This morning. The U.S. equity market is in a confirmed uptrend, though the major indexes pulled back sharply yesterday from their best levels since early August, leaving only the DJI positive in 2011. This morning, equity futures are modestly higher, benefiting from Chinese government statements that suggest that monetary policy may be eased, positive developments in Europe regarding resolutions to its sovereign debt crises, and positive earnings reports from Boeing (NYSE:B), Lockheed (NYSE:LMT), and ConocoPhillips (COC), among other U.S. companies. Equity options markets suggest a neutral short-term outlook. Asian markets closed lower in Japan, but China again posted gains with greater strength in Shanghai than Hong Kong. Eurozone equities are higher, with French equities providing the strongest result. The U.S. dollar is slightly stronger. Commodities prices are generally stronger. U.S. Treasury yields are higher. U.S. repo rates remain at low levels. 3-month LIBOR remains elevated, at the year’s high. Euribor-OIS spreads are also at 2011 highs. After a fair value adjustment of +0.30 points, December SPX equity futures are at 1233.30, up +8.00 points. The SPX opens at 1229.05, -9.87% below its April 29 multi-year closing high, +3.59% above its 20-day and +4.10% above its 50-day moving averages. The SPX is -2.27% below its 1257.64 year-end close. Next resistance is at 1246.56; next support is at 1219.16.
Tuesday. The major indexes gapped lower, trended lower through the day, and ended near the day’s low. The DJI, SNYSE composite, SPX, and Nasdaq lost -1.74%, -1.95%, -2.00%, and -2.26%, respectively. For the SPX, the loss marked its first since October 19th and its largest since October 3rd, the day prior to the start of the current uptrend. Volume heavied up, but remain mixed and just 0.89x the NYSE composite 50-day moving average. Consumer confidence weakened, contributing some gloom to the morning trade. Commentary focused primarily on Europe, but disappointing earnings from NFLX, MMM, AKS, TROW, and MF contributed to the equities’ setbacks. A late FT commentary, which largely repeated an earlier Reuters story, pressured markets after 3:00, adding to the day’s retreat. Utilities, consumer goods, and technology led, but ended at least -1.26% lower. Oil and gas, basic materials, and financials were the worst performing segments, down at least -2.02% on the day.
Trading desks reported being better to buy through most of the day, but important potential catalysts this week and next prevent aggressive short-selling or positioning. Some expressed surprise that losses weren’t worse given the headlines.
Volume increased on the SPX and NYSE composite indexes, which added to their distribution day counts. Distribution days number 2 on the SPX and NYSE composite, and 1 on the DJI and Nasdaq, since the uptrend commenced on October 4th.
In Asia, equity markets closed mixed on mixed volume, with better results in China. The Nikkei shed -0.16%, while the Hang Seng and Shanghai composite shrugged off Wall Street’s losses yesterday and gained +0.52% and +0.74%, respectively. NKY volume rose +1.87%, but the value of equities traded on the exchange was below ¥1 trillion for the 8th consecutive day, the longest such run since January 2004. Commentary focused on cautious investor attitudes given present Eurozone uncertainties. In China, HSI volume fell -11.6%. SHCOMP volume rose +20.2%. Commentary there focused on comments by Chinese Premier Wen Jiabao that China will study “stimulative policies” for smaller companies, suggesting a prospective easing of monetary policy.
In Japan, the NKY closed at 8,748.47, compared to 8,762.31 the prior day. The NKY closed +0.80% above its 20-day moving average. The NKY gapped lower to the intraday low of 8,642.56, but then reversed and moved higher to a small gain at midday. A late afternoon rally carried the NKY to an unsuccessful test of resistance at 8,800, but profit taking in the final minutes brought the index to its modest lower close. und and trended lower through the day to a 8,55.38 intraday low just before the close. Most market segments closed lower. Industrials and technology managed to gain at least +0.90%. Financials lost -0.29%. Laggards were consumer goods, health care, and consumer services, which ended at least -0.81% lower.
In China, the Hang Seng Index closed at 19,066.54, compared to the prior day’s 18,968.20 close. The index also gapped lower, but immediately reversed and reached its 19,106.7 intraday high at midday. In the afternoon session, profit taking brought the index back to the 18,850 level, but a late rally recovered most of the lost ground. The index closed +6.06% and +0.66% above its respective 20-day and 50-day moving averages. Most market segments closed higher. Leaders were basic materials, consumer services, and oil and gas, which added at least +0.76%. Financials added +0.46%. Technology, consumer goods, and utilities were the laggards.
In Shanghai, the SHCOMP closed at 2,427.48, up from 2,409.67 the prior day and rising for a 3rd consecutive day. The index opened lower and quickly traded to a 2,394.73 intraday low, but immediately reversed and traded higher within the first half hour. The index reached a 2,448.98 intraday high in mid-afternoon, before profit taking pared gains. The SHCOMP closed +1.30% above its 20-day moving average, but -2.12% below its 50-day moving average. All market segments closed higher. Leaders were consumer services, technology, and health care, with gains of at least +1.36%. Utilities, financials, and oil and gas lagged, but added at least +0.15%.
