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U.S. Equity Futures Move Lower after Yesterday's Large Gains on Lighter Volume

|Includes:BAC, BB&T Corporation (BBT), BK, BOH, COF, CYN, FRC, FULT, MTB, RF, SNV, WBS, ZION
This morning.  U.S. equity markets are in a confirmed uptrend, but U.S. equity futures are moderately lower, perhaps to consolidate the past two trading days’ significant gains. Asian equity market closed mixed. European equities are also mixed, with better performance in the U.K., where financials have benefited from analyst upgrades. U.S. Treasuries are somewhat stronger. Overall trading patterns suggest an improving outlook.  LIBO markets reopened and are little changed from Friday. Euribor-OIS spreads are trending higher, but are little changed today. The U.S. dollar is mixed.  Commodities markets are mixed.  Equity options markets suggest a neutral to bearish short-term outlook.  After a fair value adjustment of +0.48 points, September SPX equity futures are at 1198.70, down -9.88 points.  The SPX opens at 1210.08, -11.3% below its recent April 29 multi-year closing high, and +2.28% above its 20-day moving average and -3.89% below its 50-day moving average.  The SPX is -3.78% below its 1257.64 year-end close.  Next resistance is at 1220.94.  Next support is at 1188.57.
Monday.  U.S. equities added to Friday’s strong gains, but volume dropped sharply, suggesting growing resistance after the past week’s gains. Markets and particularly property and casualty insurers benefited as East coast storm damage was less than anticipated; also, July personal income and spending suggested better economic prospects. Equities gapped higher and rose steadily through the session to end at the intraday highs. As on Friday, the Nasdaq led the other major indexes, adding +3.32%, followed by the SPX, NYSE composite, and DJI, which added +2.83%, +2.82%, and +2.26%, respectively.  Financials, basic materials, and industrials were segment leaders, up at least +3.13%. Financials rose +3.99%, led by the insurers. Consumer goods, utilities, and telecommunications were the laggards, but rose at least +1.29%. Intraday put/call ratios traded opened at 0.48 and closed at 0.55.  Volatility fell.  The VIX opened at 33.81, and closed at 32.28, down -9.30% on the day
Last Tuesday’s confirmation of an equity uptrend reset the distribution day count.  Based on Thursday’s losses, the distribution day count is 1 on the DJI and NYSE composite.  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 closed higher, while Chinese equity markets closed mixed. Volume was lower in Japan and higher in China. Market commentary cited increased U.S. consumer spending and auto sales, as well as Bernanke’s speech Friday.  In China, equities slipped after the Bank of China broadened the bank reserve base by adding customer margin deposits.
In Japan, the Nikkei gapped higher and reached its 8992.86 intraday high in the first hour. Subsequent trading took the index sideways through mid-day, and the afternoon trade trended slightly lower. The index closed at 8953.90, up 1.16%. Volume fell -5.56%. Most market segments closed higher, led by oil and gas, industrials, and financials, which closed at least +1.50% higher. Telecommunications, consumer services, and utilities were the laggards, with the latter off -0.56%. The NKY closed below all moving averages and -12.5% below its 2010 close.
In China, the Hang Seng and Shanghai composite closed mixed, up +1.71% and down -0.38%, respectively.  HSI volume rose 258.4%%, while SHCOMP volume rose +3.88%.  In Hong Kong, the HSI gapped higher and reached its 20341.10 intraday high about an hour into the trading day. As in Japan, markets traded sideways through mid-day, but profit taking took the HSI back to a mid-afternoon intraday low of 20071.50. The index rallied in the final two hours to closed at 20204.17, its first close above 20000 since August 18th. Most market segments closed higher, industrials, and financials, which gained at least +1.85%.  Technology, consumer services, and utilities were the laggards. The HSI closed -12.3% below its 2010 close.  In Shanghai, the SHCOMP also gapped higher and rose to a mid-morning intraday high of 2615.14. The index subsequently lost ground, trending lower at an accelerating pace, closing at 2566.60, just above its 2563.69 intraday low.  Most market segments closed lower.  Financials managed a +0.01% gain, as BAC’s sale of half its stake in China Construction Bank Corp eliminated a large market overhang.  Telecommunications and oil and gas were the other leaders, but closed lower. Technology, health care, and consumer goods were the laggards. The SHCOMP ended -16.1% below its April 18th 3057.33 high, -8.60% below its 2010 close, and -4.57% below its 2689.49 50-day moving average.
In Europe, equity markets are mixed.  The Eurostoxx50, FTSE, and DAX are +-0.21%, +2.35%, and -0.68%,  respectively.  U.K. stocks have rallied strongly, on strength in bank and mining shares. RBC and Barclays shares benefited from a new Deutsche Bank recommendation.  Traders also cite the view that a U.S. economic recession is less likely.  In the EuroStoxx50, market segments are mixed, led oil and gas, consumer services, and industrials.  Basic materials, health care, and utilities are the laggards, off at least -0.78%.
