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U.S. Equity Futures Rebound; Options Markets Point to Oversold Conditions

|Includes:BAC, BPFH, BXS, C, COF, FFBC, FHN, FNFG, GE, Regions Financial Corporation (RF), SNV, UBSI
This morning.  U.S. equity markets are in correction.  After several consecutive lower days, world equity markets are modestly higher. U.S. equity futures are moderately higher.  The advances reflect oversold conditions and views that recent losses overestimated the slowdown in the global economy. Economic news flows is light, though there are 3 Fed speakers today, including Bernanke at 3:45, on the economy.  U.S. Treasury yields are higher, anticipating an auction of 4-week bills and 3-year notes today.  The U.S. dollar is mixed.  Commodities markets are mixed, with weaker petroleum, stronger metals, and mixed agriculture.  OPEC will announce an increase in production quotas tomorrow. After a fair value adjustment of +0.17 points, June SPX equity futures are at 1293.00, up +7.83 points.  The SPX opens at 1286.17, -5.68% below its recent April 29 multi-year closing high and -3.36% below its 50-day moving average.  The SPX is -1.45% below April’s lowest closing low of 1305.14.  Next resistance is at 1296.05.  Next support is at 1280.51.
Monday, U.S. equity markets closed broadly lower on mixed volume.  The NYSE composite was the day’s worst performer, falling -2.00%.  The Nasdaq, SPX, and DJI declined -1.11%, -1.08%, and -0.50%, respectively.  All market segments ended lower. Utilities, consumer goods and technology were the day’s best performers.  Basic materials, financials, and oil and gas were the worst.  Markets extended last week’s losses, opening lower, rallying weakly until noon, before losing ground through the afternoon to end near the day’s lows.  Reflecting the market’s action, volatility opened higher, traded lower into the afternoon, and rose through the afternoon. The VIX ended at 18.49, up +3.01% from 17.95 the prior day.  The DJI and SPX recorded distribution days.  The distribution day count is 7 on the Nasdaq, DJI, and SPX, and 6 on the NYSE. Distribution days signal institutional selling in the past  25 trading days. Trading desks reported a quiet, but orderly trade, better to the sell-side, with long sellers on the rallies and few short-sellers.
Asian and European equity markets are also in correction.  The Nikkei closed up +0.67% on a -8.57% decline in volume.  Financials were the 4th best performing markets segment, up +0.79%. All market segments ended higher. After yesterday’s holiday, Chinese equity markets closed mixed, with the Hang Seng and Shanghai composite -0.35% and +0.60%, respectively. There were mixed reports regarding the likelihood of additional monetary tightening to address inflation. On the SHCOMP, volume fell -4.30%. Basic materials, health care, and oil and gas were the best performers. Financials, utilities, and consumer goods lagged, but all sectors rose on the day. The SHCOMP closed Tuesday at 2744.30, -10.2% below its recent April 18th 3057.33 high, -2.27% below its 2010 close, and below the 2844.09 200-day moving average.  However, the SHCOMP closed +2.49% above its 2011 low of 2661.45, set on January 25.  In Europe, equity markets are modestly higher, with better strength in utilities, industrials, and health care.  Oil and gas, consumer goods, and consumer services are the worst performers.  The EuroStoxx 50, FTSE, and DAX are higher, +0.44%, +0.24%, and +0.63%, respectively.  On the EuroStoxx, financials are middling performers, up +0.41%.
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 rose to 0.12650% from 0.12600% the prior day and 0.25188% at year-end.  USD 3-month LIBOR is unchanged at 0.25175%, compared to 0.25175% the prior day and 0.30950% at year-end.  The U.S. dollar is weaker against the euro and pound, slightly stronger to the yen.  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$1.4658, compared to US$1.4576 Monday and US$1.4635 the prior day.  After a sharp decline in early May, the Euro has risen back above its US$1.4401 50-day moving average.  The dollar trades at ¥80.22, compared to ¥80.10 Monday and ¥80.34 the prior day.  The yen trades better than its 50-day moving average ¥82.01.  U.S. Treasury yields are mixed, with 2- and 10-year maturities yielding 0.429% and 3.015%, respectively, compared to 0.421% and 2.995% Monday.  The yield curve widened to +2.586% from +2.574% 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 lower energy, higher precious metals, aluminum and copper, and mixed agriculture.
Put/call.  Options markets are indicating an oversold market. The put/call ratio ended Friday at 1.23x, only the 7th reading in excess of 1.2x since the beginning of 2010.  Extreme put-call ratios point to excessive one-sided market sentiment.  Since the March 2009 bottom, a ratio over 1.2x has signaled overly bearish sentiment.  In five of the six previous instances, the S&P500 closed higher four trading days later.
