This morning. The U.S. equity market uptrend strengthened yesterday, as the major averages posted strong gains that took indexes to levels slightly above recent trading ranges. While volume rose, it remained below the 50-day moving average. Equity options markets suggest a mixed short-term outlook. Asian markets closed mixed on mixed volume. Led by financials, Eurozone equities are higher. The U.S. dollar is slightly weaker. Commodities prices are mixed. U.S. Treasury yields are higher. U.S. repo rates are unchanged, but remain at low levels. 3-month LIBOR remains elevated, at the year’s high. Euribor-OIS spreads are also near 2011 highs. After a fair value adjustment of -2.07 points, December SPX equity futures are at 1223.40, up 2.87 points. The SPX opens at 1225.38, -10.1% below its April 29 multi-year closing high, +4.94% above its 20-day and +4.32% above its 50-day moving averages. The SPX is -2.57% below its 1257.64 year-end close. Next resistance is at 1241.83; next support is at 1200.21.
Tuesday. Stocks shrugged off early weakness, and moved broadly higher on increased but still unimpressive volume of 0.90x the 50-day moving average. Notably, financials led with gains of +4.81%. The NYSE composite posted the largest +2.13% gain, followed by the SPX, Nasdaq, and DJI, which added +2.04%, +1.63%, and +1.58%, respectively. All market segments gained. Beside financials, other leaders were oil and gas and industrials, with gains of at least +2.70%. Telecommunications, utilities, and health care lagged, but added at least +0.778%. From its prior close, the SPX opened with some weakness and found its intraday low of 1191.48 just after 10:00. A better than expected NAHB housing market index may have spurred the rebound, but markets reversed and traded higher to the 1215 level by 2:00. At 3:00, news from one UK source that Germany and France had reached agreement on a sizeable Eurozone bailout fund spurred additional buying and short-covering. By 3:15, the SPX reached its 1233.10 intraday high, its best level since early August. Other news agencies disputed the earlier report, easing the gains into the close. All the major exchanges closed above their respective 20- and 50-day moving averages. The NYSE composite closed above its 50-day moving average for a 5th consecutive day.
In Asia, equity markets closed mixed, on mixed volume, with some weakness in Shanghai. The Nikkei and Hang Seng indexes gains +0.35% and +1.29%, respectively, while Shanghai shed another -0.25%. NKE volume rose +11.8%. HSI volume fell -37.7%. SHCOMP volume fell -22.3%. Commentary focused on better than expected U.S. earnings reports and slower than expected Chinese economic growth.
In Japan, the NKY closed at 8,772.54, compared to 8,741.91 the prior day. The NKY is +1.35% above its 20-day moving average but closed -0.02% below its 50-day moving average. The NKY gapped higher, reaching an intraday high of 8,831.55 in early trading, but trended lower through mid-day to an intraday low of 8,745.36 in early afternoon. The index rallied modestly into the close. Market segments were mixed. Leaders were consumer services, health care, and financials, which gained at least +0.75%. Laggards were utilities, oil and gas, and telecommunications, which lost at least -0.36%.
In China, the Hang Seng Index rebounded but only partially recaptured Tuesday’s large losses. The HSI closed at 18,309.22, compared to 18,076.46 at the prior close. The HSI gapped higher to 18,400, but immediately traded back to 18,200, where it found support. The index rallied back to its 18,426.3 intraday high in mid-morning, found resistance and traded range bound between 18,300 and 18,400 through the close. Most market segments closed higher, led by basic materials, telecommunications, and oil and gas, which added at least +1.53%. Financial gained +1.43%. Consumer services, technology, and consumer goods lagged.
In Shanghai, the SHCOMP closed at 2,377.51, down from 2,383.49 the prior day. The index moved higher at the open, but traded back to a loss in early trading. The index rallied late in the morning, traded back to par at mid-day, and spend the afternoon trending slightly lower into the close. Most market segments ended lower. Oil and gas and consumer services closed slightly higher. Financials, consumer goods, and technology lagged with losses of at least -0.30%.