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.  Open again after yesterday’s bank holiday, overnight USD LIBOR is unchanged at 0.1433%, compared to 0.1433% Friday, but down from 0.25188% at year-end.  USD 3-month LIBOR rose to 0.32556%, compared to 0.32278% Friday, and  above the 0.30950% year-end rate.
·         The US Libor-OIS (LOIS) spread is 24.3 bps, compared to 24.5 bps the prior day and 12.0 bps at the end of 2010.  Euribor-OIS is 65.0 bps, down from 65.2 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 5 bps, unchanged from 5 bps the prior day, and well off from a recent high of 33 bps on August 2nd.
·         The U.S. dollar is mixed, stronger against the euro and pound, but weaker compared to the yen.  The dollar trades at US$74.084, compared to US$73.721 the prior day, and below its US$74.566 50-day, US$74.600 100-day, and US$76.398 200-day moving averages.  The euro trades at US$1.4413, compared to US$1.4511 Monday and US$1.4499 the prior day.  The euro trades above its US$1.4319 50-day and US$1.4368 100-day moving averages.  In Japan, the dollar trades at ¥76.77, compared to ¥76.83 Monday and ¥76.64 the prior day.  The yen trades better than its 50-day moving average ¥78.492.
·         U.S. Treasury yields are lower, with 2- and 10-year maturities yielding 0.203% and 2.216%, respectively, compared to 0.203% and 2.256% Monday.  The yield curve widened to +2.013%, from +2.053% the prior day.  In the past year, the 2- and 10-year spread has varied from a low of +1.872% on August 19, 2011, and a high of +2.910% on February 4, 2011.
·         Commodities prices are mixed, with lower petroleum, higher precious metals, aluminum and copper, and lower agriculture prices.
U.S. news and economic reporting.  At 9:00, the June Case-Shiller home price report is released. August consumer confidence appears at 10:00. Survey is 52.0, down from 59.5 in July.
Overseas news: Today, Italy sold €7.7 billion of 10-year bonds in a relatively weak auction, with yields rising +13 basis points over the  prior auction and at a 5.22% yield, the highest in three weeks.  Today, the Bank of Italy warned of a weaker growth outlook, calling for less than +1% growth in 2011 and even lower in 2012.  Today, the International Accounting Standards Board said European banks haven’t sufficiently written down the value of Greek government bonds and other distressed sovereign debt on their books.  In August, Eurozone economic confidence declined more than expected and fell the most since December 2008.  Today, China again pegged the yuan exchange rate higher versus the dollar and to the highest level in 17 years. 
Company news/research:
·         BBT – upgraded to neutral at Macquarie
·         BAC – today, the FDIC objected to BAC’s proposed $8.5 billion MBS settlement. 
2Q2011 Earnings.  The second quarter’s earnings results exceeded revenue and earnings expectations.  Of the 467 S&P500 companies that reported earnings to date, 76% (354 out of 467) 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 12.2x estimated 2011 earnings ($99.15) and 10.8x estimated 2012 earnings ($112.31), compared to 11.9x and 10.5x 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 +4.8%, and +4.7%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +16.9% and +32.5%, respectively.
Large-cap banks trade at a median 1.18x tangible book value, and 10.9x and 8.6x 2011 and 2012 consensus earnings, respectively, compared to 1.13x tangible book value and 10.5x/8.3x 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 +31.0% and +65.2%, 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 0.98, below its 5- and 10-period moving averages of 1.13 and 1.19, respectively.  The index put/call ratio closed at 1.46, below the 5- and 10-period moving averages of 1.56 and 1.56, respectively.  The equity put/call ratio closed the day at 0.55, below its 5- and 10-period moving averages of 0.69 and 0.77, respectively.
Monday’s equity markets.  On lighter volume, equity markets closed significantly higher, extending and beating Friday’s gains.  The Nasdaq, SPX, NYSE, and DJI all finished the day higher, up +3.32%, +2.83%, +2.82%, and +2.26%, respectively.  Markets benefitted from several factors, including a less damaging storm than feared, a benign consumer spending report, and news that the 2nd and 3rd largest Greek banks would merge.  Personal income was reported in line, but personal spending rose.  Markets opened higher and continued higher through the day to close at their intraday highs.  Volume fell, but might have been attributable to storm effects and end of August holidays.  The SPX marked its 5th advance in the last six sessions. The VIX finished the day at 32.28, down -9.30%.
Trading desks reported light volume and investor participation.  The NYSE floor was only 90% occupied and larger hedge funds and money managers from Boston to Baltimore seemed to have a number of missing personnel. Also, UK exchanges were closed Monday for the annual Summer holiday.  Historically, the week before Labor Day tends to be lightly attended.  The Bloomberg NYSE new net highs were +18 versus the previous day’s reading of -96. The relative strength indicator rose to 49.22 from the previous day’s reading of 43.46 and is in the neutral range.
