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U.S. Futures Lower, But Off Worst Levels

|Includes:C, CBSH, EWBC, FHN, GOOG, JPM, PVTB, Signature Bank (SBNY), STT, UBSI, WBS, ZION
This morning.  The U.S. equity market uptrend remains under pressure.  In Asia, equity markets closed modestly lower on mixed volume.  European equity indexes are lower, and just above worst levels of the day.  U.S. equity futures are moderately lower, but  strengthening from earlier lows.  U.S. Treasury prices are higher.  The dollar is slightly stronger.  Commodities markets are mixed.   After a fair value adjustment of -3.01 points, September SPX equity futures are at 1306.30, down -5.59 points.  The SPX opens at 1316.14, -3.48% below its recent April 29 multi-year closing high, and +0.55% and +0.24% above its respective 20- and 50-day moving averages.  The SPX is +4.65% above its 1257.64 year-end close.  Next resistance is at 1320.05.  Next support is at 1309.87.
Friday, U.S. equity markets closed higher on increased volume spurred by July options expiration.  A better-than-consensus earnings season has supported trading results.  Market breadth was positive, and up volume led down volume.  The macro-focus remains on U.S. debt ceiling negotiations and ongoing Eurozone sovereign risk issues.  The Nasdaq rose +0.98%, followed by the SPX, NYSE composite, and DJI, which rose +0.56%, +0.44%, and +0.34%, respectively.  NYSE volume rose +16.1% to 1.11x the 50-day moving average.  Markets segments closed mixed, with oil and gas, technology, and basic materials posting the best results.  Financials, telecommunications, and health care lagged and closed lower.  Financials began well on Citigroup’s positive surprise, but traded lower through the day and ended with a -0.20% loss.  Volatility declined -6.11% to end at 19.53, compared to 20.80 at the prior day’s close.  Once again, the VIX moved within a wide range, to an intraday high of 21.68, before fading through the afternoon.  Trading desks reported that despite options expiration, it was a quiet day, without much direction or conviction.  Long-only money remains sidelined.
Recent market weakness is pressuring the market uptrend that began on June 21st.   The distribution day count is 6 on the NYSE composite, 5 on the SPX and DJI, and 4 on Nasdaq.  The BKX count rose to 7 distribution days.  Distribution days signal institutional selling in the prior 25 trading days, or since the commencement of the most recent uptrend.
In Asia, market uptrends in Japan and China are also under pressure.  Japanese markets were closed today.  Chinese equity markets closed modestly lower, with respective Hang Seng and Shanghai composite losses of -0.32% and -0.12%.  Indexes traded within narrow ranges, with the negative action attributed to Eurozone sovereign debt concerns.  In Hong Kong, volume declined -3.17%.  Most market segments closed lower.  Consumer goods, basic materials, and financials were the best performers.  Financials declined -0.20%.  Industrials, technology, and consumer goods closed lower.  The SHCOMP closed at 2816.69, +7.46% above its June 20th correction low.  Volume rose +0.56%.  Market segments were mixed, with best performance from consumer goods, utilities, and technology.  Basic materials, oil and gas, and telecommunications.  Financials dropped -0.19%.  The SHCOMP ended -7.87% below its recent April 18th 3057.33 high, +0.31% above its 2010 close, and +1.79% above the 2769.25 50-day moving average. 
In Europe, equity markets are lower and just above intraday lows.  The EuroStoxx50, FTSE, and DAX are -1.68%, -1.24%, and -1.36%, respectively.  Equity markets gapped lower, and have trended lower through the morning session.  The EuroStoxx50 is at 2628.91, compared to its 2621.74 intraday low.  All market segments are lower.  Basic materials, utilities, and consumer services are the leaders.  Technology, industrials, and financials are the laggards.  Financials are down -2.56%.
Despite sovereign debt and other macro-concerns, LIBOR levels are near their lowest since early 2009, well below those seen prior to the onset last year of the Eurozone sovereign debt crisis.  Overnight USD LIBOR fell to 0.12175%, from 0.12225% the prior day, the lowest reading in 2011 and down from 0.25188% at year-end.  USD 3-month LIBOR rose to +0.25125% from 0.24975% the prior day, but down from 0.30950% at year-end.  The U.S. dollar is slightly stronger against the euro, pound, and yen.  The dollar trades at US$75.592, above its US$75.01 50-day and US$75.17 100-day moving averages, but below its US$76.92 200-day moving average.  The euro trades at US$1.4027,  compared to US$1.4157 Friday and US$1.4143 the prior day.  The Euro trades below its US$1.4304 50-day and US$1.4293 100-day moving averages.  The dollar trades at ¥79.09, compared to ¥79.13 Friday and ¥79.14 the prior day.  The yen trades better than its 50-day moving average ¥80.66.  U.S. Treasury yields are lower, with 2- and 10-year maturities yielding 0.355% and 2.880%, respectively, compared to 0.353% and 2.906% Friday.  The yield curve narrowed to +2.525%, from +2.553% 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, mixed aluminum and copper, and lower agriculture.
