This morning. U.S. equity markets are in correction. U.S. equity futures markets are sharply lower. In Asia, equity markets closed lower, on mixed volume. European equity indexes are mixed, but mostly lower. U.S. Treasury prices are slightly lower. The U.S. dollar is mixed. Commodities markets are also mixed. Equity options markets suggest a more bullish short-term outlook. After a fair value adjustment of +4.96 points, September SPX equity futures are at 1126.40, up +10.04 points. The SPX opens at 1119.46, -17.9% below its recent April 29 multi-year closing high, and -13.2% and -13.7% below its respective 20- and 50-day moving averages. The SPX is -11.0% below its 1257.64 year-end close. Next resistance is at 1172.20. Next support is at 1093.00.
Click to enlargeMonday, U.S. equity markets again exhibited extreme volatility, gapping lower and trending lower through the day. Volume was heavy. All the major indexes ended at least -5.55% lower, with the NYSE composite off -7.05%, followed by the Nasdaq, SPX, and DJI -6.90%, -6.66%, and -5.55% lower, respectively. The SPX closed at 1119.46, its worst close since September 10th. The DJI closed at 10,809.85, its 1st sub-11,000 close since October 7th. NYSE volume rose +12.9% to 2.40x the 50-day moving average. All market segments closed lower. Consumer goods, health care, and telecommunications were the leaders, but ended at least -4.40% lower. Basic materials, oil and gas, and financials were the laggards. Financials lost -9.84%. Volatility was again volatile. The VIX ended at 48.0, up +50.0% from 32.0 at the prior close, and at its intraday high.
Total distribution days number 9 on the NYSE composite and 8 on the SPX, DJI, and Nasdaq. The BKX count rose to 13. 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 sharply lower on mixed volume. In Japan, the Nikkei closed down -1.68%, but ended well off the day’s lows. Volume rose +71.4%. Market segments closed mixed, as utilities rose +0.33%, but all other segments were at least -1.19% lower. Consumer services and industrials were the other segment leaders. Financials closed down -1.50%. Basic materials, telecommunications, and oil and gas were the laggards, down at least -2.10%. The NKY gapped lower and trended down to an mid-morning intraday low of 8656.79. The index rallied strongly through the session’s remainder to close at 8944.48, just short of its intraday high 8949.97. The NKY closed below all moving averages. It closed -12.6% below its 2010 close.
In China, the Hang Seng and Shanghai composite closed down -5.66% and -0.03%, respectively. In Hong Kong, volume rose +73.1%. All market segments closed lower, with better performance in consumer goods, utilities, and consumer services. Basic materials, financials, and oil and gas were off at least -5.51%. The index gapped lower following profound equity weakness in the United States, compounded by a report that Chinese inflation accelerated. As in Japan, markets gapped lower to an intraday low of 18868.1, then rallied strongly to a late afternoon intraday high of 20158.6, before fading to a 19330.70 close. Equities fared better in Shanghai, as traders speculated that the Fed would announce measures to support the market and state-run funds bought shares. Volume fell -5.74%. Financials rose +0.66%. Oil and gas, utilities, and telecommunications were the laggards, down at least -0.83%. The SHCOMP also gapped lower to an intraday low of 2437.68, but rallied after the first half hour to close at 2526.07. The SHCOMP ended -17.4% below its recent April 18th 3057.33 high, -10.0% below its 2010 close, and -7.45% below its 2729.51 50-day moving average.
In Europe, equity markets initially traded higher, but quickly lost momentum, before rallying again after setting mid-morning lows. The Eurostoxx50, DAX, and FTSE are down -1.49%, -0.84%, and -2.47%, respectively. The Eurostoxx50 opened at 2287.16, moved to an intraday high 2341.70, before trading off to an mid-morning intraday low of 2167.71. A subsequent rally brought indexes back to positive at mid-day, but markets subsequently weakened and remain volatile. Segments are mixed. Consumer services, industrials, and financials are the leaders. Basic materials, telecommunications, and utilities are the laggards.
