This morning. The U.S. equity market is in a confirmed uptrend, and yesterday’s positive reversals add a measure of credibility to equities’ recent strength. Futures are higher, with a positive trend. Equity options markets suggest a neutral short-term outlook. Asian markets closed mixed on lower volume. Eurozone equities are moderately higher, led by financials, on a bond rating affirmation of France and reports that German/French policy differences are minor. The U.S. dollar is slightly weaker, but mixed. 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 +1.34 points, December SPX equity futures are at 1222.50, up +11.26 points. The SPX opens at 1215.39, -10.9% below its April 29 multi-year closing high, +3.51% above its 20-day and +3.24% above its 50-day moving averages. The SPX is -3.36% below its 1257.64 year-end close. Next resistance is at 1224.17; next support is at 1201.98.
Thursday. Though the Nasdaq closed with a small loss, the other major indexes reversed significant mid-day losses and ended with modest, if respectable gains. The SPX and NYSE composite gained +0.46%, the DJI added +0.32%, but the Nasdaq shed -0.21%. Volume rose +2.12% on the Nasdaq, but fell on the other exchanges. Equities ignored a much stronger than expected October Philadelphia Fed report, but statements from German/French government spokesmen that final agreements would be announced next week motivated short-sellers to cover or reduce their exposure. Most of the recovery occurred between 12:20 and 1:30, but the intraday highs were at 3:00. Most market segments rose, led by a +1.75% gain in financials, followed by basic materials, and oil and gas, which added at least +0.67%. Telecommunications, and technology lagged with losses of at least -0.09%.
Distribution days number 1 on the DJI, SPX, NYSE composite, and Nasdaq, since the uptrend commenced on October 4th.
In Asia, equity markets closed mixed, on lower volume. The Hang Seng gained +0.24%, its first advance this week, while the Nikkei and Shanghai composite indexes lost -0.04% and -0.60%, respectively. Volumes declined -15.8%, -11.0%, and -23.9%, respectively. Commentary focused on Eurozone negotiations regarding approaches to resolve its sovereign debt issues.
In Japan, the NKY closed at 8,678.89, compared to 8,682.15 the prior day. The NKY closed +0.35% above its 20-day moving average. The NKY opened just below the prior day’s close and traded within a narrow range through most of the day. Early afternoon weakness took the index to a 8,652.26 intraday low, but the index rallied weakly through the session’s remainder to close with a small loss on the day. Most market segments were lower. Gainers were technology and industrials, which gained at least +0.59%. Health care, oil and gas, and financials lagged with losses of at least -0.87%.
In China, the Hang Seng Index gapped higher and traded to an intraday high of 18,082.4 mid-morning, but then traded back to breakeven in early afternoon. Mid-afternoon weakness took the index down to test support at 17,940, followed by a positive reversal into the close. Most market segments closed higher. Leaders were utilities, consumer goods, and consumer services, which closed up at least +0.63%. Financials added +0.32%. Oil and gas, basic materials, and telecommunications were the laggards.
In Shanghai, the SHCOMP closed at 2,317.28, down from 2,331.37 the prior day and marking its 5th consecutive loss. The index opened lower and traded mostly below the prior day’s close, marked by three failed rally attempts. The index closed just above its 2,313.78 intraday low. Among market segments, only financials closed higher, with a +0.35% gain. Other leaders were utilities and consumer goods, with losses of at least -0.15% Laggards were consumer services, technology, and basic materials, which lost at least -1.32%.
In Europe, equities are moderately higher, and have spiked higher mid-morning to intraday highs. The spike coincides with a Fitch reaffirmation of France’s long-term AAA bond rating. Commentary also focuses on reports that unresolved German/French policy differences are small, suggesting that agreement can be reached and announced next week. The Euro Stoxx 50, DAX, and FTSE are up +1.81%, +1.25%, and +1.99%, respectively. On the Euro Stoxx 50, all market segments are at least +0.35% higher. Financials are leading with a gain of +3.13%, followed by utilities, and telecommunications. Health care, oil and gas, and technology are the laggards.
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 0.14167%, unchanged from 0.14167% Thursday, and below the 0.25188% year-end level. USD 3-month LIBOR rose to 0.41833%, the highest level of the year, up from 0.41556% the prior day and compared to 0.30281% at year-end 2010.
