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U.S. Futures Rebound After Sell-Off; Japan Plummets, But Futures Firm; Europe Mixed

This morning. Today, U.S. equity futures are rallying follow yesterday's sell-off, though trading desks report low conviction levels. Japan equities sold off even more sharply, with the Nikkei down -4.18%, though tomorrow's futures are higher. The Hang Seng reopened and ended with a -2.89% loss. Chinese equity markets remain closed through Thursday. The market's focus remains squarely on this Friday's U.S. employment report, which follows the surprisingly weak January employment report.

In January, U.S. equities closed lower, their first such lower January since 2010. Wednesday's Nikkei 225 March 2014 (NKH4) equity futures are up +1.724%.

The quarter's earnings reports remain generally positive, and U.S. financials' earnings are particularly strong. This morning, economic reporting is generally light. United Kingdom construction PMI surprised positively. In China, equity markets remain closed for the New Year's holiday. Short-term Chinese interest rates appear to be stabilizing at around 5%, about +1.50% higher than in the recent past.

Monday, U.S. equity markets opened modestly higher, but quickly eased and then fell after a disappointing 10:00 January manufacturing ISM report. With only brief respites, the lower trend continued through the session to a late 1739.66 intraday low. The index ended at 1741.89, down -40.70 points on the day. On lower but above average volume, the S&P 500 (SPX), DJ Industrials (Private:DJI), Nasdaq, and NYSE composite fell -2.28%, -2.08%, -2.61%, and -2.27%, respectively. The DJ Transports (TRAN) fell -3.23%. NYSE volume fell -3.23% to 1.24x the 20-day moving average. Since January 29th, the U.S. equity market outlook is "in correction", following a "market uptrend" that commenced on September 8th.

Trading desks reported constant selling pressure that was never rushed or panicked, with participation from both hedge funds and long-only funds. Buyers were on the sideline through the session. Anxiety levels have risen sharply. Rallies are viewed with suspicion. With SPX equities trading at a 15.8x 2013 earnings multiple, attention focuses on 2014 earnings and valuations (15.8x times survey $117.97 2014 SPX operating earnings suggests a 1865.50 SPX level next year, a +7.10% rise).

Technicals worsened. Only the Nasdaq closed above its 100-day moving average. All SPX market segments closed at least -0.88% lower. Market breadth was negative, and up volume lagged down volume. Volatility rose sharply to their highest levels since late 2012. Treasury bond markets strengthened. The U.S. Treasury 10-year bond yield fell -6.89 bps to 2.5761%, compared to 2.6440% at the prior close.

This morning, 10-year U.S. Treasury yields are up +3.89 bps at 2.6149% compared to the prior close. Spanish and Italian 10-year debt yields are 3.76% and 3.80%, respectively, compared to 3.75% and 3.78% the prior day. The U.S. dollar is mixed.

U.S. options markets improved to neutral to bullish, compared to neutral the prior day. The CBOE SKEW fell -1.71% to 126.17, compared to 128.37 the prior day, above a neutral range (115-120), but below 130, which generally correlates well with short-term market tops.

In pre-market futures trading, March SPX equity futures (SPH4) price near the top of a 1734-1746 trading range. After a fair value adjustment of +3.24 points, SPX equity futures price at 1745.75, up +9.76 points. The SPX opens -4.15%, -3.84%, and -1.58% below its respective 20-, 50-, and 100-day moving averages, but +2.02% above its 200-day moving averages. Initial resistance is 1771.26. Initial support is 1726.09, then 1710.29.

In Asia, equity markets in Japan and Hong Kong closed much lower. The Nikkei 225 index (NYSEARCA:NKY) closed off -4.18%, its largest loss in the past 8 months, and closed at the intraday low. The Hang Sang index (HSI) reopened after Chinese New Year's holidays last Friday and Monday, and closed off -2.89%. The Shanghai composite (SHCOMP) remains closed for holiday this Thursday. Indexes are at least -3.92% lower in 2014. The indexes closed mixed in December. All closed higher in November. The NKY and HSI are now in correction, ending bull markets that began in July 2012. The NKY is -14.0% below its year-end highs. In January, the NKY fell -8.45%, its largest monthly drop since May 2012, which also marked the start of the index's bull market. Today's volumes are unavailable.

Economic reporting was light. Commentary suggested that Japanese equity losses reflect institutional money managers taking profits. The Japanese yen weakened slightly after strengthening modestly in recent days. In China, short-term interbank lending rates rose, as 7-day Shibo rates fell to 4.98%, compared to 5.10% the prior day.

Regional relative strength indexes (RSI) suggest that markets are oversold. The NKY RSI fell to 27.92, compared to 34.49 the prior day, its worst showing since May 2012, which marked the start of the index's long bull market. The HSI RSI ended at 25.24, compared to 32.96 the prior day. The SHCOMP's RSI closed Thursday at 43.54, compared to 47.41 the prior session. On June 27, 2013, the index's RSI fell to a low of 15.27, which was also last year's low index close.