In Europe, equities are higher, despite Moody’s overnight downgrade of Spain’s long-term sovereign debt. Commentary focuses on conflicting news reports, still unresolved, that Germany and France agreed to boost Eurozone bailout funds. The Euro Stoxx 50, DAX, and FTSE are up +1.06%, +0.80%, and +0.84%, respectively. On the Euro Stoxx 50, all market segments are at least -0.07% lower. Consumer services, industrials, and basic materials lag with losses of at least -0.05%.
Libor, LOIS, Currencies, Treasuries, Commodities:
- Interbank lending rates continue to reflect substantial stress, centered on the health of Eurozone banks in the current economic environment. Overnight USD LIBOR is at 0.14056%, unchanged from 0.14056 Tuesday, and below the 0.25188% year-end level. USD 3-month LIBOR rose to 0.41167%, the highest level of the year, up from 0.40917% the prior day and compared to 0.30281% at year-end 2010.
- The US Libor-OIS (LOIS) spread rose to 33.2 bps, the highest level of the year, from 32.7 bps the prior day and compares to 12.0 bps at the end of 2010. Euribor-OIS eased to 75.2 bps from 75.3 bps the prior day, and compares to 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 13.0 bps, unchanged from 13.0 bps Tuesday and 13.0 bps Monday, but well off from a recent high of 33 bps on August 2nd.
- The U.S. dollar is slightly weaker this morning against the euro, pound, and yen. The dollar trades at US$76.683, compared to US$77.138 the prior day, and its US$76.301 50-day, US$75.469 100-day, and US$75.859 200-day averages. The euro trades at US$1.3819, compared to US$1.3752 Tuesday and US$1.3737 the prior day. The euro trades below its US$1.3904 50-day and US$1.4117 100-day averages. In Japan, the dollar trades at ¥76.81, compared to ¥76.82 Tuesday and ¥76.83 the prior day. The yen trades better than its 50-day moving average ¥76.829.
- U.S. Treasury yields are slightly higher, with 2- and 10-year maturities yielding 0.268% and 2.186%, respectively, compared to 0.266% and 2.176% Tuesday. The yield curve widened to +1.918%, compared to +1.910% the prior day. In the past year, the 2- and 10-year spread has varied from a low of +1.520% on September 22, 2011, to a high of +2.910% on February 4, 2011.
- Commodities prices are mixed, with mixed energy, lower precious metals, copper and aluminum, and generally higher agriculture prices.
- The VIX ended at 31.56, down -5.48%% from 33.39 at the prior close. The VIX is now -14.4% below its 20-day moving average 36.86.
- The Euro Stoxx 50 volatility index (V2X) is down -4.49% to 37.88 from 39.67 the prior day. The V2X index trades -12.1% below its 20-day moving average of 43.39, -32.5% below the 56.34 30-day high, and +18.3% above the 34.17 30-day low.
- The Hang Seng volatility index (VHSI) is down -4.46%% to 35.78 from 39.67 the prior day. The VHSI index trades -7.49% below its 20-day moving average of 38.68.
- CBOE skew ended at 127.99, up +2.84% from 124.46 at the prior day’s close and moving above a neutral (115-120) range. The index tracks the cost of buying out-of-the-money, long-dated options. A rise implies that investors are paying more to buy puts, a bearish signal.
U.S. news and economic reporting. Today’s economic reports are September consumer prices at 8:30, housing starts, and building permits.
Overseas news: Yesterday, Moody’s downgraded Spain’s credit rating two notches to A1 and maintained a negative outlook. Today, a 48 hour strike kicked off in Greece as the Parliament prepares to vote tomorrow on a new austerity package. Today, more press reports continue speculating on this weekend’s Eurozone finance ministers summit and any agreement between France and Germany to leverage the Emergency Financial Stabilization Fund’s size.