In Europe, equities are higher and near their intraday highs. Commentary also focuses on the Eurozone leaders’ summit, the 2nd in 4 days, to address the debt crisis. A deal has apparently been reached to haircut Greek sovereign debt by 50%. Banks will have until June 2012 to raise private capital sufficient to meet regulatory capital requirements. The Euro Stoxx 50, DAX, and FTSE are up +0.43%, +0.23%, and +0.41%, respectively. The DAX has rallied more than 20% from early October lows. On the Euro Stoxx 50, the index open mixed, but traded slightly lower through the morning sessions before reversing higher late in the morning. Most market segments are higher, led by industrials, telecommunications, and technology, with gains of at least +0.75%. Oil and gas, financials, and basic materials are the laggards. Financials are +0.04% higher.
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 0.14222%, up from 0.14167% Monday, but below the 0.25188% year-end level. USD 3-month LIBOR rose to 0.42222%, the highest level of the year, up from 0.42028% the prior day and compared to 0.30281% at year-end 2010.
- The US Libor-OIS (LOIS) spread rose to 34.7 bps, the highest level of the year, from 34.2 bps the prior day and compares to 12.0 bps at the end of 2010. Euribor-OIS rose to 78.8 bps, also the year’s high, from 76.6 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 10.0 bps, unchanged from 10.0 bps Tuesday and 2.0 bps Monday, but well off from a recent high of 33 bps on August 2nd.
- U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.266% and 2.135%, respectively, compared to 0.243% and 2.109% Tuesday. The yield curve widened to +1.869%, compared to +1.866% 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.
- The U.S. dollar is slightly stronger against the euro, pound, and yen. The dollar trades at US$76.169, compared to US$76.122 the prior day, and its US$76.527 50-day, US$75.622 100-day, and US$75.793 200-day averages. The euro trades at US$1.3918, compared to US$1.3908 Tuesday and US$1.3929 the day prior. The euro trades below its US$1.3856 50-day and US$1.4081 100-day averages. In Japan, the dollar trades at ¥75.86, compared to ¥76.09 Tuesday and ¥76.10 the prior day. The yen trades better than its 50-day moving average ¥76.777.
- Commodities prices are mostly higher, with higher energy, precious metals, copper, lower aluminum, and higher agriculture prices.
- The VIX ended at 32.22, up +10.1% from 32.22 at the prior close. The VIX is -8.27% below its 20-day moving average 35.12.
- The Euro Stoxx 50 volatility index (V2X) is up +0.28% to 37.94, compared to 37.84 the prior day. The V2X index trades -8.59% below its 20-day moving average of 41.49, -28.0% below the 56.34 30-day high, and +17.6% above the 34.17 30-day low.
- The Hang Seng volatility index (VHSI) rose +4.66% to 36.59 from 37.84 the prior day. The VHSI index trades -3.45% below its 20-day moving average of 37.90.
- CBOE skew ended at 122.65, down -1.76% from 122.65 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. Today’s scheduled economic reports include September durable goods and capital goods at 8:30, and new home sales at 10:00. Durables goods fell -0.8%, slight better than -1.0% survey. Durable goods ex transportation was +1.7%, much better than survey +0.4%. Non-defense capital goods orders ex aircraft was +2.4%, a multiple of +0.5% survey. Thursday’s reports provide the first look at 3Q2011 GDP, inflation, and the latest week’s initial and continuing jobless claims.
Overseas news: Reports suggest European leaders will give banks until June 30, 2012 to raise core capital levels to a 9% threshold. This morning, German Chancellor Merkel spoke before the Bundestag, saying Germany will do “whatever is necessary” to preserve the euro currency. Today, European leaders meet at a Eurozone summit to discuss the a solution to the sovereign debt crisis. In October, Italian business confidence decline to the lowest level in two years, matching estimates.
Company news/ratings changes:
· MET – proposed dividend increase rejected by the Federal Reserve, will ask for increase again in 2012.
3Q2011 Earnings. The third quarter’s earnings reports have so far surprised expectations. Of the 168 S&P500 companies that reported earnings to date, 74% (125 out of 168) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat EPS expectations by an average of +5.8% (versus a historical average of +2%). EPS is up +14.4% over the prior year. Though challenged in the current operating environment, 84% 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 23 of the 24 BKX members reporting, 78% beat operating estimates with aggregated results surprising by +14.4% and 65% have beat revenue estimates with aggregated surprising by +4.2%. EPS is up +21.3% 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 12.4x estimated 2011 earnings ($99.38) and 11.0x estimated 2012 earnings ($111.57), compared to 12.6x and 11.2 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 +5.0%, and +4.0%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +17.2% and +31.6%, respectively.
