This morning. U.S. equity markets are in correction, but yesterday’s late, strong positive reversal suggests the possibility of a renewed upturn should markets follow-through next week. This morning, U.S. equity futures markets are moderately lower and have trended lower in the pre-market. In Asia, equity markets closed lower, on mixed volume. European equity indexes are mixed and volatile, reacting to various reports that an Asian bank had reduced overnight lending to Eurozone banks. U.S. Treasury prices are slightly lower. The U.S. dollar is mixed. Commodities markets are generally higher. Equity options markets suggest a generally bullish short-term outlook. After a fair value adjustment of -6.14 points, September SPX equity futures are at 1127.90, up +10.34 points. The SPX opens at 1120.76, -17.8% below its recent April 29 multi-year closing high, and -11.9% and -13.0% below its respective 20- and 50-day moving averages. The SPX is -10.9% below its 1257.64 year-end close. Next resistance is at 1155.68. Next support is at 1101.92.
Thursday. Equity market volatility remains elevated, as markets failed to hold Tuesday’s exception gains and experienced equally large or larger losses Wednesday. Futures indicated a much lower open, and markets sold off through mid-morning. A moderate subsequent rally was sold, and equity indexes closed just above their intraday lows. NYSE volume declined -10.9%, but remained elevated at 1.94x its 50-day moving average. All major indexes ended at least -4.09% lower, with the DJI posting the largest -4.62% loss, followed by the SPX, Nasdaq and NYSE composite, which lost -4.42%, -4.41%, and -4.09%, respectively. From the previous 1171.77 close, the SPX gapped more than 20 points lower to test support at 1125.0 around 11:00. On the subsequent rally, the SPX recovered through 2:30, but found resistance at 1160. Buyers stepped aside, and indexes subsequently sold off, with losses accelerating into the close. All market segments closed at least -2.11% lower, with the better performance from utilities, telecommunications, and basic materials. Consumer services, industrials, and financials were the worst performers. Financials dropped -6.99%. Volatility was again volatile, rising +22.6% to end at 42.99, from 35.06 the prior day.
Total distribution days were unchanged at 9 on the NYSE composite and 8 on the SPX, DJI, and Nasdaq. The BKX count dropped to 12. 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 mixed on lower volume, but well above their intraday lows. In Japan, the Nikkei closed at 8981.94, down -0.63%, but the intraday high was 9144.33. Volume fell -1.51%. Market segments were mixed, with consumer services and utilities posting gains. Basic materials, industrials, and oil and gas were the laggards, down at least -1.15%. Financials closed down -0.77%. The NKY gapped immediately lower to its 8832.42 intraday low, but generally rallied through the session’s remainder and closed at the day’s intraday high. The NKY closed below all moving averages. It closed -12.1% below its 2010 close.
In China, the Hang Seng and Shanghai composite closed down -0.95% and up +1.79%, respectively. In Hong Kong, volume fell -6.46%. Market segments closed mixed, with consumer services, telecommunications, and utilities the leaders, while oil and gas, basic materials, and technology lagged with losses of at least -1.37%. In early trading, the HSI dropped to an intraday low of 19269.4, before reversing to a mid-morning intraday high of 19728.90. The HSI subsequently weakened, retested the intraday high in mid-afternoon, and weakened into the close. In Shanghai, the SHCOMP also gapped lower to an intraday low of 2505.01 at the open, but immediately reversed and rallied strongly through the day to end at the session high. Volume fell -6.46%. All market segments gained, led by consumer services, health care, and consumer goods, with gains of at least +2.13%. Industrials, oil and gas, and telecommunications were the laggards, but rose at least +0.28%. Financials rose +1.23%. The SHCOMP ended -115.6% below its recent April 18th 3057.33 high, -8.07% below its 2010 close, and -5.16% below its 2722.02 50-day moving average.
In Europe, equity markets have reversed from moderate gains to moderate losses, with a negative trend. Stocks initially rallied on encouraging statements that speculators had overstated the weakness. However, markets reasserted their concerns that most banks are over-levered and under-capitalized. The Eurostoxx50, DAX, and FTSE are off -2.38%, -0.51%, and -1.15%, respectively. The Eurostoxx50 gapped higher at the open and set a mid-morning intraday high of 2220.03, but the rally was sold and the index slipped to 2091.75. All market segments are at least -1.19% lower. Technology, basic materials, and health care are the leaders, but down at least -0.91%. Consumer goods, consumer services and financials are the laggards, with financials down -4.59%.
Libor, LOIS, Currencies, Treasuries, Commodities:
· Interbank lending rates are now showing greater stress, perhaps in response to market volatility and expanded concerns regarding the health Eurozone banks in a stressed economic environment. Overnight USD LIBOR rose to 0.13944%, from 0.13833% the prior day, but down from 0.25188% at year-end. USD 3-month LIBOR rose to 0.28617%, compared to 0.28061% the prior day, but down from 0.30950% at year-end.
