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U.S. Futures Flat as Hopes For Year-End Rally Fades

Dec. 14, 2011 8:49 AM ETWFC
Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.
This morning. U.S. equity markets are in correction. All major indexes closed above 20- and 50-day moving averages. The SPX, DJI, and Nasdaq are above their 100-day moving average. Only the DJI closed above its 200-day moving average.
U.S. equity futures are modestly higher, and improving slightly, after falling following a disappointing, if expected, market response to Italy’s 5-year bond auction. The dollar is slightly stronger compared to the euro and yen, but slightly weaker compared to the British pound. U.S. equity options markets suggest a mixed short-term outlook. Commodities prices are lower. U.S. Treasury yields are slightly higher, with the 10-year at 1.970%, up from 1.965% Tuesday. U.S. repo rates edged up to 11 bps. Overnight and 3-month LIBO remain elevated. Euribor-OIS spreads are near 2011 highs. After a fair value adjustment of -0.42 points, March SPX equity futures are at 1220.00, up +0.62 points. The SPX opens at 1225.73, -10.1% below its April 29 multi-year 1363.61 closing high, +0.14% above its 20-day and +0.10% above its 50-day moving averages. The SPX is -2.54% below its 1257.64 year-end close. Next resistance is at 1243.92. Next support is at 1213.49.
Tuesday. U.S. equity markets reversed early strong gains and closed lower. Most of the sell-off coincided with the 2:15 release of yesterday’s FOMC meeting summary, which reiterated November’s commentary and contained no new stimulus initiatives. Though roundly expected, markets seemed to want more, and took profits or reduced positions. However, market weakness began earlier, as intraday highs were set in the first hour. Also, European equities sold off early gains and had closed lower. All major indexes posted losses. The DJI closed off -0.55%, followed by the SPX, NYSE composite, and Nasdaq, which lost -0.87%, -1.17%, and -1.26%, respectively.
Trading volumes rose, but remained unimpressive at just 0.95x the 50-day NYSE average. From its prior day 1236.47 close, the SPX gapped higher to open above 1245, and rose to 1249.86 in the first hour, before beginning its slide through session end, finally finding support at 1220 (the intraday low was 1219.43) in the final hour. Market breadth was negative. Most market segments closed lower. Utilities managed a +0.53% increase. Other leaders were health care and telecommunications, which closed at least -0.10% lower. Laggards were financials, consumer services, and basic materials, which closed off at least -1.43%.
Technically, the day’s developments were negative, as the SPX closed below both 1230 and 1235 (50% retracement, 38% Fibonacci retracement, respectively), though the SPX managed to close barely above its 50-day moving average. Trading desks suggested that the reversal and poor market actions suggest an end to year-end rally hopes. Many market participants have stepped aside, waiting for the new trading year. Conviction is lacking in either direction.

In Asia,
on mixed volumes, Asian equity markets closed moderately lower. In Tokyo, the NKY fell -0.39%, but rallied from its worst mid-afternoon levels. Volume fell -13.0%. In Hong Kong, the Hang Seng fell -0.50%, on a +14.3% increase in volume. The Shanghai composite fell -.089% on a -24.6% decrease in volume. The HSI and SHCOMP closed down for a 5th consecutive day. Commentary focused on yesterday’s FOMC meeting summary, which included no new stimulus, and slower than expected November retail sales.
In Japan, the NKY closed at 8,519.13, down from 8,552.81 at the prior close. The NKY closed +0.41% above its 20-day moving average, but down -16.7% for the year. The index opened at 8,513.77, and traded to an intraday high of 8,540.57 in the morning session, but lost momentum and traded to an intraday low of 8,486.37 in mid-afternoon, before rallying into the close. Most market segments closed mixed. Leaders were utilities, consumer services, and telecommunications, which closed up +0.43%. Financials closed off -0.71%. Laggards were consumer goods, technology, and oil and gas, which closed -0.76% lower.
