This morning. U.S. equity markets are in a confirmed uptrend. U.S. equity futures have reversed and are advancing strongly after news reports that Berkshire Hathaway invested $5 billion in BAC preferred shares, with warrants. However, equity markets experienced several weak uptrends since the beginning of the year, and the durability of the current uptrend is an open question. Encouragingly, financials led the market higher for the 2nd consecutive day, though utilities, a defensive group, followed right behind. Asian equity markets closed higher on mixed volume, rebounding after 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 more neutral 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 mixed. Commodities markets are mixed, with especial weakness in precious metals. Equity options markets suggest a neutral short-term outlook. After a fair value adjustment of +3.80 points, September SPX equity futures are at 1882.80, up +6.50 points. The SPX opens at 1177.60, -13.6% below its recent April 29 multi-year closing high, and -1.88% and -7.01% below its respective 20- and 50-day moving averages. The SPX is -6.36% below its 1257.64 year-end close. Next resistance is at 1185.34. Next support is at 1163.08.
Wednesday. U.S. equity markets opened mildly higher, but on lower volume trended higher through the day to end at the intraday high. For the 2nd consecutive day, financials led the markets, but financials faded mid-session before rallying strongly to end up +3.33%. Utilities and industrials were the other leaders, up at least +1.89%. All market segments gained at least +0.34%. Technology, consumer goods, and oil and gas were the laggards. Consumer goods, telecommunications, and utilities were the laggards. Intraday put/call ratios were between 0.68 and 0.75 intraday. Volatility fell. The VIX opened at 37.12, and rose to an intraday high of 37.38, but ended at 35.90, down -1.02%.
Tuesday’s confirmation of an equity uptrend reset 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 markets remain in correction, while Chinese equity markets have confirmed new uptrends. Markets closed higher, responding to stronger than expected U.S. durable goods orders. Bank of China reported record profits; also, the Chinese government may be increasing its fiscal spending to stimulate economic growth.
In Japan, the Nikkei gapped higher to the 8750 level, and trended higher to an early afternoon intraday high of 8849.94 before profit taking narrowed gains. The NKY closed at 8772.36, up +1.54% on a -3.59% decrease 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. Most market segments closed higher, led by industrials, oil and gas, and basic materials. Financials gained +1.55%. Consumer services, health care, and utilities lagged, with utilities closing off -2.58%. The NKY closed below all moving averages and -14.2% below its 2010 close.
In China, the Hang Seng and Shanghai composite closed up +1.47% and 2.92%, respectively, with volume increases of +8.33% and +62.5%, respectively. In Hong Kong, the HSI recouped most of the previous day’s losses. All market segments closed higher, led by basic materials, telecommunications, and oil and gas, which rose at least +2.48%. Financials rose +1.15%. Laggards were industrials, consumer services, and technology, which closed up at least +0.23%. The HSI opened gapped open at 19744.5, and traded to an intraday high of 19803.3 in early trading. Early afternoon profit taking drew the index back to a 19638.9 intraday low, before an afternoon rally brought the index back to a 19752.48 close. The HSI closed -14.3% below its 2010 close. In Shanghai, the SHCOMP rose impressively, trending higher through the trading session to close at 2615.26, just off the 2616.30 intraday high. All market segments closed higher, led by telecommunications, financials, and basic materials, which rose at least +3.34%. Consumer goods, technology, and health care lagged, but rose at least +1.67%. The SHCOMP ended -14.5% below its recent April 18th 3057.33 high, -6.87% below its 2010 close, and -2.85% below its 2692.02 50-day moving average.
In Europe, equity markets are mixed on Fed stimulus hopes, but on a choppy trade. The Eurostoxx50, FTSE, and DAX are +0.81%, -0.12%, and +0.50%, respectively. Market segments are mixed, led by financials, industrials, and consumer goods, all up at least +0.70%. Oil and gas, consumer services, and health care are the laggards, down at least -0.22%.
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 0.31900%, compared to 0.31428% the prior day, and exceeds the 0.30950% year-end rate.
· The US Libor-OIS (LOIS) spread is 23.4 bps, compared to 22.9 bps the prior day and 12.0 bps at the end of 2010. Euribor-OIS rose to 65.4 bps from 64.8 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 2 bps, unchanged from 2 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, but stronger vis-à-vis the pound and yen. The dollar trades at US$73.970, compared to US$74.012 the prior day, and below its US$74.618 50-day, US$74.630 100-day, and US$76.473 200-day moving averages. The euro trades at US$1.4439, compared to US$1.4414 Wednesday and US$1.4442 the prior day. The euro trades above its US$1.4312 50-day and US$1.4368 100-day moving averages. In Japan, the dollar trades at ¥77.19, compared to ¥76.98 Wednesday and ¥76.66 the prior day. The yen trades better than its 50-day moving average ¥78.692.