· The US Libor-OIS (LOIS) spread fell to 8.50 bps, compared to 8.90 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.
· The U.S. government overnight repo rate is 5 bps, unchanged from 5 bps Wednesday, from a recent high of 33 bps on August 2nd.
· The U.S. dollar is weaker against the euro, pound, and yen. The dollar trades at US$74.659, compared to US$ 74.636 the prior day, and below its US$74.699 50-day, US$74.820 100-day, and US$76.673 200-day moving averages. The euro trades at US$1.4192, compared to US$1.4178 Wednesday and US$1.4376 the prior day. The euro trades below its US$1.4325 50-day and US$1.4347 100-day moving averages. In Japan, the dollar trades at ¥76.60, compared to ¥76.86 Wednesday and ¥76.96 the prior day. The yen trades better than its 50-day moving average ¥79.402.
· U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.172% and 2.204%, respectively, compared to 0.180% and 2.106% Wednesday. The yield curve widened to +2.032%, from +1.926% 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 higher agriculture prices.
U.S. news and economic reporting. The July budget statement was slightly better than expected at -$129.4 billion, versus survey -$133.0 billion and prior -$165.0 billion. Other economic reporting includes the June trade balance and the focus is the latest week’s initial and continuing job claims (survey 405K and 3725Km respectively).
Overseas news: Today, press reports indicate the European Central Bank was in the market “aggressively” buying Spanish and Italian bonds. Today, Italy’s largest union threatened to protest recent austerity plans. Today, the Swiss National Bank discussed pegging the franc to the euro and halting the franc’s strength. Today, China’s state pension fund was in the market purchasing $1.5 billion of stocks to support equity prices.
· RF – upgraded to buy at BofA/ML, price target of $5.75
· ZION – upgraded to neutral at BofA/ML, price target of $18
· COF – upgraded to buy at Wells Fargo, price target of $60
2Q2011 Earnings. The second quarter’s earnings results have so far exceed revenue and earnings expectations. Of the 427 S&P500 companies that reported earnings to date, 76% (323 out of 427) 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 ($99.35) and 9.9x estimated 2012 earnings ($113.50), compared to 11.8x and 10.3x 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 +5.8%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +17.2% and +33.9%, respectively.
Large-cap banks trade at a median 1.07x tangible book value, and 10.2x and 8.0x 2011 and 2012 consensus earnings, respectively, compared to 1.14x tangible book value and 10.9x/8.9x 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 +30.8% and +68.9%, respectively.
Options. Options markets are neutral. Composite options markets are neutral to bullish, equity options markets are neutral to bearish, and index options markets are neutral. The composite put/call ratio closed at 1.21, below its 5- and 10-period moving averages of 1.28 and 1.22, respectively. The index put/call ratio closed at 1.49, below the 5- and 10-period moving averages of 1.54 and 1.48, respectively. The equity put/call ratio closed the day at 0.81, below its 5- and 10-period moving averages of 0.92 and 0.83, respectively.
Wednesday’s equity markets. On lower volume, equity markets finished substantially lower. The DJI, SPX, NYSE, and Nasdaq were each lower, off -4.62%, -4.42%, -4.41%, and -4.09%, respectively. Futures initially pointed to modest gains, but after 9:00, SPX futures quickly turned negative on reports that Societe Generale was experiencing liquidity problems. Markets opened lower than Tuesday’s close and were relatively range bound throughout the morning. In early afternoon, markets began to turn higher and reached their high point for the day just before 2:30. Unable to progress further, investors and short-term traders took profits and used strength to lessen positions, driving indexes through to fresh intraday lows. Indexes closed on the lows for the day. The VIX finished at 42.99, up +22.62% for the day versus the previous day’s drop of -26.96%.
Trading desks continue to comment on the volatility and volume in the markets. Wednesday’s volumes were less than the previous day’s, but still are nearly double the average number of shares traded daily in the last 3 months. Late Tuesday and all day Wednesday, trading desks reported that long-only funds had moved to the sideline as the turmoil continued. Hedge funds and high frequency traders drove the volumes, primarily through the use of ETF’s versus single stock transactions. The overall bias remains to de-risk. Rally attempts, such as on Wednesday afternoon, are met with avalanches of selling pressure. The AAII Investor Bullish Sentiment index reading was 33.43 for August 11th versus the previous reading of 27.16 on August 4th. The Bloomberg NYSE new net highs were -186 versus the previous reading of -604. The relative strength indicator fell to 26.57 from Tuesday’s reading of 31.28 and reflects a market that is oversold.
All market segments were lower. Utilities, telecommunications, and basic materials were the leaders, while consumer services, industrials and financials were the laggards.
