convincingly above the 50-day yesterday. The index’s recent correction stalled the 50-day average’s positive momentum. After narrowing, the gap between the 50- and 100-day moving averages is now holding steady. The index closed above 1300 for the 47th straight session. The index closed above its April 2010 highs for the 123rd straight session. The SPX closed (by +0.60%) above its 20-day moving average (1337.17) for the first time in 12 sessions. The index closed (by +1.09%) above its 50-day moving average for second straight session. The index closed (by +2.16%) above its 100-day moving average for the 52nd straight session. The SPX closed +8.07% above its 200-day moving average. The 20-day moving average fell for the seventh straight session. The directional momentum indicator switched to positive for the first time in 14 sessions, and the trend is weak and declining. Relative strength rose to 55.82 from 49.09, a neutral range. Next resistance is at 1349.90; next support is at 1335.80.
BKX. On higher volume, the KBW bank index rose +0.38 points, or +0.76%, to 50.10. Volume rose +59.36% to 77.57 million shares, up from 48.68 million shares Friday and below the 95.15 million share 50-day average. Recent low financial index volumes versus historical averages relates to Citigroup’s May 6th 10-1 reverse split. The BKX closed +16.57% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -13.55% and -9.94% below its April 23, 2010, and February 14, 2011 closing highs, respectively.
Financials performed in-line with the market, and large-cap banks underperformed regionals. The BKX gapped higher at the open, immediately crossing first resistance at 50.02 and setting the intra-day higher of 50.28 at the bell. Through 11:00, financials retraced gains back to break-even and traded sideways at the break-even line until 3:30. At 3:30, financials rallied with the rest of the market, and the BKX retook both its 200-day moving average and the 50.0 level in trading’s final 20 minutes and closed above both levels.
Technical indicators are mostly negative. The market’s resumed uptrend may help reverse financials’ recent underperformance. The index has remained bound on the upside by the 50-day moving average (now at 51.02 and falling). The index retook its 200-day moving average yesterday for the first time in eight sessions. The 20-day moving average (50.15) has remained below the 50-day moving average since March 11th and crossed below the 100-day moving (now at 52.22) 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 14th, 37th, and 33rd consecutive sessions, respectively. The index closed above 50 for the first time in seven sessions. The 20-, 50-, and 100-day moving averages fell. The 20-day closed (by -0.87 points) below the 50-day for the 54th straight day, and the gap expanded. The 50-day moving average closed (by +1.21 points) above the 200-day moving average for the 95th straight session, but gap narrowed. The 100-day moving average closed (by +2.42 points) above the 200-day moving average for the 77th straight session, but the gap narrowed. The directional movement indicator is negative for the 17th straight session, and the trend is strong and declining. Relative strength rose to 48.25 from 44.10, a neutral range. Next resistance is 50.37; next support at 49.73.