In China, the Hang Seng Index closed at 18,354.43, down from 18,447.17 at the prior close. The index gapped lower to open at 18,301.10, but rallied immediately back to 18,450. Through late-afternoon, the index was range bound between 18,475 and 18,400, but weakened into the close. Volatility fell -2.88%. The index ended -0.96% and -1.89% below its respective 20-day and 50-day moving averages. Market segments closed mixed. Leaders were consumer services, utilities, and technology, which closed up at least +0.60%. Financials closed off -0.61%. Laggards were oil and gas, consumer goods, and basic materials, which closed off at least -0.85%.
In Shanghai, the SHCOMP closed at 2,228.53, down from 2,248.59 at the prior close. The index opened at 2,241.39, and after some brief weakness, rallied to an intraday high of 2,256.74, but selling pressure ensued and the index trended lower through the session’s remainder to end just off its 2,224.72 intraday low. The SHCOMP closed -5.97% and -7.53% below its respective 20-day and 50-day moving averages. Market segments closed mixed. Leaders were utilities, oil and gas, and telecommunications, which closed up at least +0.27%. Financials lost -0.54%. Laggards were basic materials, industrials, and technology, which closed at least -1.75% lower.
In Europe, equities opened weakly, trended lower, and currently trade near their intraday lows. Commentary focuses on a weak Italian 5-year bond offering and the FOMC meeting summary, which offered no new stimulus. The Euro Stoxx 50, FTSE, and DAX are down -1.46%, -1.14%, and -1.32%, respectively. Compared to the prior day’s 2,260.98 close, the Euro Stoxx 50 trades at 2,227.12, off the compared to an intraday high of 2,261.75. The index is -1.01% and -0.98% below its respective 20- and 50-day moving averages. Most market segments are lower. Technology is up +0.11%. Other leaders are consumer services and telecommunications, which are off at least -0.57%. Laggards are industrials, utilities, and financials, which are down at least -1.55%.
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. USD LIBOR is 0.15050%, unchanged from 0.15050% Tuesday, but below the 0.25188% year-end level. USD 3-month LIBOR rose to 0.55505%, the highest of the year, up from 0.54625% the prior day and 0.30281% at year-end 2010.
  • The US Libor-OIS (LOIS) spread rose to 46.0 bps, the year’s high, unchanged from 46.0 bps the prior day, and compares to 12.0 bps at the end of 2010. Euribor-OIS is 95.2 bps, unchanged from 95.2 bps Tuesday, 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 11.0 bps, unchanged from 11.0 bps Tuesday, but well off from the August 2nd high of 33 bps.
  • U.S. Treasury yields are higher at the long end of the curve, with 2- and 10-year maturities yielding 0.230% and 1.965%, respectively, compared to 0.230% and 1.974% Tuesday. The yield curve widened to +1.744%, compared to +1.744% the prior day. In the past year, the 2- and 10-year spread 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 mixed, slightly stronger against the euro and yen, though slightly weaker against the pound. The dollar trades at US$80.374, compared to US$80.242 the prior day, and above its US$77.750 50-day, US$76.732 100-day, and US$75.866 200-day averages. The euro trades at US$1.2997, compared to US$1.3037 Tuesday and US$1.3187 the day prior day. The euro trades worse than its US$1.3592 50-day and US$1.3806 100-day averages. In Japan, the dollar trades at ¥77.03, compared to ¥77.64 Tuesday and ¥77.56 the prior day. The yen trades worse than its 50-day moving average ¥77.279.
  • Commodities prices are lower, with lower energy, precious metals, aluminum, copper, and agriculture prices.
Volatility, Skew:
  • The VIX ended at 25.41, down -1.01% from 25.67 at the prior close. The VIX is -15.7% below its 20-day moving average 30.42.