· U.S. Treasury yields are mixed, with 2- and 10-year maturities yielding 0.223% and 2.288%, respectively, compared to 0.227% and 2.299% Wednesday. The yield curve narrowed to +2.065%, from +2.072% 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 higher petroleum, lower precious metals and aluminum, higher copper, and lower agriculture prices.
U.S. news and economic reporting. The report focus is initial and continuing jobless claims. The report was mixed. Initial claims were 417K, compared to survey 405K and 408K prior. The Labor Department reported that initial claims were elevated by approximately 8K by the Verizon strike. Continuing claims were 3641K, compared to 3700K survey and 3702 prior. Friday’s focus is on 2Q2011 GDP revisions at 8:30, and Bernanke’s speech at 10:00.
Overseas news: Yesterday, the French government proposed a series of tax measures designed to raise €11 billion next year. This week, Eurozone officials are moderating the dispute over Finland’s collateral requirement demands for its share of Greece’s next bailout package.
2Q2011 Earnings. The second quarter’s earnings results exceeded revenue and earnings expectations. Of the 464 S&P500 companies that reported earnings to date, 76% (352 out of 464) 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 +16.6% 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 11.8x estimated 2011 earnings ($99.78) and 10.5x estimated 2012 earnings ($112.67), compared to 11.6x 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 +5.5%, 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 1.12x tangible book value, and 10.0x and 8.4x 2011 and 2012 consensus earnings, respectively, compared to 1.09x tangible book value and 9.8x/8.1x 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 to bearish. Composite options markets are neutral, equity options markets are bearish, and index options markets are neutral to bearish. The composite put/call ratio closed at 1.17, below its 5- and 10-period moving averages of 1.22 and 1.17, respectively. The index put/call ratio closed at 1.71, above the 5- and 10-period moving averages of 1.58 and 1.50, respectively. The equity put/call ratio closed the day at 0.68, below its 5- and 10-period moving averages of 0.81 and 0.76, respectively.
Wednesday’s equity markets. On lower volume, equity markets closed higher for a 3rd consecutive day. The SPX and DJI were up +1.31% and +1.29%, while the NYSE and Nasdaq rose +0.89% and +0.87%. This winning streak is the longest for the SPX and DJI since the 5-day streak that ended July 1st. Markets began the day indicated lower after Moody’s lowered the rating on Japanese sovereign debt to Aa3 from Aa2, but after a strong durable goods report, futures recovered. Markets opened even to slightly down, but quickly replaced those losses in the first hour with very strong gains. The market reversed again and sold off through noon. Markets lulled through the early afternoon as gains were consolidated. In the last hour, markets rallied strongly, eclipsing the previous intraday high and closing near the highs for the day. Beyond the durable goods report, MBA mortgage applications fell while homes sold in June rose more than expected. The VIX finished the day at 35.90, down -1.02%.
Investors seem focused on Friday’s Jackson Hole speech by Fed Chairman Ben Bernanke and are looking for indications of additional economic stimulus. Trading desks reported even buying and selling of equities. They also reported strong short covering in leading financial names; specifically mentioning short covering in BAC, which finished the day higher by +11.0%. Trading desks reported that long only and hedge funds were active in Wednesday’s rally, but once again sellers seemed to disappear in the afternoon. The last hour rally was more attributable to a lack of sellers. The Bloomberg NYSE new net highs were -21 versus the previous reading of -156. The AAII Bullish Investor Sentiment reading was 36.44 versus last week’s reading of 35.56. The Investment Company Institute (NYSEARCA:ICI) reported inflows for domestic equity funds of +1.131mm for the first time in ten weeks, generally a positive indication. The relative strength indicator rose to 43.20 from the previous day’s reading of 41.34, still in the lower end of a neutral range.
All market segments were positive. Financials, utilities, and industrials were the leaders, while technology, consumer goods, and oil and gas were the laggards.
For a 2nd consecutive day, financials were the leaders. The BKX, XLF, and KRX were all significantly higher, up +3.34%, +2.68%, and +2.41%, respectively. BAC was the primary driver, finishing the day up +11.0%, as shorts were squeezed. The BKX finished the day with all 24 names higher. Beyond BAC, BK, PNC, and C all were higher by at least +4.14%. The laggard of the group was FNFG, which finished with +0.2% gain. The KRX finished the day 48 names higher and 2 lower. The leaders were HCBK, CYN, and WTFC, up at least +4.41%. The two laggards were SNV and PVTB. 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 -34.9% below its April 2010 high and -54.3% below its best level of 82.55 in September 2008.
