This morning. The U.S. equity market correction gained momentum yesterday, as world equity markets suffered their worst losses since March 2009. Today, world equity markets continue to sell off, but in Europe, equities are above their intraday lows. In Asia, equity markets closed lower on increased volume. After a better than expected July employment report, U.S. equity futures markets are moderately higher and improving. U.S. Treasury prices are higher, and the U.S. dollar has strengthened following intervention by Japanese monetary authorities. Commodities markets are mostly lower. Equity options markets suggest a pessimistic market outlook. After a fair value adjustment of -2.03 points, September SPX equity futures are at 1208.20, up +11.53 points. The SPX opens at 1200.07, -12.0% below its recent April 29 multi-year closing high, and -8.16% and -7.90% below its respective 20- and 50-day moving averages. The SPX was last this low on November 30, 2010. The SPX is -4.58% above its 1257.64 year-end close. Next resistance is at 1240.35. Next support is at 1179.66.
Thursday, U.S. equity markets experienced their worst 1-day sell-off since March 2009, spurred by Eurozone fears after the ECB surprised money markets when it left its benchmark interest rate unchanged. On flight to safety, the U.S. dollar surged, and U.S. Treasury yields fell across the curve. The NYSE composite fell most with a -5.41% loss, followed by respective losses of -5.08%, -4.78%, and -4.31% on the Nasdaq, SPX, and DJI. Markets gapped lower and trended lower through the day, with the momentum accelerating in the final hour. Indexes closed at their intraday lows. Volatility rose, as the VIX rose +35.4% to 31.66, from 23.38 at the prior close. The SPX closed below 1300 for the 5th straight session and barely held the 1200 level. The DJI closed at 11,383.68, its 3rd consecutive sub-12,000 close. NYSE volume rose +34.7% to 1.821 billion shares, 1.82x the 50-day moving average. All market segments closed lower. Utilities, telecommunications, and consumer goods performed best, but closed at least -3.69% lower. Industrials, oil and gas, and basic materials were the laggards.
Total distribution days were unchanged and number 9 on the NYSE composite and 8 on the SPX and DJI, and 7 on the Nasdaq. The BKX count is 11. Distribution days signal institutional selling in the prior 25 trading days, or since the commencement of the most recent uptrend.
In Asia, Japanese and Chinese equity markets are also in correction. Markets closed markedly lower on higher volume. In Japan, the Nikkei closed down -3.72%. Utilities closed up +0.20, but all other market segments closed at least -2.27% lower. Volume rose +21.9%. Industrials, consumer services, and oil and gas were the segment laggards. The NKY gapped immediately to the intraday low of 9264.16, after which the index traded within a narrow range. The NKY closed below 10,000 for a 7th consecutive day and below 9,300 for the 1st time since March 18th. The NKY closed below all moving averages. It closed -0.55% below its recent June 17th correction low, and -9.08% below its 2010 close.
In China, the Hang Seng and Shanghai composite indexes closed down -4.29% and -4.29%, respectively. In Hong Kong, volume rose +127.7%. All market segments closed lower. Technology, utilities, and telecommunications were the leaders, but at least -2.90% lower. Basic materials, consumer services, and industrials were the laggards. Financials lost -4.24%. The SHCOMP gapped immediately to its 2605.14 intraday low, and the rallied to a mid-afternoon intraday high of 2644.58 before losing ground into the close. Volume rose +33.9%. The SHCOMP closed at 2626.42, 0.20% above its June 20th correction low of 2621.25. All market segments closed lower. Consumer services, health care, and telecommunications were segment leaders, but with losses of at least -1.15%. Utilities, basic materials, and oil and gas were the laggards. Financials lost -1.97%. The SHCOMP ended -14.1% below its recent April 18th 3057.33 high, -6.47% below its 2010 close, and -3.98% below its 2735.38 50-day moving average.
In Europe, equity markets are lower. The Eurostoxx50, DAX, and FTSE are down -0.57%, -2.27%, and -1.89%, respectively. Equity markets gapped lower, but have generally trended higher through the trading session. The Eurostoxx50 touched an intraday low of 2339.77, but rebounded to an intraday high of 2413.91, before selling off slightly to 2402.59. Market segments are mixed, led by consumer services, financials, and telecommunications. Financials are up +0.80%. Health care, oil and gas, and basic materials are the worst performers. The Eurostoxx50 now setting lower correction lows and is off -13.9% in 2011.