- The US Libor-OIS (LOIS) spread rose to 33.8 bps, the highest level of the year, from 33.4 bps the prior day and compares to 12.0 bps at the end of 2010. Euribor-OIS rose to 75.7 bps from 74.8 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 5.0 bps, unchanged from 5.0 bps Wednesday and 5.0 bps Tuesday, but well off from a recent high of 33 bps on August 2nd.
- The U.S. dollar is mixed this morning, slightly stronger against the euro, but weaker versus the pound and yen. The dollar trades at US$76.911, compared to US$76.974 the prior day, and its US$76.401 50-day, US$75.558 100-day, and US$75.839 200-day averages. The euro trades at US$1.773, compared to US$1.3780 Thursday and US$1.3780 the day prior. The euro trades below its US$1.3884 50-day and US$1.4101 100-day averages. In Japan, the dollar trades at ¥76.70, compared to ¥76.80 Thursday and ¥76.81 the prior day. The yen trades better than its 50-day moving average ¥76.828.
- U.S. Treasury yields are slightly higher, with 2- and 10-year maturities yielding 0.267% and 2.191%, respectively, compared to 0.262% and 2.189% Thursday. The yield curve narrowed to +1.924%, compared to +1.927% 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, higher precious metals, lower copper and aluminum, and generally higher agriculture prices.
- The VIX ended at 34.78, up +0.99% from 34.44 at the prior close. The VIX is -4.41% below its 20-day moving average 36.38.
- The Euro Stoxx 50 volatility index (V2X) is down -9.66% to 40.34, compared to 44.61 the prior day. The V2X index trades -5.91% below its 20-day moving average of 42.86, -28.48% below the 56.34 30-day high, and +24.5% above the 34.17 30-day low.
- The Hang Seng volatility index (VHSI) is up +0.40% to 37.97 from 37.82 the prior day. The VHSI index trades -2.62% below its 20-day moving average of 38.99.
- CBOE skew ended at 122.57, unchanged from 127.57 at the prior day’s close, but still 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. There are no scheduled economic reports today. Monday’s reports include the Chicago Fed national activity index for September. Tuesday’s reports included the August CaseShiller home price index, October consumer confidence, and the Richmond Fed manufacturing index.
Overseas news: Today, Fitch ratings officials said France’s AAA rating is not at risk for downgrade from the current sovereign debt crisis negotiations and bailout funds. Today, Standard & Poor’s said it may downgrade by 1 to 2 notches the ratings of France, Spain, Italy, Portugal, and Ireland should the region enter a recession.
Company news/ratings changes:
- STI – reports 3Q11 GAAP and operating EPS of $0.39 and $0.26, compared to estimates of $0.35
- COF – reports 3Q11 GAAP and operating EPS of $1.78 and $1.91, compared to estimates of $1.68
- HBAN – downgraded to neutral at Oppenheimer
3Q2011 Earnings. The third quarter’s earnings reports have so far surprised expectations. Of the 103 S&P500 companies that reported earnings to date, 73% (75 out of 103) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat EPS expectations by an average of +6.3% (versus a historical average of +2%). EPS is up +13.4% over the prior year. Though challenged in the current operating environment, 78% of companies reported increased revenues over the prior year and 63% 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 21 of the 24 BKX members reporting, 76% beat operating estimates with aggregated results surprising by +14.1% and 67% have beat revenue estimates with aggregated surprising by +4.3%. EPS is up +18.2% over the prior year, while revenue is up +1.5%. 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 12.2x estimated 2011 earnings ($99.25) and 10.9x estimated 2012 earnings ($111.57), compared to 12.1x 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 +4.9%, and +4.0%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +17.1% and +31.6%, respectively.
Large-cap banks trade at a median 1.17x tangible book value, and 10.5x and 9.3x 2011 and 2012 consensus earnings, respectively, compared to 1.21x tangible book value and 10.5x/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 +27.2% and +54.2%, respectively.
Options. Options markets are neutral to bearish. Composite options markets are bearish, index options markets are neutral to bearish, and equity options markets are neutral. The composite put/call ratio closed at 1.39, compared to 1.11 the prior day and above its 5- and 10-period moving averages of 1.13 and 1.17, respectively. The index put/call ratio closed at 1.90, compared to 1.52 the prior day and above the 5- and 10-period moving averages of 1.55 and 1.63, respectively. The equity put/call ratio closed the day at 0.75, compared to 0.72 yesterday and above its 5- and 10-period moving averages of 0.68 and 0.69, respectively.