U.S. news and economic reporting.  Today’s economic reporting is limited to June IBD/TIPP economic optimism and the JOLTs jobs openings for April, both at 10:00.  There are 3 Fed speakers, including Bernanke at 3:45. Wednesday’s reports include April consumer credit and MBA mortgage applications.  The Fed Beige Book is released Wednesday afternoon.    
Overseas news.  In April, Euro-zone retail sales rose more than expected.  Today, China’s top banking regulator warned of rising emerging market inflation.  Tomorrow, OPEC may agree to boost production following its meeting.  Yesterday, 120 Syrian security officials were killed in retaliatory attacks as violence escalated.   
Company news/research:
·         RF – signed an agreement to purchase a $1.0 billion credit card portfolio from FIA Card Services
·         COF and GE – both companies made bids to purchase ING Group’s ING Direct USA online brokerage unit, worth an estimated $9 billion. 
1Q2011 Earnings.  The first quarter’s earnings results have exceeded EPS and revenue expectations.  Of the 470 S&P500 companies that reported earnings to date, 72% (338 of the 470) 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, 355 companies (75%) reported increased revenues and 317 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 13.0x estimated 2011 earnings ($99.30) and 11.4x estimated 2012 earnings ($112.52), compared to 13.1x and 11.6x respective 2011-12 earnings Friday.  The 10-year average median Price/Earnings multiple is 20.0x.  Since the beginning of 2011, analysts increased 2011 and 2012 earnings estimates by +5.0%, and +4.9%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +17.1% and +32.7%, respectively.
Large-cap banks trade at a median 1.40x tangible book value and 12.0x 2011 consensus earnings, compared to 1.41x tangible book value and 12.3x 2011 earnings Friday.  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. 
Monday’s equity markets.  On mixed volume, equity markets closed lower. The NYSE, Nasdaq, SPX, and DJI finished lower, off -1.29%, -1.11%, -1.08%, and -0.50%, respectively.  Markets opened lower and sold off sharply in the first hour.  Markets attempted a small rally in late morning, but the attempt was short-lived, and indexes turned lower after 12:30. The afternoon saw consistent selling pressure with feeble rally attempts.  Indexes saw their lows just after 3:00, with a failed bounce in the last half hour, and ended the day closing near the lows.  While there was no specific news either corporate or economic, the consistent theme of this 5-week sell off has been to de-risk in the face of a slowing economy.  The economic news from last week, coupled with uncertainty over tighter government regulation has investors seeking safer havens. Friday’s speech by Federal Reserve Governor Tarullo concerning capital surcharges for financial institutions considered systemically important (SIFI’s) has investors concerned about the future of the regulation of  large cap financials and their ability operate in this environment. The financials led the way down today, finishing off over -2%. Trading desks report orderly selling and a lack of interest by those that had been buying the dips to step in Monday. They categorize the bounces more as short-term covering and not real buy interest.  Interestingly, we continue to hear a lack of short sellers in this market. The VIX finished the day at 18.49, up +3.01%.
Technical indicators are negative.  The SPX finished the day at 1286, breaking below support at 1294 and 1288.  The next support level is 1273.  The SPX reached 1284 in the last hour and attempted to rally off point, but failed and closed with 2 points of the low.  For the first time since last September, the SPX, Nasdaq and NYSE all finished the day below their 150-day moving averages. Volume rose on the SPX and DJI, but declined on the NYSE and Nasdaq.  The SPX, DJI, NYSE, and Nasdaq traded below their 50- and 100-day moving averages, but not the 200-day average. The Bloomberg NYSE new net highs were -50 versus Friday’s reading of -25.  The relative strength indicator fell to 35.76 from Friday’s 40.55, indicating an oversold condition.
All market segments closed lower. Utilities, consumer goods, and technology were the leaders, while basic materials, financials and oil and gas were the laggards.
Financials underperformed. The BKX, XLF and KRX were sharply lower, off -2.03%, -1.91%, and -0.52%, respectively. The BKX sold off sharply at the bell, seeing its lows in the first half hour. The BKX rebounded through mid-day, but gave up those gains through the afternoon session as the index slid lower, ending only 10 basis points higher than the morning’s low.  Investors seemed concerned with Fed speak regarding about possible capital surcharges for global banks with more than $50 billion in assets.  Coupled with an analyst’s downgrade of WFC from neutral to a sell, bank stocks were under pressure all day.  The BKX ended with 1 name up and 23 down.  The lone gainer was FNFG (+0.8%).  The laggards were RF, C, and BAC, each off at least -3.99%. The KRX fared better with 10 names up, 36 down, and 4 unchanged.  Leaders included FFBC, BXS and UBSI.  The laggards were SNV, FHN, and BPFH.  The BKX, KRX, and XLF all finished below the 50-, 100-, and 200-day moving averages. While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -19.4% below its April 2010 high and -43.4% below its best level of 82.55 in September 2008.