  • The Euro Stoxx 50 volatility index (V2X) is down -1.34% to 33.67 the prior day. The V2X index trades -12.4% below its 37.98 20-day moving average, -25.6% below the 44.69 30-day high, and +3.03% above the 32.25 30-day low.
  • The Hang Seng volatility index (VHSI) fell -2.88% to 27.95 from 28.78 the prior day. The VHSI index trades -2.88% below its 31.77 20-day moving average.
  • CBOE skew fell -0.68% to 119.44, from 120.26 at the prior day’s close and near the top of a neutral (115-120) range. The index tracks the cost of buying out-of-the-money, long-dated options. A fall suggests that investors are buying more calls than puts, a bullish signal.
U.S. news and economic reporting. Today’s economic reports are the latest week’s MBA mortgage applications, which rose +4.1% compared to +12.8% the prior week. At 8:30, November import prices are reported.
Overseas news: Today, Italy auctioned €3 billion in 5-year notes at 6.47% yields, a 14-year high, and under weaker demand than the prior auction. In October, Eurozone industrial production declined -0.1% over the prior year, missing expectations for no change. Today, Bundesbank President Weidmann said his institution will only provide new money to an IMF-led European rescue fund if countries beyond Europe do so as well. Today, China announced plans to imposed anti-dumping duties on U.S. made cars.
Company news/ratings changes:
· WFC – upgraded to buy at JP Morgan, $41 price target.
3Q2011 Earnings. The third quarter’s earnings reports surprised expectations. Of the 475 S&P500 companies that reported earnings to date, 73% (346 out of 475) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat EPS expectations by an average of +4.5% (versus a historical average of +2%). EPS is up +14.8% over the prior year. Though challenged in the current operating environment, 80% of companies reported increased revenues over the prior year and 58% 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 all of the 24 BKX members reporting, 75% beat operating estimates with aggregated results surprising by +14.3% and 63% have beat revenue estimates with aggregated surprising by +4.2%. EPS is up +21.2% over the prior year, while revenue is up +1.5%. In the third quarter of 2011, the BKX earned $1.24 per share, beating analysts’ estimate of $1.15 per share, and compared to $1.12 and $0.71 in 2Q11 and 3Q10, (an +11% and +48% 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 ($99.04) and 11.3x estimated 2012 earnings ($108.92), compared to 12.5x and 11.4 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 +4.7%, and +1.5%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +16.9% and +28.5%, respectively.
Large-cap banks trade at a median 1.18x tangible book value, and 10.8x and 9.3x 2011 and 2012 consensus earnings, respectively, compared to 1.20x tangible book value and 10.9x/9.4x 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 +30.2% and +53.8%, respectively.
Options. Options markets are mixed. Composite options markets are neutral, index options markets are neutral to bearish, and equity options markets are bullish. The composite put/call ratio closed at 1.17, compared to 0.88 the prior day and above its 5- and 10-period moving averages of 1.02 and 0.97, respectively. The index put/call ratio closed at 1.45, compared to 1.19 the prior day and above the 5- and 10-period moving averages of 1.27 and 1.22, respectively. The equity put/call ratio closed the day at 0.81, compared to 0.62 the prior day and above its 5- and 10-period moving averages of 0.73 and 0.69, respectively.
NYSE Indicators. Volume rose +19.1% to 926.53 million shares, from 777.79 million shares Monday, 0.95x the 978.4 million share 50-day moving average. Market breadth was negative, and up volume lagged down volume. Advancing stocks lagged decliners by -1,377 (compared to -1867 the prior day), or 0.37:1. Up volume lagged down volume by 0.22:1.
SPX. On higher volume, the SPX fell -10.74 points, or -0.87%, to end at 1225.73. Volume rose +20.38% to 735.60 million shares, up from 611.05 million shares Monday and the highest volume of December, but still below the 751.93 million share 50-day moving average. For the 85th straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1224.48 vs. 1262.46, respectively). The SPX closed above its 200-week moving average (1134.75) for the 47th straight session.