Company news/ratings changes:
- PNC – reports 3Q11 GAAP and operating EPS of $1.55 and $1.52, compared to estimates of $1.50
- USB – reports 3Q11 GAAP and operating EPS of $0.65 and $0.65, compared to estimates of $0.62
- BK – reports 3Q11 GAAP EPS of $0.53 compared to estimates of $0.51
- CMA – reports 3Q11 GAAP and operating EPS of $0.51 and $0.59, compared to estimates of $0.53
- BLK – reports 3Q11 GAAP and operating EPS of $3.23 and $2.83, compared to estimates of $2.66
- MS – reports 3Q11 GAAP and operating EPS of $1.14 and $0.01, compared to estimates of $0.30
- NTRS – reports 3Q11 GAAP EPS of $0.70 compared to estimates of $0.69
3Q2011 Earnings. The third quarter’s earnings reports have so far surprised expectations. Of the 38 S&P500 companies that reported earnings to date, 66% (25 out of 38) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat EPS expectations by an average of +5.7% (versus a historical average of +2%). EPS is up +12.5% over the prior year. Though challenged in the current operating environment, 82% of companies reported increased revenues over the prior year and 66% beat revenue estimates. In the third quarter of 2011, analysts estimate the SPX will earn $24.98 per share, compared to $24.84 and $21.49 per share in 2Q11 and 3Q10, a +0.6% and +16.2% increase, respectively.
With nine of the 24 BKX members reporting, 78% beat operating estimates with aggregated results surprising by +16.6% and 50% have beat revenue estimates with aggregated surprising by +4.8%. EPS is up +14.9% over the prior year, while revenue is up +1.4%. In the third quarter of 2011, analysts estimate the BKX will earn $1.15 per share, compared to $1.12 and $0.71 in 2Q11 and 3Q10, (a +17% and +84% increase, respectively). In the second quarter, 88% (21 of 24) beat earnings estimates on an operating basis. Revenues also exceeded expectations, with 79% of BKX members beating estimates.
Valuation. The SPX trades at 12.3x estimated 2011 earnings ($99.76) and 11.0x estimated 2012 earnings ($111.57), compared to 12.0x and 10.8 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 +5.4%, and +4.0%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +17.7% and +31.6%, respectively.
Large-cap banks trade at a median 1.24x tangible book value, and 10.5x and 8.9x 2011 and 2012 consensus earnings, respectively, compared to 1.17x tangible book value and 10.1x/8.4x 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 +36.4% and +65.2%, respectively.
Options. Options markets are mixed. Composite options markets are bullish, index options markets are neutral to bullish, and equity options markets are bearish. The composite put/call ratio closed at 1.00, compared to 1.14 the prior day and below its 5- and 10-period moving averages of 1.09 and 1.14, respectively. The index put/call ratio closed at 1.37, compared to 1.60 the prior day and below the 5- and 10-period moving averages of 1.51 and 1.61, respectively. The equity put/call ratio closed the day at 0.64, compared to 0.70 yesterday and below its 5- and 10-period moving averages of 0.66 and 0.68, respectively.
NYSE Indicators. Volume rose +19.9% to 1.085 billion shares from 905.53 million shares Monday, 0.90x the 1.206 billion share 50-day moving average. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by +2,074 (compared to -1,877 the prior day), or 5.26:1. Up volume led down volume by 13.0:1.
SPX. On higher volume, the SPX rose +24.52 points, or +2.04%, to end at 1225.38, its highest close since August 3rd. Volume rose +26.17% to 857.12 million shares, up from 679.34 million shares Monday and above the 945.33 million share 50-day moving average. For the 46th straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1174.66 vs. 1275.48 respectively). The SPX closed above its 200-week moving average (1140.30) for the 10th straight session.
From its prior close at 1200.86, the SPX opened flat. At 9:45, the index sold off and reached an intra-day low of 1191.48 at 10:00. Through the 1:00, the index staged a multi-step rally, rallying to 1205 by 10:45 and continuing to rally by 5 points every hour thereafter to reach 1215 by 1:00. The index traded sideways through 3:00 when news hit of French/German agreement on an increased Eurozone bailout initiative. The index gained 18 points in 12 minutes and reached an intra-day high of 1233.10 at 3:12. The strong rally was sold back to 1222 at 3:30, but the SPX staged one more rally to 1130 by 3:55. The index sold off from there into the close to finish at 1225, at the top of the day’s range.