Financials continue to weigh on the markets. The KRX, BKX, and XLF were each substantially lower, off -8.30%, -8.21%, and -6.95%, respectively. Concerns about the sufficiency of French bank capitalization and ability to fund their operations translated into weakness in U.S. bank equities. The BKX followed the market through the day, opening lower, but rallied through 2:00. However, buyers stepped aside, and in the final hour sell-off was exacerbated by financially-focused ETFs. In the morning, trading desks indicated that they were seeing 3:1 buyers over sellers. Most buyers were nibbling away at issues that had been oversold in recent sessions. In the afternoon, buyers disappeared, and sellers took over. The BKX finished the day with 1 name higher and 23 lower. After purchasing HSBC’s credit card business, COF was the sole name higher, up +0.56%. Laggards were BAC, STI, and RF, each off at least -10.9%. The KRX finished the day with all 50 names lower. VLY, TCBI, and HBHC were the leaders, while FCF, MBFI, and BPFH were the laggards. 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 -37.31% below its April 2010 high and -55.99% below its best level of 82.55 in September 2008.
NYSE Indicators. Volume fell -10.9% to 2.1147 billion shares, from 2.410 billion shares Tuesday, 1.94x the 1.107 billion share 50-day moving average. By large margins, market breadth was negative, and up volume lagged down volume. Advancing stocks lagged decliners by -1500 (compared to +2651 the prior day), or 0.35:1. Up volume trailed down volume by 0.63:1.
SPX. On lower but comparatively large volume, the SPX fell -51.77 points, or -4.42%, to 1120.76. Volume fell -7.46% to 1,723 million shares, down from 1,861 million shares Tuesday but still more than 2.0x the 848.30 million share 50-day moving average. For the 202nd consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1288.75 vs. 1285.77 respectively), but a cross to the downside may occur as early as tomorrow. The SPX closed below its 200-week moving average (1155.60).
The SPX gapped lower at the open and set the intraday high immediately at the 1167 level. Within five minutes, the index had declined to 1140. By 9:50, a bounce took the index to 1150, but sellers reversed momentum. By 10:20, the index declined to the 1128 level, which would provide solid support through the early afternoon. Through 1:45, the index made numerous unsuccessful rallies which were sold at the 1144 level. At 1:45, a strong rally finally lifted the SPX through that resistance point, and by 2:15, the index reached 1160. Selling pressure again reversed positive momentum, and the index fell through the closing bell and set the intra-day low of 1118.01 at 3:58.
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 ninth straight session and below 1200 for the fourth straight time. The index closed below its April 2010 highs for the fifth straight session. The 50-day moving average has been below the 100-day moving average since July 11th. The SPX closed (by -11.93%) below its 20-day moving average (1272.63) for the 11th straight session. The index closed (by -13.04%) below its 50-day moving average for the 11th straight session. The index closed (by -14.43%) below its 100-day moving average (1309.69) for the 10th straight session. The SPX closed -12.83% below its 200-day moving average, closing below that average for the sixth straight session. All moving averages fell. The directional momentum indicator is negative for the 10th straight session, and the trend is strong and increasing. Relative strength fell to 26.59 from 31.68, an oversold range. Next resistance is at 1155.68; next support is at 1101.92.
BKX. On lower volume, the KBW bank index fell -3.25 points, or -8.21%, to 36.33, its fifth close below the prior 52-week low of 42.70 from August 25, 2010, its third straight sub-40 closem, and a new 2-year closing low. Volume fell -6.44% to 199.15 million shares, down from 212.85 million shares Tuesday but still 2.1x the 94.64 million share 50-day average. The BKX closed -15.47% below its August 30 closing low of 42.98, the trough of the recent prior correction, -37.31% and -34.69% below its April 23, 2010, and February 14, 2011 closing highs, respectively.
Financials were the market’s worst performing segment, large-cap banks performed in-line with regional banks. The BKX gapped lower at the open and set its intra-day high immediately at 38.62, a -2.4% loss. Through 10:25, the BKX continued falling and reached 36.72. A rebound took the index back to 37.50 by 10:05, but the move higher was quickly sold back to 36.70. The financial index traded between 36.80 and 35.70 through 1:45, when the broader market rally lifted financials to 38.25 at 2:15. Momentum reversed in sympathy with the broader market, and the BKX fell through the closing bell. The intra-day low of 36.28 came at 3:58.
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 (46.32) crossed below the 100- and 200-day moving averages (48.67 and 49.87, respectively) on April 25th and June 16th. The 20-day closed (by -1.69 points) below the 50-day for the 104th straight day, and the gap expanded. The 50-day moving average closed (by -3.55 points) below the 200-day moving average for the 40th straight session, and the gap expanded. The 100-day moving average closed (by -1.20 points) below the 200-day moving average for the 18th straight session, and the gap expanded. The index closed below the 20-day moving average for the 21st time in 22 sessions. The index closed below its 50-, 100-, and 200-day moving average for the 24th, 84th, and 50th consecutive sessions, respectively. The index closed below the 50.00 level for the 49th straight session and below 40 for the third straight session. The directional movement indicator is negative for the 12th straight session, and the trend is strong and increasing. Relative strength fell to 24.29 from 30.07, an oversold range. Next resistance is 38.28; next support at 35.33.