NYSE Indicators. Volume fell -0.61% to 958.13 million shares, from 964.0 million shares Wednesday, 0.83x the 1.153 billion share 50-day moving average. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by 631 (compared to -1,354 the prior day), or 1.54:1. Up volume led down volume by 1.97:1.
SPX. On lower volume, the SPX rose +5.51 points, or +0.46%, to end at 1215.39. Volume fell -0.99% to 769.10 million shares, down from 776.81 million shares Wednesday and below the 904.55 million share 50-day moving average. For the 48th straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1177.30 vs. 1274.88 respectively). The SPX closed above its 200-week moving average (1140.25) for the 11th straight session.
From its prior close at 1209.88, the SPX opened flat and fluctuated with modest rallies to 1215 and sell-offs back to break-even through 10:55. European headlines crossed at 11:00 which raised doubts over potential progress at this weekend’s Eurozone summit, and through 12:20, the SPX fell to an intra-day low of 1197.34. Positive headlines at 1:00 signaling Germany and France’s joint resolve to solve the crisis motivated the index higher. Through 1:20, the index rose back to 1215 and a 2:30 rally lifted the index to 1219.53 at 2:55, setting the intra-day high. The index closed at 1215, towards the high end of the day’s range.
Technical indicators are mostly negative. The market returned to a confirmed uptrend following October 12th’s follow-through confirmation of October 4th’s strong reversal. The SPX closed below 1300 for the 59th straight session but above 1200 for the seventh straight session. The index closed below its April 2010 highs for the third time in the previous five 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 +3.51%) above its 20-day moving average (1174.14) for the 10th time in 11 sessions. The index closed (by +3.24%) above its 50-day moving average for the 8th straight session. The index closed (by -1.43%) below its 100-day moving average (1233.03) for the 60th straight session. The SPX closed -4.67% below its 200-day moving average, closing below that average for the 56th straight session. The 20- and 50-day moving averages rose. The directional momentum indicator is positive for the seventh straight session, and the trend is weak and declining. Relative strength rose to 56.19 from 55.20, a neutral range. Next resistance is at 1224.17; next support is at 1201.98.
BKX. On lower volume, the KBW bank index rose +0.71 points, or +1.89%, to end at 38.31, its 56th close below the prior 52-week low of 42.70 from August 25, 2010 and its 53rd straight sub-40 close. Volume fell -10.36% to 100.48 million shares, down from 112.10 million shares Wednesday and below the 112.57 million share 50-day average. The BKX closed -10.87% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -33.89% and -31.13% below its April 23, 2010, and February 14, 2011 respective closes.
Financials were the market’s best performing segment, and large-cap banks performed in-line with regionals. The BKX opened flat at 37.70 and fluctuated between small gains and losses through 10:45. The index fell to 37.20 at 11:00 and reached an intra-day low of 37.12 at 12:15. Through 1:25, the index rally almost straight up, crossing back into positive territory at 1:00 and reaching 38.20 at 1:25. Gains retraced back to 37.80 by 2:15 but rallied again, reaching the intra-day high of 38.45 at 2:55. Investors took profits at 3:00 and the index retraced back to 37.90 at 3:30, but a rally into the close nearly retook the intra-day high. The index closed at 38.31, towards the higher end of the day’s range.
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 has now recorded its seventh close above that level since October 12th. Moving averages align bearishly, as the shorter duration averages are below the longer duration averages, although some gaps are narrowing or holding and some averages are rising. The 50-day average (37.25) crossed below the 100- and 200-day moving averages (41.78 and 47.00, respectively) on April 25th and June 16th. The 20-day closed (by -0.53 points) below the 50-day for the 154th straight day, but the gap narrowed. The 50-day moving average closed (by -9.75 points) below the 200-day moving average for the 91st straight session, and the gap narrowed. The 100-day moving average closed (by -5.22 points) below the 200-day moving average for the 69th straight session, and the gap expanded. The BKX closed above its 20-day moving average for the 10th time in the previous 11 sessions and above its 50-day moving average for the seventh time in eight sessions. The BKX closed below its 100- and 200-day moving averages for the 74th and 99th consecutive sessions, respectively. The index closed below 50.0 for the 99th straight session and below 40.00 for the 53rd straight session. The directional movement indicator is positive for the fourth straight session, and the trend is weak and declining. Relative strength rose to 53.31 from 51.12, a neutral range. Next resistance is 38.80; next support at 37.47.