Technical indicators are mostly negative. The market returned to a confirmed uptrend following Wednesday’s follow-through confirmation of October 4th’s strong reversal. The SPX closed below 1300 for the 57th straight session but above 1200 for the fifth straight session. The index closed above its April 2010 highs for the second time in the previous three sessions. The 50-day moving average has been below the 100-day moving average since July 11th. The 100-day moving average crossed the 200-day average to the downside on September 7th. The SPX closed (by +4.94%) above its 20-day moving average (1167.69) for the eighth time in nine sessions. The index closed (by +4.32%) above its 50-day moving average for the 6th straight session. The index closed (by -0.82%) below its 100-day moving average (1235.54) for the 58th straight session. The SPX closed -3.93% below its 200-day moving average, closing below that average for the 54th straight session. The 20- and 50-day moving averages rose. The directional momentum indicator is positive for the fifth straight session, and the trend is weak and declining. Relative strength rose to 58.67 from 54.46, a neutral range. Next resistance is at 1241.83; next support is at 1200.21.
BKX. On higher volume, the KBW bank index rose +2.23 points, or +6.11%, to end at 38.74, its 54th close below the prior 52-week low of 42.70 from August 25, 2010 and its 51st straight sub-40 close. Volume rose +43.48% to 132.13 million shares, up from 92.09 million shares Monday and above the 116.56 million share 50-day average. The BKX closed -9.87% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -33.15% and -30.36% below its April 23, 2010, and February 14, 2011 respective closes.
Financials led the market higher from the opening bell, and regional banks outperformed large-cap banks’ strong gains. Fueled by better-than-feared earnings from BAC and GS, the BKX gapped higher to 37.00, up +1.2%. The index continued rising to 37.50 by 9:45 before selling back down to 36.71 at 9:55, setting the intra-day low, but still in positive territory. Banks gathered strength through the morning, and small dips in the larger rally were quickly bought. At noon, the index reached 38.00, up +3.8% intra-day. The rally slowed through the afternoon, and by 3:00, the index stood at 38.25. The strong, headline-fueled rally at 3:00 lifted the BKX by nearly 1.0 point in 10 minutes to the intra-day high of 39.17, marking a +6.9% intra-day gain. The strong move was sold back to 38.50, and one more rally to 39.00 at 3:55 was sold back to a similar level. The index closed at the high end of the day’s range and had the best one-day gain since August 11th’s +6.2% gain.
Technical indicators are mostly negative. Bank stocks are leading the market’s direction, which switched to an uptrend after Wednesday’s confirmation of October 4th’s strong reversal. 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, but the index closed above that level for the fifth time in six session. Moving averages align bearishly. The shortest duration averages are below the longer duration averages, some gaps are widening, and most major averages are falling. The 50-day average (37.25) crossed below the 100- and 200-day moving averages (42.02 and 47.15, respectively) on April 25th and June 16th. The 20-day closed (by -0.84 points) below the 50-day for the 152nd straight day, but the gap narrowed. The 50-day moving average closed (by -9.90 points) below the 200-day moving average for the 89th straight session, and the gap narrowed. The 100-day moving average closed (by -5.13 points) below the 200-day moving average for the 67th straight session, and the gap expanded. The BKX closed above its 20-day moving average for the eighth time in the previous nine sessions and above its 50-day moving average for the fifth time in six sessions. The BKX closed below its 100- and 200-day moving averages for the 72nd and 97th consecutive sessions, respectively. The index closed below 50.0 for the 97th straight session and below 40.00 for the 51st straight session. The directional movement indicator is positive for the second straight session, and the trend is weak and declining. Relative strength rose to 54.96 from 47.85, a neutral range. Next resistance is 39.70; next support at 37.24.