This morning. Yesterday’s strong equity gains were accompanied by increased volume. The exceptional gains confirmed a new market uptrend, with a rally that commenced on August 9th. However, equity markets experienced several weak uptrends since the beginning of the year, and today, Asian equity markets closed lower on mixed volume, following a Moody’s downgrade of Japanese sovereign risk. In Europe, anticipated Fed announcements provide some lift to equity markets, but trading is choppy. Treasuries are somewhat stronger. U.S. equity futures are moderately weaker. Overall trading patterns suggest a bearish outlook. 3-month LIBO continues to drift higher. Euribor-OIS spreads indicate increasing Eurozone interbank risk premiums, while the US LOIS spreads remain low. The U.S. dollar is lower. Commodities markets are mixed. Equity options markets suggest a neutral short-term outlook. After a fair value adjustment of +1.80 points, September SPX equity futures are at 1155.80, down -4.60 points. The SPX opens at 1162.35, -14.8% below its recent April 29 multi-year closing high, and -3.15% and -8.22% below its respective 20- and 50-day moving averages. The SPX is -7.58% below its 1257.64 year-end close. Next resistance is at 1175.50. Next support is at 1136.06.
Tuesday. U.S. equity markets opened with a whimper, but rallied immediately and added to gains through the day (interrupted only by a mid-afternoon earthquake) to close impressively at their intraday highs. Volume rose. Financials participated, too, after initially trading lower, then reversing to close at their intraday highs. The contrast to Monday’s trade, when futures were particularly strong, but momentum faded quickly after the open, was notable. All market segments gained at least +1.92%. Oil and gas, technology, and industrials were the market leaders. Financials popped +3.33%. Consumer goods, telecommunications, and utilities were the laggards. Intraday put/call ratios were between 0.67 and 0.76 intraday. Volatility fell. The VIX opened at 41.89, but trended lower through the day and ended at 36.27, down -14.5%.
The confirmation of a new equity uptrend resets the distribution day count. Distribution days signal institutional selling in the prior 25 trading days, or since the commencement of the most recent uptrend. An accumulation of distribution days signal a weakening of an uptrend and increased probability that an uptrend will come under pressure or that a correction will ensue.
In Asia, Japanese and Chinese equity markets remain in correction. Markets closed lower, responding to Moody’s downgrade of Japanese long-term sovereign debt to Aaa3 from Aaa2. Market commentary focused on the likelihood that Fed Chairman Bernanke will announce further measure to stimulative measures.
In Japan, the Nikkei proved unable to add to yesterday’s strong gains, and closed at 8639.61, down -1.07% on a +5.03% increase in volume. The index gapped higher at the open, and briefly exceeded 8800 mid-morning, but retreated on doubts that Bernanke will announce meaningful additional stimulus this Friday. The NKY reached its 8620.89 intraday low in the hour before the close. All market segments closed lower. Oil and gas, financials, and utilities were the leaders, but lost at least -0.175. Industrials, consumer goods, and technology were the laggards. The NKY closed below all moving averages and -15.5% below its 2010 close.
In China, the Hang Seng and Shanghai composite closed down -2.06% and -0.51%, respectively. In Hong Kong, the HSI lost all the previous day’s strong gains, as buyers stepped aside. Volume fell -14.3%. All market segments closed lower. Leaders were utilities, technology, and industrials. Basic materials, oil and gas, and financials closed lower. Financials lost -2.77%. The HSI opened slightly lower, but began a fade that persisted through the day. The index ended at 19466.79, just above the 19452.7 intraday low. The HSI closed -2.28% below its 2010 close. In Shanghai, the SHCOMP traded higher through mid-morning, but lost ground through the afternoon to an intraday low of 2536.26, before ending at 2541.09. , but traded back to breakeven in the first hour before rallying through the day’s remainder to close at 2554.02. Volume rose +8.52%. Market segments closed mixed, with telecommunications, consumer services, and consumer goods modestly higher, while industrials, basic materials and financials lagged. Financials lost -0.86%. The SHCOMP ended -16.9% below its recent April 18th 3057.33 high, -9.51% below its 2010 close, and -5.72% below its 2695.31 50-day moving average.
In Europe, equity markets are higher on Fed stimulus hopes, but on a choppy trade. The Eurostoxx50, DAX, and FTSE are up +0.58%, +0.29%, and +1.08%, respectively. Most market segments are higher, led by technology, basic materials, and utilities. Telecommunications, consumer goods and oil and gas are the laggards.
Libor, LOIS, Currencies, Treasuries, Commodities:
· Interbank lending rates are showing increased stress, as concerns heighten regarding the health of Eurozone banks in a stressed economic environment. Overnight USD LIBOR is unchanged at 0.14444%, compared to 0.1444% the prior day, but down from 0.25188% at year-end. USD 3-month LIBOR rose to 0.31428%, compared to 0.31178% the prior day, and has exceeds the 0.30950% year-end rate.