U.S. news and economic reporting.  Today’s economic reports net long-term TIC flows for May and July NAHB housing market index.    Tuesday’s economic reports focus on June housing starts and building permits.
Overseas news:  This morning, yields on Italy’s 10-year bonds set a Euro-era record at 6.02% and have risen +100 basis points in the past nine trading sessions.   This Thursday, Euro-zone leaders will meet again to discuss solutions to the Eurozone debt crisis.  In June, new home prices in China increased in 67 of the 70 cities surveyed.  Reports indicated Venezuelan President Chavez is back in Cuba for further cancer treatments and ceded some responsibilities to his vice president and finance minister.
Company news/research:
·         SBNY – initiated at buy at BofA/ML, $64 price target
1Q2011 Earnings.  The second quarter’s earnings results have so far exceed revenue and earnings expectations.  Of the 14 S&P500 companies that reported earnings to date, 79% (11 out of 14) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies beat EPS expectations by an average of +8.8% (versus a historical average of +2%).  EPS is up +23.1% over the prior year.  Though challenged in the current operating environment, 79% of companies reported increased revenues over the prior year and 77% beat revenue estimates.  In the second quarter of 2011, analysts estimate the SPX will earn $24.36 per share, compared to $23.06 and $21.17 per share in 1Q11 and 2Q10, a +5.6% and +15.1% increase, respectively.  
Out of the 4 BKX members to have reported earnings thus far, 100% (4 of 4) have beat earnings estimates on an operating basis.  Revenues have also exceeded expectations, with 75% of BKX members beating estimates.  For the second quarter of 2011, analysts estimate the BKX will earn $0.97 per share, compared to $0.96 and $0.61 per share in 1Q11 and 2Q10, a +1.0% and +59% increase, respectively. 
Valuation.  The SPX trades at 13.2x estimated 2011 earnings ($99.35) and 11.7x estimated 2012 earnings ($112.91), compared to 13.2x 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 +5.2%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +17.2% and +33.2%, respectively.
Large-cap banks trade at a median 1.41x tangible book value and 12.3x 2011 consensus earnings, compared to 1.41x tangible book value and 12.4x 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 +31.1% and +68.2%, respectively.
Friday’s equity markets. On mixed volume, equity markets finished higher. The Nasdaq, SPX, NYSE, and DJI rose +0.98%, +0.56%, +0.44%, and +0.34%, respectively.  Futures were indicated higher after earnings from C beat expectations.  A bid by financier Carl Icahn for Clorox also helped extend gains in the SPX futures.  Economic news was mixed as the Consumer Price Index was in line with expectations, but the July Empire State Factory Index fell unexpectedly.  Markets seemed to take this news in stride.  The market opened and immediately posted its intraday highs.  The market immediately turned and gave up its gains after news that House Republicans planned to hold a vote on a $2.4 trillion debt increase without any consensus on deficit reduction with the administration.  Markets moderated through the day, neither gaining nor losing significant ground.  Markets momentum improved in the last hour and spiked significantly through the last half hour as options expiration approached. The markets closed near their intraday highs.
Trading desks reported a relatively quiet day with options expiration taking the forefront.  The macro overhangs continue as investors digest the latest news and commentary on the sovereign debt crisis in Europe and the deficit reduction negotiations in the United States. Investors lack conviction.  Short-term moves are directed by faster accounts.  The market continues to be headline driven, but the last two days individual names have led on earnings beats, notably JPM, GOOG, and C.  The relative strength indicator rose to 49.45 from Thursday’s reading of 47.44 and is now in the neutral range. The VIX finished the day lower at 19.53, off -6.11%.
Market segments mixed. Oil and gas, technology, and basic materials were the leaders, while financials, telecommunications and health care were the laggards.
Financials were lower Friday. The KRX, BKX and XLF finished lower, off -0.31%, -0.28%, and -0.20%, respectively.   Despite the beginnings of positive earnings season, banks and other financials seem to be for sale. Friday C reported a solid quarter and still ended up being for sale by the end of the day. Master trust data released by the major credit card issuers continues to improve both on a delinquency and default basis, yet many of these names were under pressure on Friday as well. The BKX began Friday on its highs and sold off through the day, alternatively positive and negative through the morning, before turning decidedly negative in the afternoon. The BKX finished with 9 names higher, 13 lower and 2 unchanged. Leaders in the BKX included RF, ZION, and CBSH, up at least +0.8%. Laggards were STT, JPM and C, off at least -0.84%. The KRX finished with 10 names higher, 37 lower and 3 unchanged. Leaders included WBS, PVTB, and FHN. Laggards were UBSI, EWBC, and GBCI. We continue to see headline risk and faster accounts drive individual names in the financials. The BKX, KRX, and XLF finished below their respective 50-, 100-, and 200-day moving averages. While the broader indexes have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -20.12% below its April 2010 high and -43.93% below its best level of 82.55 in September 2008.