The U.S. debt ceiling fiasco contributed to a spike in LIBOR and repurchase agreement rates, but for a 2nd consecutive day, these moderated after Tuesday’s debt ceiling agreement. Overnight USD LIBOR fell to 0.13611%, from 0.15278% the prior day and compared to 0.25188% at year-end. USD 3-month LIBOR rose to 0.27161%, from 0.26939% the prior day, but down from 0.30950% at year-end. The US Libor-OIS (LOIS) spread is 8.20 bps, compared to 7.90 bps the prior day and 11.98 bps at the end of 2010. A rise in the LOIS indicates an increased intra-bank lending risk premium. Overnight U.S. government repo rates are at 9 bps, unchanged from the prior day and a peak of 33 bps Tuesday. The U.S. dollar is weaker against the euro and pound, but weaker compared to the yen. The dollar trades at US$74.969, above its US$74.704 50-day, US$74.859 100-day, and US$76.713 200-day moving averages. The euro trades at US$1.4169 compared to US$1.4092 Thursday and US$1.4144 the prior day. The euro trades below its US$1.4334 50-day and US$1.4344 100-day moving averages. Japanese monetary authorities continue their intervention, so the dollar trades at ¥78.46, compared to ¥78.89 Thursday and ¥77.06 the prior day. The yen trades better than its 50-day moving average ¥79.725. U.S. Treasury yields are slightly higher, with 2- and 10-year maturities yielding 0.268% and 2.401%, respectively, compared to 0.255% and 2.403% Thursday. The yield curve narrowed to +2.133%, from +2.148% 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 generally lower, with mixed petroleum, higher precious metals, lower aluminum and copper, and lower agriculture prices.
U.S. news and economic reporting. Today’s focus is the July employment report. Respective non-farm and private payrolls surprised to the upside, with gains of 117K and 154K, respectively. A gain of 85K nonfarm payrolls and 113K private payrolls was expected. The unemployment rate fell to 9.1% from 9.2% in June.
Overseas news: Today, the Bank of Spain estimated the country’s 2Q11 GDP rose +0.2% over the prior quarter and that the economic recovery lost momentum. Today, Italy’s 2Q11 GDP rose +0.3% over the prior quarter, in-line with estimates. Today, the Swiss National Bank’s president said the bank will not accept further franc appreciation without acting.
· STI – upgraded to buy at Jeffries
· BAC – downgraded to market perform at Wells Fargo
· CMA – downgraded to underperform at Wells Fargo
· U.S. banking sector – cut to market weight at Wells Fargo
2Q2011 Earnings. The second quarter’s earnings results have so far exceeded revenue and earnings expectations. Of the 409 S&P500 companies that reported earnings to date, 75% (308 out of 409) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat EPS expectations by an average of +5.2% (versus a historical average of +2%). EPS is up +18.2% over the prior year. Though challenged in the current operating environment, 84% of companies reported increased revenues over the prior year and 71% 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.
With all 24 BKX members reporting earnings, 88% (21 of 24) beat earnings estimates on an operating basis. Revenues also exceeded expectations, with 79% of BKX members beating estimates. For the second quarter of 2011, the BKX earned $1.12 per share, beating $0.97 estimates and compared to $0.96 and $0.61 per share in 1Q11 and 2Q10 (a +17% and +84% increase, respectively).
Valuation. The SPX trades at 12.0x estimated 2011 earnings ($99.71) and 10.6x estimated 2012 earnings ($113.43), compared to 12.6x and 11.1x 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 +5.4%, and +5.7%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +17.6% and +33.8%, respectively.
Large-cap banks trade at a median 1.19x tangible book value, and 11.6x and 9.4x 2011 and 2012 consensus earnings, respectively, compared to 1.24x tangible book value and 12.1x/9.8x 2011/2012 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 +31.8% and +68.9%, respectively.
