This morning. The U.S. equity market uptrend remains under pressure. In Asia, equity markets closed mixed on mixed volume. European equity indexes are higher, rebounding from yesterday’s losses. U.S. equity futures are moderately higher, and strengthening on generally robust earnings report. U.S. Treasury prices are lower. The dollar is slightly weaker. Commodities markets are mixed. After a fair value adjustment of +0.84 points, September SPX equity futures are at 1310.10, up +8.56 points. The SPX opens at 1305.44, -4.27% below its recent April 29 multi-year closing high, and -0.40% and -0.53% below its respective 20- and 50-day moving averages. The SPX is +3.80% above its 1257.64 year-end close. Next resistance is at 1315.61. Next support is at 1295.59.
Monday, U.S. equity markets closed lower on decreased volume, but well above intraday lows. Markets followed down a weak European trade, which declined principally on Eurozone sovereign debt concerns. Market internals were extremely negative. The NYSE composite fell +1.11%, followed by the Nasdaq, SPX, and DJI, which declined -0.89%, -0.81%, and -0.76%, respectively, though off intraday lows that were nearly twice those declines. NYSE volume fell -18.6% to 0.91x the 50-day moving average. Markets segments all closed at least -0.25% lower, with technology, oil and gas, and consumer goods the best performers, while consumer services, industrials, and financials lagged. Financials lost -1.32%. Volatility rose +7.27% to end at 20.95, compared to 19.53 at the prior day’s close. Once again, the VIX moved within a wide range, to an mid-day intraday high of 21.93, before fading through the afternoon. Trading desks reported short-selling in early trading, and a subsequent mid-day switch as investors bought the weakness. The a dearth of buyers. Long-only money remains sidelined.
Recent market weakness is pressuring the market uptrend that began on June 21st. Due to lower volumes, the distribution day count is 6 on the NYSE composite, 5 on the SPX and DJI, and 4 on Nasdaq. The BKX count was unchanged at 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 closed lower. The Nikkei closed down -0.85%on a +7.92% increase in volume. Telecommunications and basic materials closed higher. Financials lost -0.44%. Consumer goods, technology, and utilities closed lower. Chinese equity markets closed mixed, with Hang Seng up +0.45% and the Shanghai composite down -0.70%. Action followed losses in the U.S. and Europe, and traders cited European and U.S. debt concerns. In Hong Kong, volume rose +16.4%. Most market segments closed lower. Utilities, basic materials, and consumer services were the best performers. Financials rose +0.44%. Industrials, technology, and consumer goods closed lower. The SHCOMP closed at 2816.69, +7.46% above its June 20th correction low. Volume fell -14.3%. Market segments were mostly lower, with best performance from telecommunications, basic materials, and oil and gas. Health care, technology, and consumer services were the laggards. Financials dropped -0.63%. The SHCOMP ended -8.52% below its recent April 18th 3057.33 high, -0.40% below its 2010 close, and +1.11% above the 2766.15 50-day moving average.
In Europe, strong earnings reports have spurred an equity market rebound. The EuroStoxx50, FTSE, and DAX are up +1.56%, +0.45%, and +1.22%, respectively. Equity markets gapped higher, and have trended higher through the morning session. The EuroStoxx50 is at 2664.56, compared to its 2631.99 intraday low. All market segments are higher. Financials, technology, and industrials are the leaders. Health care, basic materials, and consumer goods are the laggards. Financials are up +3.08%, largely recouping the prior day’s losses.
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 rose to 0.12225%, from 0.12175% the prior day and down from 0.25188% at year-end. USD 3-month LIBOR rose to +0.25200%, from 0.25125% the prior day, but down from 0.30950% at year-end. The U.S. dollar is slightly weaker against the euro, pound, and yen. The dollar trades at US$75.073, above its US$75.02 50-day, but below its US$75.15 100-day and US$76.91 200-day moving averages. The euro trades at US$1.4178, compared to US$1.4112 Monday and US$1.4157 the prior day. The Euro trades below its US$1.4301 50-day and US$1.4298 100-day moving averages. The dollar trades at ¥79.00, compared to ¥79.04 Monday and ¥79.13 the prior day. The yen trades better than its 50-day moving average ¥80.62. U.S. Treasury yields are lower, with 2- and 10-year maturities yielding 0.379% and 2.953%, respectively, compared to 0.363% and 2.928% Monday. The yield curve narrowed to +2.574%, from +2.565% 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 higher energy, lower precious metals, higher aluminum and copper, and higher agriculture.