Libor, LOIS, Currencies, Treasuries, Commodities:
· The S&P downgrade of U.S. debt had relatively little impact on interbank lending rates. Overnight USD LIBOR is unchanged at 0.13611%, compared to 0.13611% the prior day, and 0.25188% at year-end. USD 3-month LIBOR rose to 0.27839%, compared to 0.27478% the prior day, but down from 0.30950% at year-end.
· The US Libor-OIS (LOIS) spread is unchanged at 8.80 bps, compared to 8.80 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. U.S. government overnight repo rate is 6 bps, unchanged from 6 bps Monday, from a recent high of 33 bps last Tuesday.
· The U.S. dollar is stronger against the euro and pound, but weaker against the yen. The dollar trades at US$74.425, below its US$74.689 50-day, US$74.839 100-day, and US$76.688 200-day moving averages. The euro trades at US$1.4270, compared to US$1.4179 Monday and US$1.4282 the prior day. The euro trades below its US$1.4332 50-day and US$1.4345 100-day moving averages. Intervention by Japanese monetary authorities has been ineffective, as the dollar trades at ¥77.13, compared to ¥77.77 Monday and ¥78.40 the prior day. The yen trades better than its 50-day moving average ¥79.573.
· U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.274% and 2.398%, respectively, compared to 0.260% and 2.318% Monday. The yield curve widened to +2.124%, from +2.058% 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 petroleum, mixed precious metals, lower aluminum and copper, and mixed agriculture prices.
U.S. news and economic reporting. Economic reporting focuses on the July NFIB small business optimism report and preliminary 2Q2011 nonfarm productivity. The NFIB optimism index slipped to 89.9 from 90.8 the prior month, continuing its long recessionary outlook. The FOMC begins a one-day meeting. It’s rate decision is expected at 2:15. There is no scheduled press conference.
Overseas news: In June, U.K. industrial production remained flat to the prior month, missing estimates for a +0.4% gain. In July, China’s consumer and producer price indexes rose 6.5% and 7.5% over the prior year’s level, in-line with estimates and above the prior month’s increase. Also in July, China’s retail sales increased at 17.2%, slower than expected and than last month’s increase. In July, Chinese home sales fell -30% compared to the prior month. Today, the South Korean government asked institutional investors to help stabilize markets and calm sentiment. Today, according to press reports, the Japanese, Taiwanese, and South Korean governments directly entered equity markets to support prices. Today, the Syrian regime increased its violent assaults on protestors to stem further uprising. Today, London witnessed its third day of violent riots following the shooting death of a civilian linked to organized crime.
· WFC – raised to buy at FBR, price target of $31
· WBS – raised to buy at FBR, price target of $24
2Q2011 Earnings. The second quarter’s earnings results have so far exceed revenue and earnings expectations. Of the 417 S&P500 companies that reported earnings to date, 76% (316 out of 417) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat EPS expectations by an average of +5.1% (versus a historical average of +2%). EPS is up +17.6% 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 11.3x estimated 2011 earnings (reduced to $99.42 from $99.75) and 9.9x estimated 2012 earnings ($113.50), compared to 12.0x and 10.6x 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 +5.1%, and +5.8%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +17.3% and +33.9%, respectively.
Large-cap banks trade at a median 1.08x tangible book value, and 10.4x and 8.2x 2011 and 2012 consensus earnings, respectively, compared to 1.18x tangible book value and 11.3x/9.2x 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 bullish. Equity options markets are bullish, whereas index options markets are neutral. The composite put/call ratio closed at 1.36, above both its 5- and 10-period moving averages of 1.27 and 1.15, respectively. The index put/call ratio closed at 1.51, above the 5- and 10-period moving averages of 1.50 and 1.41, respectively. The equity put/call ratio closed the day at 1.08, above its 5- and 10-period moving averages of 0.89 and 0.80, respectively.