This week, the NKY closed down -6.08%, the HSI is down -2.89%, and the SHCOMP has been closed for holiday. Last week, the SHCOMP closed down -0.01%, while the NKY and HSI closed off -0.61% and -5.00%, respectively. In January, the NKY lost -8.45%, the HSI closed down -5.45%, and the SHCOMP lost -3.92%. In December, the NKY rose +4.02%. The HSI and SHCOMP closed down -2.41% and -4.71%, respectively.

In 2014, the NKY is down -14.0%. The HSI and SHCOMP are down -8.19% and -3.92%, respectively. In 2013, the NKY rose +56.7%. The HSI closed up +2.87%. The SHCOMP closed down -6.75%. In 2012, the NKY rose +1.37%. The HSI rose +22.9%. The SHCOMP rose +3.17%.

In Japan, the NKY closed at 14,008.47, compared to 14,619.13 the prior day and -64.0% below its late-1989 38,915.87 high close. The index gapped lower to open at 14,350, but fell immediately to initial support at 14,200. A late morning rally brought the index to 14,300, but the index traded lower through the afternoon to end at the intraday low. The index closed -9.80%, -9.95%, -6.43%, and -2.86% below its 20-, 50-, 100-, 200-day moving averages. Most market segments closed at least -0.88% lower. Leaders were telecommunications, which rose 0.31%, and consumer services and health care, which fell at least -3.51%. Financials fell -4.24%. Laggards were basic materials, industrials, and consumer goods, which fell at least -4.91%.

In China, the HSI closed at 21,397.77, compared to 22,035.42 at last Thursday's close. The index gapped lower and traded around 21,550 until early afternoon, then traded lower to a late 21,388.61 intraday low. Most market segments closed lower. Leaders were utilities, which rose +0.16%, and industrials and consumer goods, which fell -1.99%. Financials fell -2.33%. Laggards were consumer services, oil and gas, and technology, which fell at least -3.81%. The index closed -10.5% below its recent December 3rd 23,910.47 high, but +17.7% above its 18,185.59 June 4, 2012 low.

Last Thursday, in Shanghai, the SHCOMP closed at 2,033.08, compared to 2,049.91 at the prior close, +4.26% above the 1,950.01 June 27th close, last year's low.

In Europe, the major equity indexes are modestly lower, with greater weakness in Germany, but are near their intraday lows. The Euro Stoxx50, FTSE 100, CAC 40, and DAX are down -0.41%, -0.41% -0.05%, -1.13%, respectively. This week, the indexes are at least -1.10% lower. Last week, the indexes closed at least -2.42% lower, compared to gains of at least +1.33% the prior week. In January, the indexes close at least -3.22% lower. All closed higher in December.

European bourses have recently outperformed U.S. equity indexes. Euro Stoxx50 relative strength (RSI) is 32.48, in the lower end of a neutral (30-70) range, compared to 33.73 at the prior close, and now worse than December 13th's oversold 32.71, which marked the month's low. The indexes lowest recent RSI level was 25.77 on June 24th, which marked the year's 2,494.54 closing low.

Today, the Euro Stoxx50 trades at 2,950.50, -6.89% below its 3,168.76 January 15th post-2008 high close, and -43.8% below its 5,249.55 March 31, 2000, all-time closing high. The index gapped lower, set an early 2,944.13 intraday low, then briefly rallied to 2,965.57 before weakening into the afternoon. Most market segments are lower. Leaders are utilities, which are up +0.17%, and financials and consumer services, which are at least -0.14% lower. Laggards are technology, telecommunications, and basic materials, which are down at least -0.72%.

This week, the Euro Stoxx50, CAC 40, and DAX are down -2.10%, -1.10%, -1.46%, and -2.36%, respectively. Last week, the Euro Stoxx 50, FTSE 100, CAC 40, and DAX closed down -0.47%, -2.30%, -0.10%, and -0.49%, respectively. In January, the Euro Stoxx50, FTSE 100, CAC 40, and DAX closed down -3.06%, -3.54%, -3.03%, and -2.575, respectively. In December, the Euro Soxx50, FTSE 100, CAC 40, and DAX closed up +0.72%, +1.48%, +0.02%, and +1.56%, respectively. In 2013, the indexes closed up +18.0%, +14.4%, +18.0%, and +25.5%, respectively, compared to +13.8%, +5.84%, +15.2%, and +29.1% the prior year.

4Q2013 SPX Earnings. Of 262 (of 499) reporting companies, 206 or 78.9% surprised positively on earnings, with an average +5.53% surprise average. Of reporting companies, 172 or 65.7% reported sales or revenues above estimates. The average sales/revenue surprise is +0.856%. Financials lead with +11.1% EPS and +2.74% revenue surprises.