U.S. news and economic reporting. Today’s economic reports focus on June housing starts and building permits.
Overseas news: Eurozone leaders will begin meetings tomorrow, a day ahead of schedule, to discuss solutions to the region’s sovereign debt crisis. Today, Spain sold €4.45 billion of 12- and 18-month treasury bills, at the top end of the target range, but at yields 70-100 basis points higher than June’s auction. In July, the German ZEW economic sentiment survey fell more than expected, to a negative -15.1 compared to -9.0 prior rating and -12.5 expectations.
· BAC – reports adjusted EPS of $0.33, compared to estimates of $0.27
· CMA – reports GAAP and operating EPS of $0.53 and $0.58, respectively, compared to estimates of $0.54
· KEY – reports GAAP and operating EPS of $0.26 and $0.22, respectively, compared to estimates of $0.20
· BK – reports operating EPS of $0.59 compared to estimates of $0.56
· STT – reports operating EPS of $0.96 compared to estimates of $0.97
· GS – reports operating EPS of $1.86 compared to estimates of $2.30
· WFC – reports GAAP and operating EPS of $0.70 and $0.78, respectively, compared to estimates of $0.69
2Q2011 Earnings. The second quarter’s earnings results have so far exceed revenue and earnings expectations. Of the 24 S&P500 companies that reported earnings to date, 88% (21 out of 24) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat EPS expectations by an average of +9.3% (versus a historical average of +2%). EPS is up +23.2% over the prior year. Though challenged in the current operating environment, 87% of companies reported increased revenues over the prior year and 78% 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 10 BKX members to have reported earnings thus far, 90% (9 of 10) 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 13.1x estimated 2011 earnings ($99.35) and 11.6x estimated 2012 earnings ($112.91), compared to 13.2x 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 +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 1.38x tangible book value and 12.1x 2011 consensus earnings, compared to 1.41x tangible book value and 12.3x 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 +33.2% and +68.9%, respectively.
Monday’s equity markets. On lower volume, equity markets declined substantially, but ended much better than their worst intraday levels. The NYSE, Nasdaq, SPX and DJI were all lower, off -1.11%, -0.89%, -0.81%, and -0.76%, respectively. Futures indicated a substantially weaker open, as European contagion worries and ongoing U.S. borrowing ceiling negotiations have sent many investors to the sidelines. Markets opened lower and sold off through the morning, following weakness in Europe and with minimal economic and earnings news. Financials were in focus as they followed European financials lower. Several large financial institutions are due to report earnings on Tuesday. Markets reached their intraday lows just before noon and shortly after the close of the European markets. Through the afternoon, markets rallied from their lows as buyers stepped into names that had been sold off sharply during the morning session. The SPX moved back above 1300 and finished the day above 1305.
Trading desks reported a medium day in size of order flow, but with some important distinctions. Short sellers were present during the morning session, and were especially active in the financial sector. Traders noted that these were faster accounts and that the long-only accounts remained on the sidelines through the morning. Just after noon, a shift to the buy side was noted, with trading desks reporting that they were 4:1 better to buy with long accounts adding to existing positions or taking advantage of sold-off names. This participatory buying existed throughout most of the afternoon. With headlines still driving markets, the presence of short sellers after several weeks’ absence was a new development. Tuesday’s scheduled earnings releases in some large financials seemed to drive orders received in the afternoon. The Bloomberg NYSE new net highs were -72 versus -4 on Friday. The relative strength indicator fell to 44.76 from Friday’s reading of 47.44, and remains in the neutral range. The VIX finished the day higher at 20.95, up +7.27%. The VIX had been as high as 21.91, up +12% and closed at its highest point since June 24th.
Market segments were all negative. Technology, oil and gas, and consumer goods were the leaders, while consumer services, industrials, and financials were the laggards.
