This morning. U.S. equity markets are in correction. Asian equity markets closed mixed, while European markets are lower. U.S. equity futures are moderately lower. Economic news flows is light, principally the Fed Beige Book at 2:00. U.S. Treasury yields are mixed, with auctions of 10-year notes today. The U.S. dollar is mixed. Commodities markets are lower, with weaker petroleum, mixed metals, and mixed agriculture. OPEC will announce an increase in production quotas today. After a fair value adjustment of -0.86 points, June SPX equity futures are at 1278.40, down -5.64 points. The SPX opens at 1284.94, -5.77% below its recent April 29 multi-year closing high and -3.41% below its 50-day moving average. The SPX is -1.55% below April’s lowest closing low of 1305.14. Next resistance is at 1292.53. Next support is at 1280.51.
Tuesday, U.S. equity markets traded higher through most of the day, but faded in the final hour to end mixed. The late fade coincided with Fed Chairman Bernanke’s 3:45 speech in Atlanta, in which he cited weaker economic momentum. The speech was less notable than the Q&A, when JPM’s Dimon asked whether the cumulative effect of industry changes, legislative, and regulatory dictates on the economic recovery. Remarkably, Bernanke answered that the Fed and regulators haven’t, that it’s “too complicated. We don’t really have the quantitative tools.” The fade came despite a better than expected April consumer credit report, released at 3:00. Volumes were mixed, too, modestly lower on the DJI, Nasdaq, and NYSE, but slightly higher on the SPX. The NYSE composite was the day’s best performer, rising +0.19%. The SPX, Nasdaq, and DJI declined -0.16, -0.10%, -0.04%, respectively. Market segments ended mixed. Health care, consumer services, and basic materials were the day’s best performers. Telecommunications, consumer goods, and technology were the worst. Volatility fell through most of the day, but rebounded late in the session. The VIX ended at 18.07, down -2.27% from 18.49 the prior day. There was no change in the distribution day count, currently 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 afternoon 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, but closed mixed. Bernanke’s comments yesterday, in which he identified a loss of economic momentum, were cited for the day’s weaker trade. The Nikkei closed up +0.07% on a -8.59% decline in volume. Financials were middling performers, up +0.13%. Utilities, basic materials, and telecommunications were the best performers. Chinese equity markets closed mixed, with the Hang Seng and Shanghai composite -0.91% and +0.15%, respectively. On the SHCOMP, volume rose +14.4%. Consumer goods, technology, and basic materials were the best performers. Consumer services, financials, and health care lagged, with financials ending down -0.08%. The SHCOMP closed at 2750.29, -10.0% below its recent April 18th 3057.33 high, -2.06% below its 2010 close, and below the 2844.71 200-day moving average. However, the SHCOMP closed +3.34% above its 2011 low of 2661.45, set on January 25. In Europe, equity markets are moderately lower, with better strength in utilities, health care, and telecommunications. Financials, basic materials, and technology are the worst performers. The EuroStoxx 50, FTSE, and DAX are lower, -1.19%, -1.19%, and -1.40%, respectively. On the EuroStoxx, financials are the 8th worst performing segment, down -1.36%.
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% unchanged from 0.12650% the prior day and 0.25188% at year-end. USD 3-month LIBOR is higher at 0.25025%, compared to 0.25175% the prior day and 0.30950% at year-end. The U.S. dollar is stronger against the euro and pound, slightly weaker compared to the yen. The dollar, which has trended lower since last June, trades below its 50-, 100-, and 200-day moving averages. The euro trades at US$1.4629, compared to US$1.4691 Tuesday and US$1.4576 the prior day. After a sharp decline in early May, the Euro has risen back above its US$1.4412 50-day moving average. The dollar trades at ¥79.82, compared to ¥80.09 Tuesday and ¥80.10 the prior day. The yen trades better than its 50-day moving average ¥81.94. U.S. Treasury yields are mixed, with 2- and 10-year maturities yielding 0.401% and 2.984%, respectively, compared to 0.405% and 2.995% Tuesday. The yield curve narrowed to +2.583% from +2.590% 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 mixed agriculture.