Options. Options markets are neutral. Equity options markets are bullish, whereas index options markets are bearish. The composite put/call ratio closed at 1.28 on Thursday. The composite put/call ratio is above both its 5- and 10-period moving averages of 1.23 and 1.07, respectively. The index put/call ratio closed at 1.49 on Thursday. The 5- and 10-period moving averages of the index put/call ratio are 1.49 and 1.37, respectively. The equity put/call ratio closed the day at 0.92, above its 5- and 10-period moving averages of 0.78 and 0.71, respectively.
Thursday’s equity markets. On exceptionally high volume, the markets fell significantly. The NYSE, Nasdaq, SPX and DJI were all lower, off -5.41%, -5.08%, -4.78%, and -4.31%. The markets were indicated significantly lower in the pre-market as concerns of a weakening US economy spread around the world and caused selling in major markets around the globe. This coupled with concerns about the ongoing debt crisis in Europe caused investors to sell US equities and buy US treasuries. The DJI fell 512.76 points, its 9th worst day and the worst since 12/1/2008. The economic news we received Thursday prior to open did nothing to alleviate those fears as initial jobless claims were in line with expectations, but continuing claims rose for the week ending July 23rd. The macro news was also a driver of Thursdays’ price action as the central banks of Japan and Switzerland both stepped into currency markets to stem appreciating exchange rates that threatened export competiveness. As a result, US dollar gained against all the major currencies. The ECB left its key interest rate unchanged and Mr. Trichet remarked that the ECB remains “accommodative” and resumed bond buying will offer banks more cash to stop the region’s debt crisis.
Trading desks reported heavy selling from all sectors and by long only accounts as well as faster accounts. Thursday’s trading was orderly and not panicked until the last half hour, when the selling accelerated and became somewhat disorderly. Customers could exit positions, though at lesser levels through the day. Customers were selling cyclical stocks and those considered to be “safe haven” names. Short sellers, while present and laying on new shorts, have not been aggressive as in past down market cycles. Volumes were exceptional, posting the highest day totals for the major indexes since the Russell rebalancing on June 24th. The AAII US Investor sentiment bullish was reported at 27.16, lower than the previous week’s report of 37.84. The NYSE new net highs were -412. The relative strength indicator fell to 22.61 from the previous day’s reading of 32.89 and is in the oversold range. The VIX finished the day at 31.66, or +35%, its biggest one day gain since February 27, 2007. The VIX volume rose and set a single day volume record of 137,132 contracts, more than double the 4 week average of 60,665 contracts.
All market segments were lower. Utilities, telecommunications, and consumer goods were the leaders, while industrials, oil and gas, and basic materials were the laggards.
Financial stocks fell sharply. The BKX, XLF, and KRX were all lower, off -5.30%, -5.06%, and -4.60% as investors sought to de-risk in this economically sensitive sector. The BKX began the day lower and sold off with the other indices. The BKX, like others, accelerated its losses into the close as investors prepared themselves for Friday’s jobs number. The BKX finished with all 24 names lower. Names that lost the least were NYB, CBSH, and CFR. ZION, BAC, and RF were the worst performers. The KRX finished the day with all 50 names lower. BRKL, HCBK, and FRC were down the least, while SNV, CATY, and FMBI were the laggards. Among broader financials, ETFC, GNW, and CBG were the worst performers, off at least -7.76%. Financial trading desks report that investors are continuing to de-risk in this sector and that shorts are beginning to appear. The BKX has been selling off since late June and short sellers are one thing that has been absent as the values continue to be present in some of these names. The BKX, KRX and XLF finished below their 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 -26.94% below its April 2010 high and -48.71% below its best level of 82.55 in September 2008.
NYSE Indicators. Volume rose +34.7% to 1.821 billion shares, from 1.352 billion shares Wednesday, 1.82x the 999.86 million share 50-day moving average. By large margins, market breadth was negative, and up volume led down volume. Advancing stocks lagged decliners by -2818 (compared to +445 the prior day), or 0.05:1. Up volume led down volume by 0.01:1.
SPX. On the second highest volume of the year (behind the Friday following Japan’s March earthquake and nuclear meltdown) the SPX fell -60.27 points, or -4.78%, to 1200.07. Yesterday marked the largest percent decline for the index since February 10, 2009. Volume increased +36.79% to 1,334 million shares, up from 975.36 million shares Wednesday and nearly double the 761.95 million share 50-day moving average. For the 198th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1302.96 vs. 1286.35 respectively). The SPX closed above its 200-week moving average (1157.81).