· The US Libor-OIS (LOIS) spread is 22.9 bps, compared to 22.7 bps the prior day and 12.0 bps at the end of 2010. Euribor-OIS declined to 64.8 bps, compared to 65.1 bps the prior day, and 40.6 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 3 bps, unchanged from 3 bps the prior day, and well off from a recent high of 33 bps on August 2nd.
· The U.S. dollar is slightly weaker against the euro, pound, and yen. The dollar trades at US$73.740, compared to US$73.894 the prior day, and below its US$74.648 50-day, US$74.644 100-day, and US$76.495 200-day moving averages. The euro trades at US$1.4447, compared to US$1.4442 Tuesday and US$1.4358 the prior day. The euro trades above its US$1.4308 50-day and US$1.4367 100-day moving averages. In Japan, the dollar trades at ¥76.52, compared to ¥76.66 Tuesday and ¥76.79 the prior day. The yen trades better than its 50-day moving average ¥78.751.
· U.S. Treasury yields are lower, with 2- and 10-year maturities yielding 0.211% and 2.128%, respectively, compared to 0.217% and 2.153% Tuesday. The yield curve narrowed to +1.917%, from +1.936% the prior day. In the past year, the 2- and 10-year spread has varied from a low of +1.872% on August 18, 2011, and a high of +2.889% on February 3, 2011.
· Commodities prices are mixed, with mixed petroleum, higher precious metals, aluminum, and copper, and mixed agriculture prices.
U.S. news and economic reporting. The report focus is July durable goods orders at 8:30 and the June home price index at 10:00. Durable goods surprised with a gain of +4.0%, compared to survey +2.0% and -1.3% revised prior. Ex-transportation order rose +0.7%, compared to -0.5% survey and +0.6% revised prior. Tomorrow’s focus is initial and continuing jobless claims. Friday’s focus is on 2Q2011 GDP revisions at 8:30, and Bernanke’s speech at 10:00.
Overseas news: Today, Moody’s downgrade Japan’s long-term debt rating one notch to Aa3. In August, the German Ifo Institute’s economic survey fell much more than expected, to 108.7 from 112.9 compared to expectations of a decline to 111.0 and led downward by a near record drop in the expectations component. Today, the People’s Bank of China set its yuan peg at a record high, signaling the government is permitting another leg of yuan appreciation.
· NDAQ – upgraded to buy at UBS, price target of $28
2Q2011 Earnings. The second quarter’s earnings results exceeded revenue and earnings expectations. Of the 462 S&P500 companies that reported earnings to date, 76% (350 out of 462) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat EPS expectations by an average of +5.0% (versus a historical average of +2%). EPS is up +16.5% 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 11.6x estimated 2011 earnings ($99.78) and 10.3x estimated 2012 earnings ($112.67), compared to 11.3x and 10.0x 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 +5.5%, and +5.0%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +17.7% and +32.9%, respectively.
Large-cap banks trade at a median 1.09x tangible book value, and 9.8x and 8.1x 2011 and 2012 consensus earnings, respectively, compared to 1.04x tangible book value and 9.6x/7.7x 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 +35.6% and +66.9%, respectively.
Options. Options markets are neutral. Composite options markets are neutral, equity options markets are neutral to bearish, and index options markets are neutral. The composite put/call ratio closed at 1.02, below its 5- and 10-period moving averages of 1.25 and 1.17, respectively. The index put/call ratio closed at 1.40, below the 5- and 10-period moving averages of 1.59 and 1.48, respectively. The equity put/call ratio closed the day at 0.69, below its 5- and 10-period moving averages of 0.84 and 0.88, respectively.
Tuesday’s equity markets. On higher volume, equity markets surged. The Nasdaq, SPX, NYSE, and DJI were all substantially higher, finishing the day up +4.29%, +3.43%, +3.28%, and +2.97%, respectively. Investors fended off early session sellers as the market dipped slightly at the open, before rallying through the morning. A mid-afternoon earthquake interrupted the rally, but markets rebounded and continued their upward progression to close at the intraday highs. The rally was all the more impressive given that economic reports were weaker. While there was no clear reason for Tuesday’s rally, commentary seemed to point to Friday’s speech by Ben Bernanke in Jackson Hole and hopes for additional material economic stimulus. The VIX finished the day at 36.27, off -14.54%.
Trading desks report that buyers were abundant in the morning, while the afternoon saw many retreat again to the sidelines. The morning’s action was evenly split between long only accounts and hedge funds. Many desks described the morning trade as evenly split between longs adding to positions and shorts locking in some of their profits. The Bloomberg NYSE new net highs were -156 versus the previous day’s reading of -234. The relative strength indicator rose to 41.34 from Monday’s reading of 34.14, in the lower end of a neutral range.
Market segments were all positive. Oil and gas, technology, and industrials were the leaders, while consumer goods, telecommunications, and utilities were the laggards.