Options Markets. The equity P/C ratio remains elevated, closing the day at 0.73, compared to the prior day’s 0.79 and 10-day average 0.65. Based on market patterns since March 2009, a ratio above 0.75 is extremely bearish. Yesterday, the total P/C ratio followed a similar pattern, closing at 1.09, below Friday’s extreme 1.23 reading, but above its 10-day 0.95 average. Since the March 2009 bottom, short-term extreme readings in the total P/C ratio have led to higher equity prices within four trading days. A failure in this pattern over the next two trading days may signal continued correction in equity prices.
U.S. news and economic reporting. Today’s economic reporting is limited to the Fed Beige Book at 2:00.
Overseas news. In the first quarter, Euro-zone GDP increased +0.8% over the prior quarter, in-line with estimates. In April, German exports fell -5.5% from the prior month, more than estimates more than offsetting the decline in imports. News reports indicate Greece’s second bailout could total €100 billion over the next three years, +33% higher than the amount discussed a few weeks ago.
· AIG – initiated at neutral at Goldman
· BBT – removed from the Focus List at Morgan Keegan, but reiterated overweight recommendation
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 12.9x estimated 2011 earnings ($99.31) and 11.4x estimated 2012 earnings ($112.52), compared to 13.0x and 11.4x 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 +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 1.41x tangible book value and 12.1x 2011 consensus earnings, compared to 1.40x tangible book value and 12.0x 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 +33.1% and 70.9%, respectively.
Tuesday’s equity markets. On mixed volume, the equity markets closed mixed. The NYSE finished positively, up +0.19%, while the DJI, SPX and Nasdaq were lower, off -0.16%, -0.10%, and -0.04%, respectively. Markets opened higher and built on those gains during the morning session. The markets traded sideways during mid-day, but began to gain traction in the early afternoon. However, in front of Chairman Bernanke’s 3:45 speech, markets began to lose their gains. In the last hour, markets fell markedly and closed at their intraday lows. Bernanke acknowledged that the economy had lost momentum, but opined that the recovery would resume in the second half of the year. Markets responded to this confirmation of recent soft economic reports by selling stocks. Trading desks noted that the day was quiet with small buy orders, but little conviction among longs. Sellers used early strength to de-risk. Short sellers remained on the sidelines. The VIX finished the day at 18.07, off -2.27%.
Technical indicators are mixed. The SPX fell for a fifth straight day, its longest slump in almost a year. While the SPX touched resistance at 1296, the intraday high, the session was notable for the afternoon’s rapid reversal. Even with the last hour’s decline, SPX support levels of 1280 and 1274 were not in danger. Volume was slightly higher on the SPX, but lower on the other major indexes. The SPX, DJI, NYSE and Nasdaq all finished below their 50- and 100-day moving averages, but above the 200-day average. The Nasdaq, SPX, and NYSE all finished below their 150-day average as well. The Bloomberg NYSE new net highs were a -41 versus Monday’s reading of -50. The relative strength indicator rose to 36.96 from Monday’s 35.76, indicating an oversold condition.
Market segments were mixed. Health care, consumer services, and basic materials were the leaders, while telecommunications, consumer goods, and technology were laggards.
Financials were a middling performer. The KRX finished positively, up +0.18%, while the XLF and BKX ended lower, off -0.23% and -0.17%, respectively. The BKX traded higher from the bell and maintained those gains through the morning and early afternoon session, even though the index moved sideways during that time period. In the last hour, the index moved substantially lower and that move accelerated as Chairman Bernanke confirmed that the U.S. economy was indeed slowing. The BKX ended the day with 14 names up and 10 down. HBAN, FITB, and MTB were the leaders, while BAC, ZION, and WFC were the laggards. The KRX ended with 28 names higher, 21 lower and 1 unchanged. Leaders included SUSQ, FMBI, and SBIB. The laggards were FCF, MBFI and SNV. The BKX, KRX, and XLF all finished below their 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 -19.51% below its April 2010 high and -43.5% below its best level of 82.55 in September 2008.