Market segments were all positive. Financials, basic materials, and industrials were the leaders, while consumer goods, utilities and technology were the laggards.
Financials led the markets higher. The KRX, BKX, and XLF all finished significantly higher, up +5.28%, +4.54%, and +4.15%, respectively. News that the 2nd and 3rd largest Greek banks were considering a merger combined with BAC agreeing to sell 13.1 billion shares of China Construction Bank and lighter than expected damage from Hurricane Irene sent financials higher across the board. Among broader financials, HIG (+12.97%), LNC (+8.86%), and JNS (+8.86%) were the best performers, with a mixture of large cap banks and P/C insurers higher as well. The BKX began the day higher and, like the broader markets, followed a linear progression throughout the day, finishing at its highs. The BKX finished the day with all 24 names higher. The leaders in the BKX were BAC (+8.12%), RF (+8.01%), and ZION (+6.22%). The laggards were MTB, BK, and COF, up at least +2.62%. The KRX finished the day with all 50 names higher. Leaders on the KRX were SNV, WBS, and FULT up at least +8.36%, while the laggards were BOH, FRC, and CYN. The BKX, KRX, and XLF each 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 -31.23% below its April 2010 high and -51.72% below its best level of 82.55 in September 2008.
SPX. On lower volume, the SPX rose +33.28 points, or +2.83%, to end at 1210.08.  Volume fell -3.93% to 686.50 million shares, down from 714.61 million shares Friday and below the 891.71 million share 50-day moving average.  For the 11th straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1259.03 vs. 1283.72 respectively)The SPX closed above its 200-week moving average (1152.21).
The SPX gapped higher at the open to the 1190 level, immediately setting the intra-day low.  Through 10:30, the index rallied to 1200.  Momentum reversed at that threshold, and by 11:05, the index had slowly retraced back to 1195.  The market climbed from 11:05 through 1:10, breaching 120 at 12;00 and reaching 1205 by 1:10.  Gains consolidated at the 1203 level and another rally lifted the index through the close.  The index set the intra-day high of 1210.28 at 3:58.
Technical indicators are negative.  Markets, in correction since July 27th, resumed an uptrend with August 23rd’s gains in higher volume and set a recent high yesterday.  The SPX closed below 1300 for the 22nd straight session and above 1200 for the 1st time in 10 sessions.  The index closed below its April 2010 highs for the 18th straight session.  The 50-day moving average has been below the 100-day moving average since July 11thThe SPX closed (by +2.80%) above its 20-day moving average (1177.16) for the first time in 24 sessions.  The index closed (by -3.89%) below its 50-day moving average for the 24th straight session.  The index closed (by -6.24%) below its 100-day moving average (1290.55) for the 23rd straight session.  The SPX closed -5.74% below its 200-day moving average, closing below that average for the 19th straight session.  All moving averages fell.  The directional momentum indicator is negative for the 23rd straight session, and the trend is very strong but declining.  Relative strength rose to 50.87 from 45.06, in the middle of a neutral range.  Next resistance is at 1220.94; next support is at 1188.57.
BKX.  On lower volume, the KBW bank index rose +1.73 points, or +4.54%, to end at 39.85, its 19th close below the prior 52-week low of 42.70 from August 25, 2010 and its 16th straight sub-40 close.  Volume fell -4.69% to 108.96 million shares, down from 114.31 million shares Friday but above the 104.72 million share 50-day average.  The BKX closed -7.28% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -31.23% and -28.37% below its April 23, 2010, and February 14, 2011 respective closes.
Financials were the market’s best performing segment, and regional banks outperformed large-cap banks.  The BKX gapped higher at the open to the 38.60 level, immediately setting the intra-day low.  Through 10:30, the index climbed to the 39.30 level, where gains consolidated through 11:30.  A second rally at 11:30 lifted the index to 39.50 by 1:10.  Gains retraced to 39.37 before a rally began that lasted through the closing bell.  The index closed at the intra-day high of 39.85. 
Technical indicators are negativeBank 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 resumed their loss leadership.  Recent gains on higher volume, and bank outperformance, 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 (43.85) crossed below the 100- and 200-day moving averages (46.79 and 49.26, respectively) on April 25th and June 16th.  The 20-day closed (by –5.07 points) below the 50-day for the 117th straight day, and the gap expanded.  The 50-day moving average closed (by -5.41 points) below the 200-day moving average for the 54th straight session, and the gap expanded.  The 100-day moving average closed (by –2.47 points) below the 200-day moving average for the 32nd straight session, and the gap expanded.  The index closed above the 20-day moving average for the 1st time in 25 sessions.  The index closed below its 50-, 100-, and 200-day moving average for the 36th, 96th, and 62nd consecutive sessions, respectively.  The index closed below 50.00 for the 62nd straight session and below 40.00 for the 16th straight session.  The directional movement indicator is negative for the 25th straight session, and the trend is very strong but declining.  Relative strength rose to 48.63 from 42.23, a neutral range.  Next resistance is 40.34; next support at 38.88.