Financials were a middling performer. The KRX, BKX, and XLF ended substantially higher, up +5.19%, +4.02%, and +3.24%, respectively. The BKX continued its selloff early in the session, but buyers took over, driving the average and most names substantially higher. Bank stocks were probably helped by a mid-morning FDIC report that the number of “problem” institutions declined for the first time since the 3rd quarter of 2006. While no surprise, this spurred the recovery, as investors returned to this oversold sector. The BKX finished with 23 names higher and 1 lower. USB, FITB, and STI were up at least +5.36%. BAC was the sole laggard, off -1.87%. The KRX finished with all 50 names higher. The leaders in that index were PVTB, BPFH, and EWBC, up at least +7.35%. 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 -37.0% below its April 2010 high and -55.8% below its best level of 82.55 in September 2008.
NYSE Indicators. Volume rose +4.12% to 1.241 billion shares, from 1.192 billion shares Monday, 1.06x the 1.167 billion share 50-day moving average. Market breadth was overwhelmingly positive, and up volume led down volume by a large margin. Advancing stocks led decliners by +2119, compared to -356 the prior day), or 5.54:1. Up volume led down volume by 7.26:1.
SPX. On higher volume, the SPX gained +38.53 points, or +3.43%, to end at 1162.35. Volume rose +3.12% to 928.19 million shares, up from 900.14 million shares Monday and above the 901.55 million share 50-day moving average. For the 7th straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1266.41 vs. 1284.45 respectively). The SPX closed above its 200-week moving average (1152.14).
The SPX opened flat at the 1125 level and fluctuated between 1130 and slightly negative territory. Pressured lower by opening bell bank selling, the SPX set its intra-day low of 1122.91 at 9:40. Buying and short covering quickly ensued, and the SPX rallied to 1140 by 10:15. The index traded sideways until 11:30 when a second rally began and took the index to 1150 by 12:00. The index again traded sideways through the 1:50pm east coast earthquake, which caused a brief and small sell-off to the 1152 level. At 2:30, strength resumed, and the index rallied to 1160 by 3:10. The index traded mostly sideways into the close, but finished at the intra-day high and above the 1160 level.
Technical indicators are negative. Markets, in correction since July 27th, resumed an uptrend with yesterday’s gains in higher volume according to one publication. The SPX closed below 1300 for the 18th straight session and below 1200 for the 12th time in 13 sessions. The index closed below its April 2010 highs for the 14th straight session. The 50-day moving average has been below the 100-day moving average since July 11th. The SPX closed (by -3.15%) below its 20-day moving average (1200.22) for the 20th straight session. The index closed (by -8.22%) below its 50-day moving average for the 20th straight session. The index closed (by -10.36%) below its 100-day moving average (1296.65) for the 19th straight session. The SPX closed -9.51% below its 200-day moving average, closing below that average for the 15th straight session. All moving averages fell. The directional momentum indicator is negative for the 19th straight session, and the trend is very strong and increasing. Relative strength rose to 41.47 from 33.44, a neutral range. Next resistance is at 1175.50; next support is at 1136.06.
BKX. On higher volume, the KBW bank index rose +1.41 points, or +4.02%, to end at 36.51, its 14th close below the prior 52-week low of 42.70 from August 25, 2010 and its 12th straight sub-40 close. Volume rose +11.53% to 142.84 million shares, up from 128.07 million shares Monday and above the 101.80 million share 50-day average. The BKX closed -15.05% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -37.00% and -34.37% below its April 23, 2010, and February 14, 2011 respective closes.
Financials performed in-line with the market, and regional banks outperformed large-cap banks. The BKX trade was more volatile than the broader market. The BKX opened slightly higher to the 35.26 level and quickly fell into negative territory. By 9:40, the index had fallen a sharp -2.0% from its open to the intra-day low of 34.57. Short covering and dip buying spurred the index to recover its losses quickly, and by 10:15, the index reached 35.50. At 11:00, gains had retraced to the 35.30 level when a second rally lifted the index to 35.94 by noon and continued to 36.20 by 1:00. Through 1:50, the index gradually retraced, falling back to 35.75 before the east coast earthquake sent financials to the 35.50 level. Positive momentum quickly returned, and the index climbed to 36.43 by 3:10. A small sell-off into the close reversed, and the BKX closed at its intra-day high of 36.51.
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 reassumed their loss leadership, but recent gains may have returned markets to an uptrend. 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 (44.56) crossed below the 100- and 200-day moving averages (47.37 and 49.45, respectively) on April 25th and June 16th. The 20-day closed (by -4.22 points) below the 50-day for the 113th straight day, and the gap expanded. The 50-day moving average closed (by -4.89 points) below the 200-day moving average for the 50th straight session, and the gap expanded. The 100-day moving average closed (by -2.08 points) below the 200-day moving average for the 27th straight session, and the gap expanded. The index closed below the 20-day moving average for the 30th time in 31 sessions. The index closed below its 50-, 100-, and 200-day moving average for the 32nd, 92nd, and 58th consecutive sessions, respectively. The index closed below the 50.00 level for the 58th straight session and below 40 for the 12th straight session. The directional movement indicator is negative for the 21st straight session, and the trend is the strongest since July 7, 2008 and is still increasing. Relative strength rose to 35.88 from 29.95, the lower end of a neutral range. Next resistance is 37.16; next support at 35.22.