NYSE Indicators. Volume fell -2.56% to 934.66 million shares, from 959.22 million shares Monday, 1.03x the 50-day moving average. Market breadth was positive, and and up volume led down volume, both by small margins. Advancing stocks led decliners by +386 (compared to -1798 Monday), or 1.29:1. Up volume led down volume by 1.11:1.
SPX. On slightly higher volume, the SPX fell -1.23 points, or -0.10%, to 1284.94. Volume rose +0.55% to 750.78 million shares, up from 746.68 million shares Monday and above the 732.26 million share 50-day moving average. For the 157th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1330.34 vs. 1250.16, respectively). The SPX closed above its 200-week moving average (1165.73).
The SPX gapped higher at the open to the 1292 level. By 9:50, the index had retraced to 1290 before a 10:00 rally took the index to 1295 by 11:00. Through 11:30, gains retraced back to 1292. At 12:45, a second rally lifted the index to the intra-day high of 1296.22 at 2:20. At 2:30, a minor sell-off dropped the index back to 1294 and a steeper sell-off from 3:00 through the close retraced the day’s entire gains. By 3:57, the index turned negative and set the intra-day low of 1284.74 at 3:58. The SPX closed lower on the day and just above the intra-day low.
Technical indicators are negative. The index’s May 2nd failure at the 1370 level moved stocks into correction. The SPX broke below the 50-, 100-, and 150-day moving averages. 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 second straight session. The index closed above its April 2010 highs for the 128th straight session. The SPX closed (by -3.08%) below its 20-day moving average (1325.83) for the fifth straight session. The index closed (by -3.41%) below its 50-day moving average for fifth straight session. The index closed (by -2.51%) below its 100-day moving average (1317.96) for the fifth straight session. The SPX closed +2.78% above its 200-day moving average. The 20-, 50-, and 100-day moving averages fell for the 11th, second, and first straight sessions, respectively. The last time the 100-day moving average switched from rising to falling was June 23, 2010. The directional momentum indicator is negative for the fifth straight day, and the trend is moderate and increasing. Relative strength fell to 33.43 from 33.77, the low end of a neutral range. Next resistance is at 1292.53; next support is at 1281.05.
BKX. On lower volume, the KBW bank index fell -0.08 points, or -0.17%, to 46.64. Volume fell -16.2% to 85.15 million shares, down from 101.61 million shares Monday and below the 93.98 million share 50-day average. The BKX closed +8.52% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -19.52% and -16.16% below its April 23, 2010, and February 14, 2011 closing highs, respectively.
Financials performed in-line with the market, and large-cap banks’ losses underperformed regionals’ gains. The BKX gapped higher at the open to the 47.00 level. By 9:40, the index surged through first resistance at 47.25 before retracing back to 47.15. A second rally at 9:45 took the index to its intra-day high of 47.38 at 10:00. A sharp sell-off at 10:10 retraced gains back to the 47.00 level by 10:30, but the index recovered to the 47.20 level shortly after. Through 2:30, the index traded sideways between 47.10 and 47.20. At 2:30, a quick but small sell-off to 47.05 switched momentum. The index fell through the close, completely retracing the day’s gains by 3:45 and setting the intra-day low of 46.63, in negative territory, at 3:58. The market closed at the 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 (49.26 and falling) is below the 50- and 100-day moving averages (50.60 and 51.92, respectively) 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 19th, 42nd, 38th, and fifth consecutive sessions, respectively. The index closed below 50 for the 10th time in 11 sessions. The 20-, 50-, and 100-day moving averages fell. The 20-day closed (by -1.34 points) below the 50-day for the 59th straight day, and the gap expanded. The 50-day moving average closed (by +0.73 points) above the 200-day moving average for the 100th straight session, but the gap narrowed and indicates a cross next week. The 100-day moving average closed (by +2.05 points) above the 200-day moving average for the 82nd straight session, but the gap narrowed. The directional movement indicator is negative for the 22nd straight session, and the trend is strong and increasing. Relative strength fell to 27.30 from 27.64, the lowest since August 24, 2010, and an oversold range. Next resistance is 47.14; next support at 46.39.