NYSE Indicators. Volume fell -10.6% to 1.109 billion shares, from 1.241 billion shares Tuesday, 0.95x the 1.168 billion share 50-day moving average. Market breadth was positive, and up volume led down volume by a large margin. Advancing stocks led decliners by +1173, compared to +2119 the prior day), or 2.26:1. Up volume led down volume by 3.41:1.
SPX. On lower volume, the SPX gained +15.25 points, or +1.31%, to end at 1177.60. Volume fell -8.94% to 876.43 million shares, down from 928.19 million shares Tuesday and below the 905.80 million share 50-day moving average. For the 8th straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1264.20 vs. 1284.22 respectively). The SPX closed above its 200-week moving average (1152.22).
The SPX opened lower to the 1156 level, matching the intra-day low that would be retested at 12:15pm. Through 10:00, the index rallied quickly, fueled by short-covering and buying in financials. At 10:00, the index reached 1175 before momentum waned. Through 11:00, the SPX retraced gains back to the 1162 break-even level. Through 12:00, sideways trading at the break-even line finally gave way to a short sell-off into negative territory. The index set its intra-day low of 1156.30, a resistance point, at 12:15 and rallied to the 1168 level through 1:30. A 2:20 rally took the index higher through the close. The index set its intra-day high of 1178.56 at 3:45 and closed near this level.
Technical indicators are negative. Markets, in correction since July 27th, resumed an uptrend with Tuesday’s gains in higher volume. The SPX closed below 1300 for the 19th straight session and below 1200 for the 13th time in 14 sessions. The index closed below its April 2010 highs for the 15th straight session. The 50-day moving average has been below the 100-day moving average since July 11th. The SPX closed (by -1.36%) below its 20-day moving average (1193.85) for the 21st straight session. The index closed (by -6.85%) below its 50-day moving average for the 21st straight session. The index closed (by -9.07%) below its 100-day moving average (1295.10) for the 20th straight session. The SPX closed -8.30% below its 200-day moving average, closing below that average for the 16th straight session. All moving averages fell. The directional momentum indicator is negative for the 20th straight session, and the trend is very strong and stable. Relative strength rose to 44.33 from 41.47, a neutral range. Next resistance is at 1185.34; next support is at 1163.08.
BKX. On lower but still above average volume, the KBW bank index rose +1.22 points, or +3.34%, to end at 37.73, its 15th close below the prior 52-week low of 42.70 from August 25, 2010, its 13th straight sub-40 close, but the first back-to-back session gains since July 20th - 21st. Volume fell -6.02% to 135.36 million shares, down from 142.84 million shares Tuesday but above the 102.99 million share 50-day average. The BKX closed -12.21% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -34.89% and -32.18% below its April 23, 2010, and February 14, 2011 respective closes.
Financials were the market’s best performing sector, and large-cap banks outperformed regional banks. The BKX opened slightly lower at the 36.36 level, setting the intra-day low. A sharp short-covering rally took the index up +1.35 points by 10:00 to the 37.70 level. Momentum faded as quickly as it started, and the index retraced to 37.20 by 10:30. Through 11:45, the BKX traded sideways at that level when an 11:45 sell-off took the financials back to the 36.60 level at 12:15. The index rallied through 1:30 to the 37.20 level and traded sideways again through 2:45. A final-hour rally took the index to the intra-day high of 37.80 at 3:45 and the index closed near this level.
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. Recent gains on higher volume, and bank outperformance, may have returned markets to an uptrend on August 23rd. 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 (44.36) crossed below the 100- and 200-day moving averages (47.22 and 49.40, respectively) on April 25th and June 16th. The 20-day closed (by -4.46 points) below the 50-day for the 114th straight day, and the gap expanded. The 50-day moving average closed (by -5.04 points) below the 200-day moving average for the 51st straight session, and the gap expanded. The 100-day moving average closed (by -2.18 points) below the 200-day moving average for the 28th straight session, and the gap expanded. The index closed below the 20-day moving average for the 31th time in 32 sessions. The index closed below its 50-, 100-, and 200-day moving average for the 33rd, 93rd, and 59th consecutive sessions, respectively. The index closed below the 50.00 level for the 59th straight session and below 40 for the 13th straight session. The directional movement indicator is negative for the 22nd straight session, and the trend is the strongest since July 7, 2008 and is stable. Relative strength rose to 40.56 from 35.88, a neutral range. Next resistance is 38.23; next support at 36.79.