NYSE Indicators.  Volume fell -1.25% to 959.22 million shares, 1.03x the 50-day moving average, from 971.40 million shares Friday.  Market breadth was negative, and up volume lagged down volume, both by large margins.  Advancing stocks lagged decliners by -1798 (compared to -1615 Friday), or 0.89:1.  Up volume lagged down volume by 0.08:1.
SPX.  On higher volume, the SPX fell -13.99 points, or -1.08%, to 1286.17.  Volume rose +3.23% to 746.68 million shares, up from 723.30 million shares Friday and above the 730.28 million share 50-day moving average.  For the 156th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1330.92 vs. 1249.09, respectively).  The SPX closed above its 200-week moving average (1165.74).
The SPX opened flat, immediately setting its intra-day high of 1300.26 before moving lower.  By 10:30, the index fell to 1292.  An 11:00 rally lifted the SPX back to the 1296 level.  At 12:30 and 1:15, two sell-offs moved the market lower to 1294 and 1290, respectively.  By 2:30, the index climbed back to 1292.  A 2:30 sell-off gained momentum at 3:00, and by 3:15, the market set its intra-day low of 1384.72.  Into the close, stocks attempted a weak rebound, which was sold.  The index finished just above its low. 
Technical indicators are negative.  The index’s May 2nd failure at the 1370 level moved stocks into correction.  The SPX broke through both the 50- and 100-day moving averages last week, closed below the 100-day moving average for the fourth straight day, and moved below the 150-day moving average for the first time since August 10, 2010.  The index last crossed the 100-day moving average to the downside on May 14th, 2010 and remained below it until September 9th.  The 50-day average has remained above the 100-day moving average by a small, but consistent margin.  The index closed below 1300 for the first time in 51 sessions.  The index closed above its April 2010 highs for the 127th straight session.  The SPX closed (by -3.22%) below its 20-day moving average (1328.89) for the fourth straight session.  The index closed (by -3.36%) below its 50-day moving average for fourth straight session.  The index closed (by -2.41%) below its 100-day moving average (1317.97) for the fourth straight session.  The SPX closed +2.97% above its 200-day moving average.  The 20- and 50-day moving averages fell for the 11th and first straight sessions, respectively.  The directional momentum indicator is negative for the fourth straight day, and the trend is moderate and increasing.  Relative strength fell to 33.77 from 37.80, the low end of a neutral range.  Relative strength was last this low on March 16th when the SPX set its year-to-date closing low of 1256.88 following the Japanese earthquake and tsunami.  Next resistance is at 1296.05; next support is at 1280.51. 
BKX.  On higher volume, the KBW bank index fell -0.97 points, or -2.03%, to 46.72.  Volume rose +47.47% to 101.61 million shares, up from 68.90 million shares Friday and above the 93.84 million share 50-day average.  The BKX closed +8.70% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -19.38% and -16.02% below its April 23,  2010, and February 14, 2011 closing highs, respectively. 
Financials underperformed the market, and large-cap banks underperformed regionals.  The BKX gapped lower at the open, reaching the 47.30 level.  At 9:33, the index set its intra-day high of 47.46 before rapidly falling to its intra-day low of 46.62 by 10:10.  Through 12:30, financials rebounded nearly back to the day’s highs.  Unable to retake the 46.40 threshold, momentum reversed, and a gradual sell-off ensued that lasted through the close.  The BKX broke back through the 47.00 level at 2:50 and tested the intra-day low at 3:15.  Unable to rally in trading’s final minutes, the index closed near the intra-day low. 
Technical indicators are negative.  The market’s correction has withdrawn support for financial stocks.  The index fell through all major moving averages, crossing decisively below the 200-day moving average on June 1st.  The 20-day moving average (49.45) is below the 50- and 100-day moving averages and the 50-day average is below the 100-day average.  The index closed below the 20-, 50-, 100-, and 200-day moving averages for the 18th, 41st, 37th, and fourth consecutive sessions, respectively.  The index closed below 50 for the ninth time in ten sessions.  The 20-, 50-, and 100-day moving averages fell.  The 20-day closed (by -1.25 points) below the 50-day for the 58th straight day, and the gap expanded.  The 50-day moving average closed (by +0.84 points) above the 200-day moving average for the 99th straight session, but the gap narrowed and indicates a cross in the next two weeks.  The 100-day moving average closed (by +2.14 points) above the 200-day moving average for the 81st straight session, but the gap narrowed.  The directional movement indicator is negative for the 21st straight session, and the trend is strong and increasing.  Relative strength fell to 27.64, the lowest since August 24, 2010, and into an oversold range.  Next resistance is 47.25; next support at 46.41.