Financials were the worst performing sector. The BKX, KRX, and XLF all finished lower, off -1.43%, -1.39%, and -1.35%. Among broader financials, GNW (-7.65%), ALL (-4.95%), and NDAQ (-3.88%) were the worst performers. DFS and WU were the sole gainers in the SPX financial index. The BKX began the day lower and sold off through the morning. European banks tumbled after failing stress tests last week, with some names closing below the value of their tangible assets for the first time in two years. The BKX saw its lows for the day just after the European close and then rebounded through the afternoon as buyers stepped back into buy names due to report this week. Notably, we heard from trading desks a very specific shift to the buy side just after lunch, with desks reporting they were 3:1 better to buy in financials. The BKX finished the day with all 24 names lower. COF, JPM and FITB were the leaders, though off at least -0.31%. The laggards were KEY, BAC and STI, off at least -2.52%. The KRX finished the day with 3 names up and 47 names down. Leaders were PACW, SBNY, and EWBC. The laggards were MBFI, FCF, and SNV. The BKX, KRX, and XLF finished below their respective 50-, 100-, and 200-day moving averages. While the broader indexes recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -21.26% below its April 2010 high and -44.72% below its best level of 82.55 in September 2008.
NYSE Indicators. Volume fell -18.6% to 874.26 million shares, from 1.074 billion shares Friday, 0.91x the 960.28 million share 50-day moving average. Market breadth was negative, and up volume lagged down volume, both by large margins. Advancing stocks lagged decliners by -2139, compared to +650 the prior day, or 0.17:1. Up volume lagged down volume by 0.92:1.
SPX. On lower volume, the SPX declined -10.70 points, or -0.81%, to 1305.44. Volume declined -23.27% to 679.01 million shares, down from 720.49 million shares Friday and above the 737.68 million share 50-day moving average. For the 185th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1312.39 vs. 1277.50, respectively). The SPX closed above its 200-week moving average (1160.57).
The SPX gapped lower at the open to the 1310 level and by 10:15, declined to 1300. Through 10:30, the market climbed higher to 1304. Over the next hour and a half, the index made a series of higher lows and lower lows, reaching its intra-day low of 1295 at noon. The index rallied to the 1300 level by 12:15 and traded in a tight range until 1:30. At 1:30, the index rallied until 3:00, climbing to 1305. The index retraced some of these gains over the next half hour, declining to 1301. A rally in trading’s final half-hour lifted the index back to 1305 at the close.
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 13th straight session. The index closed above its April 2010 highs for the 156th straight session. The 50-day moving average has been below the 100-day moving average since July 11th. The SPX closed (by -0.40%) below its 20-day moving average (1310.64) for first time in 13 sessions. The index closed (by -0.53%) below its 50-day moving average and has fluctuated above and below that level since July 11th. The index closed (by -0.81%) below its 100-day moving average (1316.06). The SPX closed +2.19% above its 200-day moving average. The 50-day and 100-day moving averages declined. The directional momentum indicator turned negative after yesterday’s session. Relative strength declined to 47.46 from 51.41, a neutral range. Next resistance is at 1315.61; next support is at 1295.59.
BKX. On lower volume, the KBW bank index fell -0.66 points, or -1.43%, to 45.63. Volume declined -19.65% to 90.91 million shares, down from113.14 million shares Friday and above the 77.73 million share 50-day average. The BKX closed +6.17% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -21.26% and -17.98% below its April 23, 2010, and February 14, 2011 closing highs, respectively.
Financials’ losses lagged the market’s decline, but regionals outperformed large-cap banks. The BKX gapped lower at the open to 46.12 and continued to slide for the balance of the morning. At 11:45, the banks reached their intra-day low of 45.11. The large-cap banks rallied from their lows to 45.39 by 1:00. A small sell-off took the bank index down to 45.29 by 1:25. By 2:00 the bank index had climbed to 45.53 and traded in a tight range until 3:20. In the final 40 minutes of trading the index rallied, closing the day at 45.63.
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 (47.44) is below the 50- and 100-day moving averages (48.22 and 50.02, 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 sixth straight session. The index closed below its 50-day moving average for the seventh straight session. The index closed below the 100- and 200-day moving averages for the 67th and 33nd consecutive sessions, respectively. The index closed below the 50.00 level for the 32st 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 -0.78 points) below the 50-day for the 87th straight day, and the gap widened. The 50-day moving average closed (by -1.84 points) below the 200-day moving average for the 22st straight session, and the gap expanded. The 100-day moving average closed (by -0.03 points) below the 200-day moving average for the first time in 110 sessions. The directional movement indicator is negative for the sixth straight session, and the trend is moderate and stable. Relative strength fell to 35.64 from 39.28, the lower end of a neutral range. Next resistance is 46.16; next support at 45.11.