From its prior close at 1236.47, the SPX gapped higher at the open to the 1245 level and by 10:00, rose to the intra-day high of 1249.86. Through 11:10, the index retraced its gains back to the break-even line. The market held in a narrow range until the Fed’s 2:15 policy statement, which disappointed. The index turned negative at 2:35, reached the 1230 level by 3:20, and hit the intra-day low of 1219.43 at 3:34. A small rally into the close lifted the index back above its 20- and 50-day moving averages, but the market closed at the bottom end of the day’s range and with its second consecutive loss.
Technical indicators are mostly negative. The market returned to a correction following mid-November’s reversal. The SPX closed below 1300 for the 95th straight session but above 1200 for the 10th straight session. The index closed above its April 2010 highs for the 10th straight session. The 50-day moving average crossed above the 100-day moving average on December 6th, having been below that average since July 11th. The 100-day moving average crossed the 200-day average to the downside on September 7th and the spread is still widening. The SPX closed (by +0.14%) above its 20-day moving average (1223.99) for the 10th straight session. The index closed (by +0.10%) above its 50-day moving average for the 10th straight session. The index closed (by +1.46%) above its 100-day moving average (1208.04) for the 10th straight session. The SPX closed -2.91% below its 200-day moving average, closing below that average for the 30th time in 31 sessions. The 50-day moving average rose. The directional momentum indicator is negative for the second straight session, and the trend is weak and declining. Relative strength fell to 48.80 from 51.32, a neutral range. Next resistance is at 1243.92; next support is at 1213.49.
BKX. On higher volume, the KBW bank index fell -0.59 points, or -1.55%, to end at 37.58. The index recorded its 91st straight close below the prior 52-week low of 42.70 from August 25, 2010 and finished below the 40-level for the 26th time in the last 27 sessions. Volume rose +27.36% to 84.09 million shares, up from 66.03 million shares Monday but below the 96.00 million share 50-day average. The BKX closed -12.56% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -35.15% and -32.45% below its April 23, 2010, and February 14, 2011 respective closes.
Financials underperformed the market, and regional banks underperformed large-cap banks. From its prior close at 38.17, the BKX gapped higher to 38.40 and rose to the intra-day high of 38.67 at 9:55. The index retraced its gains back to break-even by 11:05, and held in a narrow, but positive range through the Fed’s 2:15 policy statement. The BKX sold off following the statement, turning negative at 2:35, reaching 37.80 by 2:45, and setting the intra-day low of 37.13 at 3:35. The index rallied +1.0% into the close but still finished at the low end of the day’s range.
Technical indicators are mostly negative. Bank stocks are leading the market’s direction, which returned to correction following mid-November’s reversal. Moving averages align bearishly, as most shorter duration averages are below the longer duration averages and some moving averages are falling. The 50-day average (38.20) crossed below the 100- and 200-day moving averages (38.54 and 44.17, respectively) on April 25th and June 16th. The 20-day closed (by -0.64 points) below the 50-day for the eighth straight session, and the gap expanded. The 50-day moving average closed (by -5.97 points) below the 200-day moving average for the 129th straight session, but the gap narrowed. The 100-day moving average closed (by -5.63 points) below the 200-day moving average for the 107th straight session, and the gap expanded. The BKX closed (by +0.05%) above its 20-day moving average for the 10th straight session. The index closed (by -1.62%) below its 50-day moving average for the first time in 10 sessions. The index closed (by -2.47%) below the 100-day moving average for the third time in four sessions. The index closed (by -14.91%) below its 200-day moving averages for the 136th consecutive session. The index closed below 50.0 for the 136th straight session and below the 40.0 level for the 26th time in 27 sessions. The directional movement indicator switched to negative for the first time in 10 sessions, and the trend is weak and stable. Relative strength fell to 47.77 from 50.18, a neutral range. Next resistance is 38.46; next support at 36.92.

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