Monday’s equity markets. On heavy volume, the equity markets sold off to levels not seen since last fall. The NYSE, Nasdaq, SPX and DJI were each substantially lower, off -7.05%, -6.90%, -6.66%, and -5.55%. Monday’s session was the first since S&P cut the debt rating of U.S. government debt from AAA to AA+ and investors responded by selling. The day began with equity markets indicated much lower than Friday’s closing prices. After the opening, investors reduced risk in every sector of the equities markets. The markets, with small intraday swings, consistently went lower throughout the day and after a failed rally in the last hour, ended on its lows. This selloff was fueled by the S&P downgrade and the inability of the Congress to rein in spending in meaningful quantities. Investors are concerned that we are already in or headed to a 2nd dip recession. Economic numbers since July 1st have been mixed at best, with no consistent theme other than manufacturing is slowing and unemployment continues above 9%.
Trading desks were busy on Monday, but the cash desks were not as busy as they were last Wednesday through Friday. This indicates that Monday’s volume was primarily driven by the futures/ETF markets. Hedge funds, which were very active last week, were more subdued Monday. We did, however, hear of some large sellers, primarily in financials. These sellers were looking for bounces within the market and not panicked or chasing prices down. The SPX fell to its lowest level since November 2008 and has retreated 11% in the last three days. The SPX is down 18% since April 29th’s high. The DJI is below 11,000 for the first time since November 2010. The VIX, which measures the cost of using options as insurance against declines in the SPX, soared 50% to finish the day at 48, its highest level since March 2009. The Bloomberg NYSE new net highs were -953 versus the previous reading of -604. This reading is the lowest since November 20th, 2008. The relative strength indicator fell to 15.56 from the previous day’s reading of 22.45 and is severely oversold.
All market segments were substantially lower. Consumer goods, health care and telecommunications were the leaders, while basic materials, oil and gas, and financials were the laggards.
Financials were the laggard in Monday’s down market. the BKX, KRX, and XLF were substantially lower, off -10.70%, -9.83%, and -9.48%, respectively. It was the BKX worst session since 4/20/09 and the index closed at its lowest level since July 22nd, 2009. BAC led all financials lower, finishing down -20.32% after AIG announced a suit seeking to recover more than $10 billion on investments in mortgage-backed securities. This added to concerns that BAC might have to turn to the equity markets and raise additional capital. C, STI and RF were also substantially lower, finishing at least -13.5% lower. The leaders in the BKX were CBSH, MTB, and CFR which off at least -6.4%. The BKX finished the day with all 24 names lower. The KRX finished the day with all 50 names lower. Leaders in the KRX were CHCO, FFBC, and BRKL, while the laggards were SNV, PVTB, and CATY. Concerns about a second dip recession are the primary reason financials were hit hardest Monday. Many of these names are approaching values not seen since 2007 and while trading desks were better for sale in most of the large cap names, some investors were buying small quantities in the quality names. We heard that long-term value accounts were beginning at the end of the day to look at the high quality names that were for sale. The BKX, KRX, and XLF all finished below their 50-, 100-, and 200-day and 200-week moving averages. While the broader indexes have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -36.17% below its April 2010 high and -55.19% below its best level of 82.55 in September 2008.
NYSE Indicators. Volume rose +12.9% to 2.544 billion shares, from 2.254 billion shares Friday, 2.40x the 1.060 billion share 50-day moving average. By large margins, market breadth was negative, and up volume lagged down volume. Advancing stocks lagged decliners by -3068 (compared to -1503 the prior day), or 0.01:1. Up volume lagged down volume by 0.01:1.
SPX. Setting a new 2011 volume record for the second straight day, the SPX fell -79.92 points, or -6.66%, to 1119.46. Volume rose +12.4% to 1,938 million shares, up from 1,724 million shares Friday and more than 2.4x the 806.49 million share 50-day moving average. For the 200th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1296.42 vs. 1286.15 respectively), but a cross to the downside may occur later this week. The SPX closed above its 200-week moving average (1155.59).