NYSE Indicators.  Spurred by options expiration, volume rose +16.1% to 1.074 million shares, from 925.21 million shares Thursday, 1.11x the 965.06 million share 50-day moving average.  Market breadth was positive, and up volume led down volume.  Advancing stocks led decliners by +650, compared to -1732, or 1.56:1.  Up volume lagged down volume by 1.27:1.
SPX.  On options expiration-inspired higher volume, the SPX rose +7.27 points, or +0.56%, to 1316.14.  Volume rose +22.82% to 884.92 million shares, up from 720.49 million shares Thursday and above the 738.71 million share 50-day moving average.  For the 184th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1312.99 vs. 1276.68, respectively).  The SPX closed above its 200-week moving average (1161.67).
The SPX gapped higher at the open to the 1315 level and by 9:33, set the intra-day high of 1317.70.  Through 10:00, the market searched for direction.  By 9:55, the SPX fell back to 1311, rallied back up above 1316 by 10:05 before falling to 1308, below the break-even line, by 10:20.  Through 12:00, a sporadic rally lifted the index back to 1316, but momentum reversed through the afternoon.  By 2:30, the index again retraced to its break-even line at 1309.  A rally in the final hour lifted the index back to 1316 at the close, and the SPX finished at the high end of the day’s range.
Technical indicators are neutral.  The index’s reversal in June’s second half returned markets to an uptrend on June 21st that was confirmed on June 30th.  However, the market’s weakness since Friday, July 8th has placed the nascent uptrend under pressure.  The SPX closed above 1300 for the 12th straight session.  The index closed above its April 2010 highs for the 155th straight session.  The 50-day moving average has been below the 100-day moving average since July 11thThe SPX closed (by +0.55%) above its 20-day moving average (1308.95) for the 13th straight session.  The index closed (by +0.24%) above its 50-day moving average and has fluctuated above and below that level since July 11thThe index closed (by +0.01%) above its 100-day moving average (1316.08).  The SPX closed +3.09% above its 200-day moving average.  The 50-day and 100-day moving averages declined.  The directional momentum indicator is positive for the 12th straight session but is narrowing, and the trend is weak and declining.  Relative strength rose to 51.41 from 48.72, a neutral range.  Next resistance is at 1320.05; next support is at 1309.87.
BKX.  On higher volume, the KBW bank index fell -0.13 points, or -0.28%, to 46.29.  Volume rose +31.5% to 113.14 million shares, up from 86.02 million shares Thursday and above the 78.30 million share 50-day average.  The BKX closed +7.70% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -20.12% and -16.79% below its April 23, 2010, and February 14, 2011 closing highs, respectively.
Financials underperformed the market, and regionals underperformed large-cap banks.  The BKX gapped higher at the open to 46.60 and at 9:33, set the intra-day high of 46.74.   Through 10:35, financials fell, crossing break-even at 10:10 and reaching 46.10 by 10:35.  At 10:40, momentum reversed, and by 11:30, the index rallied back to the break-even line.  Unable to move convincingly above that threshold, the BKX lost momentum through the afternoon.  By 2:35, the index fell to its intra-day low of 45.96.  The move below 46.00 was brief, as the BKX rallied into the close to finish near the 46.30 level and a modest loss. 
Technical indicators are mostly negative.  Bank stocks significantly underperformed the broader market during the May-June correction.  Recent outperformance during the market’s July rebound has been short-lived as European sovereign debt concerns and renewed risk aversion punish the sector.  The 20-day moving average (47.52) is below the 50- and 100-day moving averages (48.32 and 50.09, respectively).  The 50-day average is below the 100-day moving average and has been below the 200-day moving average since June 16th.  The index closed below its 20-day moving average for fifth straight session.  The index closed below its 50-day moving average for the sixth straight session.  The index closed below the 100- and 200-day moving averages for the 66th and 32nd consecutive sessions, respectively.  The index closed below the 50.00 level for the 31st straight session.  All moving averages fell, with the 200-day moving average turning from positive to negative for the first time since January 14th.  The 20-day closed (by -0.79 points) below the 50-day for the 86th straight day, but the gap narrowed.  The 50-day moving average closed (by -1.74 points) below the 200-day moving average for the 21st straight session, and the gap expanded.  The 100-day moving average closed (by +0.04 points) above the 200-day moving average for the 109th straight session, but the gap narrowed and will cross below the 200-day after today’s close.  The directional movement indicator is negative for the fifth straight session, and the trend is moderate and stable.   Relative strength fell to 39.28 from 40.03, the lower end of a neutral rangeNext resistance is 46.70; next support at 45.92.