Large-cap banks trade at a median 1.17x tangible book value, and 10.4x and 9.3x 2011 and 2012 consensus earnings, respectively, compared to 1.21x tangible book value and 10.7x/9.6x 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 +28.8% and +53.8%, respectively.
Options. Options markets are neutral to bearish. Composite options markets are neutral, index options markets are neutral to bearish, and equity options markets are neutral. The composite put/call ratio closed at 1.03, compared to 0.95 the prior day and below its 5- and 10-period moving averages of 1.07 and 1.08, respectively. The index put/call ratio closed at 1.29, compared to 1.47 the prior day and below the 5- and 10-period moving averages of 1.48 and 1.50, respectively. The equity put/call ratio closed the day at 0.77, compared to 0.53 the prior day and above its 5- and 10-period moving averages of 0.66 and 0.66, respectively.
NYSE Indicators. Volume fell -22.1% to 927.32 million shares, from 1.190 billion shares Friday, 0.82x the 1.132 billion share 50-day moving average. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by 1,991 (compared to 2,239 the prior day), or 4.81:1. Up volume led down volume by 6.92:1.
SPX. On higher volume, the SPX fell -25.14 points, or -2.00%, to end at 1229.05. Volume rose +10.43% to 775.47 million shares, up from 702.20 million shares Monday but below the 887.15 million share 50-day moving average. For the 52nd straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1180.62 vs. 1274.41 respectively). The SPX closed above its 200-week moving average (1139.11) for the 14th straight session.
From its prior close at 1254.19, the SPX opened flat, setting the intra-day high immediately, and selling off rapidly in the first 15 minutes. By 9:45, the index reached the 1233 level before momentum stabilized. Through 3:20, the index bounced between 1235 and 1245, unable to move higher or lower. A sell-off that began at 3:00 from the 1240 level took the index back to 1235 by 3:30 but the index failed to find support. The index fell into the close, reaching the intra-day low of 1226.79 at 3:57.
Technical indicators are negative but improving. 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 62nd straight session but above 1200 for the 10th straight session. The index closed above its April 2010 highs for the fifth time in the previous eight 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 +3.59%) above its 20-day moving average (1186.47) for the 13th time in 14 sessions. The index closed (by +4.10%) above its 50-day moving average for the 11th straight session. The index closed (by -0.16%) below its 100-day moving average (1230.96) after recording two straight closes above that average. The SPX closed -3.56% below its 200-day moving average, closing below that average for the 59th straight session. The 20- and 50-day moving averages rose. The directional momentum indicator is positive for the ninth straight session, and the trend is weak and increasing. Relative strength fell to 56.58 from 62.67, a neutral range. Next resistance is at 1246.56; next support is at 1219.16.
BKX. On lower volume, the KBW bank index fell -1.27 points, or -3.17%, to end at 38.78, more than erasing its prior day gains, recording its 58th close below the prior 52-week low of 42.70 from August 25, 2010 but and its 56th close below 40 in the last 57 sessions. Volume fell -4.85% to 89.26 million shares, down from 93.81 million shares Monday and below the 111.76 million share 50-day average. The BKX closed -9.77% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -33.08% and -30.29% below its April 23, 2010, and February 14, 2011 respective closes.
Financials were the market’s worst performing sector, and regionals underperformed large-cap banks. The BKX gapped lower at the open to 39.70 and fell -1.0 point in 15 minutes to reach 38.85 by 9:45. Through 11:00, the index rebounded back to 39.60 and traded between 39.60 resistance and 39.20 support through 2:30. The index broke below 39.20 at 2:30 and began a closing bell sell-off at 3:00 from the 39.20 level down to the intra-day low of 38.69 at 3:58.
Technical indicators are mostly negative, but are improving. Bank stocks are leading the market’s direction, which switched to an uptrend after October 13’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 10th close above that level since October 12th. Moving averages align bearishly, as the shorter duration averages are below the longer duration averages, although all major gaps are narrowing, and some averages are rising. The 50-day average (37.30) crossed below the 100- and 200-day moving averages (41.52 and 46.79, respectively) on April 25th and June 16th. The 20-day closed (by -0.12 points) below the 50-day for the 157th straight day, but the gap narrowed. The 50-day moving average closed (by -9.50 points) below the 200-day moving average for the 94th straight session, and the gap narrowed. The 100-day moving average closed (by -5.27 points) below the 200-day moving average for the 72nd straight session, but the gap narrowed. The BKX closed above its 20-day moving average for the 13th time in the previous 14 sessions and above its 50-day moving average for the 10th time in 11 sessions. The BKX closed below its 100- and 200-day moving averages for the 77th and 102nd consecutive sessions, respectively. The index closed below 50.0 for the 102nd straight session and below 40.00 for the 55th time in the last 56 sessions. The directional movement indicator is positive for the seventh straight session, and the trend is weak and stable. Relative strength fell to 53.69 from 58.47, a neutral range. Next resistance is 39.50; next support at 38.38.