The SPX traded over a 60 point range during the day, opening at its high and closing at its low under massive volume. The SPX gapped lower at the open to 1255 and then 1245 with in the first two minutes. Through 11:30, the index declined consistently, reaching 1225 by 11:30. At 11:35, the sell-off intensified, and the index dropped sharply to 1216 at 11:45. The aggressive selling was bought (or covered), and through 12:45, the index rebounded to the 1230 level. Sellers returned in mass, and the index declined through the close. Small rebounds were crushed, and the index set its intra-day low of 1199.54 at 3:52. The index was able to maintain the 1200 level, perhaps only because the market was not open longer.
Technical indicators are negative. Recent sovereign debt issues, foreign and domestic, returned markets to a correction on July 27th. The SPX closed below 1300 for the fifth straight session. The index closed below its April 2010 highs for the first time in 169 sessions. The 50-day moving average has been below the 100-day moving average since July 11th. The SPX closed (by -8.16%) below its 20-day moving average (1306.76) for the seventh straight session. The index closed (by -7.90%) below its 50-day moving average for the seventh straight session. The index closed (by -8.70%) below its 100-day moving average (1314.49) for the sixth straight session. The SPX closed -6.71% below its 200-day moving average, closing below that average for the second straight session. The 20-, 50-, and 100-day moving averages fell. The directional momentum indicator is negative for the sixth straight session, and the trend is strong and increasing. Relative strength fell to 23.99 from 34.04, an oversold range and the lowest level since October 10, 2008. Next resistance is at 1240.35; next support is at 1179.66.
BKX. On higher volume, the KBW bank index fell -2.37 points, or -5.30%, to 42.34, breaking its 52-week intra-day low of 42.70 from August 25, 2010. The BKX was last below this level on December 17, 2009. Yesterday marked the index’s largest decline since July 16, 2009. Volume rose +36.12% to 130.38 million shares, up from 95.78 million shares Wednesday and above the 81.62 million share 50-day average. The BKX closed +-1.49% below its August 30 closing low of 42.98, the trough of the recent prior correction, -26.94% and -23.89% below its April 23, 2010, and February 14, 2011 closing highs, respectively.
Financials underperformed the market, and regional banks outperformed large cap banks. The BKX traded almost in lock-step with the broader markets as correlations between sectors move towards 1 and action becomes futures-market driven. The index opened at its intra-day high and closed just above its 3:53pm intra-day low. By 9:45, the BKX crossed below 44.00 and fell to 43.10 by 11:45. The intra-day broader market rebound lifted the BKX back to 43.50 by 12:45, but the resumed sell-off in the afternoon took financials down through 43.00 at 2:25. A small bounce to 43.30 was sold at 3:15, and the index fell through 42.50 at 3:50 and hit the intra-day low of 42.31 at 3:53pm.
Technical indicators are negative. Bank stocks significantly underperformed the broader market during the May-June correction. Foreign and domestic sovereign debt fears returned markets to a correction on July 27th and banks have reassumed their loss leadership. Since the BKX crossed below its 50-day moving average on February 23rd, the 50-day average has provided meaningful resistance to any positive momentum. Moving averages align bearishly. The shortest duration averages are below the longer duration averages, the gaps are widening, and all major averages are falling. The 50-day average (47.19) crossed below the 100- and 200-day moving averages (49.18 and 50.01, respectively) on April 25th and June 16th. The 20-day closed (by -0.82 points) below the 50-day for the 100th straight day, and the gap expanded. The 50-day moving average closed (by -2.82 points) below the 200-day moving average for the 36th straight session, and the gap expanded. The 100-day moving average closed (by -0.82 points) below the 200-day moving average for the 14th straight session, and the gap expanded. The index closed below the 20-day moving average for the 17th time in 19 sessions. The index closed below its 50-day moving average for the 20th straight session. The index closed below the 100- and 200-day moving averages for the 80th and 46th consecutive sessions, respectively. The index closed below the 50.00 level for the 45th straight session. The directional movement indicator is negative for the eighth straight session, and the trend is strong and increasing. Relative strength fell to 25.42 from 34.49, an oversold range and its lowest level since inauguration day 2009. Next resistance is 43.76; next support at 41.62.