The SPX had its worst percentage loss since November 20, 2008. The SPX gapped lower at the open to the 1175 level. A modest bounce to 1180 at 9:40 set the intra-day high, already -1.80% below the prior day’s close. Through 10:35, the index continued falling and reached the 1155 level. Finding some support there and looking for capitulation, the index attempted two rallies to the 1160 level at 10:50 and to the 1170 level at 11:15. The second rally was quickly sold. Through 1:35, the index fell gradually to the 1150 level before breaking down at 1:35 and reaching 1140 at 2:00. Through 2:30, selling pressure accelerated, and the index reached 1120 at 2:25. Momentum sharply, but briefly, reversed, and the index retook 1130 at 2:30 and rallied to 1150 by 3:20. Buying and short covering stepped away, and the index fell into the close, finishing below 1120 and at the intra-day low.
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 seventh straight session and below 1200 for the second straight time. The SPX was last this low n September 13, 2010. The index closed below its April 2010 highs for the third straight session. The 50-day moving average has been below the 100-day moving average since July 11th. The SPX closed (by -13.19%) below its 20-day moving average (1289.53) for the ninth straight session. The index closed (by -13.65%) below its 50-day moving average for the ninth straight session. The index closed (by -14.69%) below its 100-day moving average (1312.29) for the eighth straight session. The SPX closed -12.96% below its 200-day moving average, closing below that average for the fourth straight session. All moving averages fell, with the 200-day moving average switching to negative for the first time since August 23rd, 2010. The directional momentum indicator is negative for the eighth straight session, and the trend is strong and increasing. Relative strength fell to 16.46 from 23.90, an oversold range and the lowest level since September 20, 2001. Next resistance is at 1172.20; next support is at 1093.00.
BKX. On higher volume, the KBW bank index fell -5.43 points, or -10.70%, to 36.99, its third close below the prior 52-week low of 42.70 from August 25, 2010, its first close below 40 since July 30th, 2009, and the lowest closing level since July 22nd, 2009. Volume rose +24.0% to 266.25 million shares, up from 214.65 million shares Friday and 3.0x the 88.92 million share 50-day average. The BKX closed -13.9% below its August 30 closing low of 42.98, the trough of the recent prior correction, -36.2% and -33.5% below its April 23, 2010, and February 14, 2011 closing highs, respectively.
Financials were the market’s worst performing segment, large-cap banks underperformed regional banks. The BKX’s trading pattern mirror the broader markets, albeit with smaller rallies and larger sell-offs. The BKX gapped lower at the open to the 40.60 level, and rallied to the intra-day high of 40.93 at 9:36, still -1.2% below its prior close. Through 10:35, the index fell consistently, breaching 40.00 at 10:15 and reaching 39.30. Two small rallies at 10:35 and 11:00 failed to lift the index significantly, and heavy selling quickly resumed. The index fell on a level trajectory lower through 2:15 when the BKX crossed below 38.00. Between 1:300 and 2:25, the index fell almost vertically, falling -1.50 points, or -3.0% in approximately 15 minutes, to the 36.55 level, the intra-day low and a -11.77% intra-day decline. Buying and short covering stepped in, and the index rallied +1.0 point, or +2.75%, in 10 minutes to the 37.50 level. Another rallied at 3:00 lifted the index an additional +2.6% in 20 minutes to the 38.50 level by 3:20, but selling reversed the positive momentum. The index fell into the close and finished below 37.00, near but not at its intra-day low.
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 (46.80) crossed below the 100- and 200-day moving averages (48.95 and 49.94, respectively) on April 25th and June 16th. The 20-day closed (by -1.27 points) below the 50-day for the 102nd straight day, and the gap expanded. The 50-day moving average closed (by -3.15 points) below the 200-day moving average for the 38th straight session, and the gap expanded. The 100-day moving average closed (by -0.99 points) below the 200-day moving average for the 16th straight session, and the gap expanded. The index closed below the 20-day moving average for the 19th time in 20 sessions. The index closed below its 50-, 100-, and 200-day moving average for the 22nd, 82nd, and 48th consecutive sessions, respectively. The index closed below the 50.00 level for the 47th straight session and below 40 for the first time since July 30th, 2009. The directional movement indicator is negative for the 10th straight session, and the trend is strong and increasing. Relative strength fell to 15.13 from 22.90, an oversold range and its lowest level since September 21st, 2001. Next resistance is 39.87; next support at 35.33.