Valuation. The SPX trades at 15.8x estimated 2013 earnings ($110.15), 14.8x estimated 2014 earnings ($117.97), 13.3x estimated 2015 earnings ($131.02), and 12.0x estimated 2016 earnings ($144.83). The 10-year average median price/earnings multiple is 15.9x. Analysts expect 2013, 2014, 2015, and 2016 earnings to grow +6.52%, +13.8%, +10.9%, and 11.1%, respectively.

The BKX trades at 15.9x 2012 adjusted EPS ($4.32), 12.7x estimated 2013 earnings ($5.16), 11.7x estimated 2014 earnings ($6.15), 10.6x 2015 earnings ($6.15), and 9.4x 2016 earnings ($6.95). Analysts expect 2013, 2014, 2015, 2016 EPS will grow +19.4%, +8.08%, +103%, and +12.9%, respectively.

Composite, index, and equity options. Options markets are neutral to bullish, from neutral the prior session. Composite options are bullish, index options are bullish, and equity options are neutral. The composite put/call ratio is 0.80, compared to 0.87 the prior day, and better than 5- and 10-period moving averages of 0.84 and 0.84, respectively. The index put/call ratio is 0.69, compared to 0.70 the prior day, and better than its 5- and 10-period moving averages of 0.93 and 0.94, respectively. The equity put/call ratio closed the day at 0.92, compared to 0.99 the prior day, and worse than its 5- and 10-period moving averages of 0.84 and 0.82, respectively.

NYSE Volume, Breadth Indicators. Volume fell -3.23% to 921.64 million shares, compared to 952.37 million shares the prior day, 1.24x the 744.50 million shares 20-day moving average. Market breadth was negative, and up volume lagged down volume. Advancing stocks lagged by -2,169 (compared to +1,616 the prior day), or 0.18:1. Up volume was 0.05:1 down volume.

Distribution day count and market outlook. On January 28th, the market outlook worsened to "in correction", ending the uptrend that commenced on September 9th, when the SPX opened at 1655.17, with a subsequent gain of +7.19%.

Libor, LOIS, Currencies, Treasuries, Commodities:

· USD LIBOR is 0.08500%, compared to 0.08550% the prior day. USD 3-month LIBOR is 0.23645%, down from 0.23560% the prior day, and compares to the January 4, 2013, recent peak of 0.58250%.

· The US Libor-OIS (LOIS) spread is 15.245 bps, compared to 15.060 bps the prior day, and compares to the recent June 12, 2012, 46.785 bps high. Euribor-OIS is 15.400 bps, down from 15.500 bps the prior day, and down from the December 27, 2011, high of 98.800 bps. Moves in the LOIS indicate changes in intra-bank lending risk premiums.

· The 3-month Euro basis swap is -6.413 bps, compared to -6.631 bps the prior day, up from a trough of -147.00 bps on December 14, 2011, but far better than a normal -10 bps and -40 bps range.

· Spanish 10-year debt yields are 3.75%, unchanged from 3.75% the prior day. Italian 10-year debt yields are at 3.80%, compared to 3.78% the prior day. German 10-year debt yields are 1.63%, compared to 1.64% the prior day. Japanese 10-year debt yields are 0.61%, compared to 0.62% the prior day.

· The U.S. government overnight repo rate is +2 bps, compared to +3 bps the prior day. The January 2, 2013, 45 bps rate was the highest since late 2008. The record -2 bps low was on October 22, 2013.

· U.S. Treasury yields are lower, with 2- and 10-year maturities yielding 0.300% and 2.567%, respectively, compared to 0.294% and 2.576% Monday. The yield curve widened +1.49 bps, with the 2- to 10-year spread at +2.297%, compared to 2.282% the prior day. In the past year, the 2- and 10-year spread varied from a low of +1.429% on May 1, 2013, to a high of +2.648% on December 31, 2013.

· The U.S. dollar is mixed, better compared to the euro and Japanese yen, but weaker compared to the British pound. The dollar trades at US$81.110, compared to a US$81.210 intraday high and US$81.009 the prior day, and mixed compared to its $80.590 50-day, US$80.456 100-day, and US$81.382 200-day averages. The euro trades at US$1.3511, compared to a US$1.3494 intraday low and US$1.3525 the prior day. The euro trades worse compared to its US$1.3652 50-day and US$1.3606 100-day averages, and compares to a multi-year low of US$1.1877 on June 7, 2010. In Japan, the dollar trades at ¥101.30, compared to ¥100.98 the prior day. The yen trades better than its 50-day moving average ¥103.55, but better than its January 1st 105.31 closing low, its weakest prior multi-year closing low.

· Citigroup Economic Surprise Index worsened to +32.60, compared to +49.00 the prior day. The index is worse compared to its respective +46.48 5-day and +54.40 10-day moving averages. The index turned positive on February 25th and moved to a March 25th high of 30.20, but turned negative again on May 6th and fell to a low of -32.90 on June 10th. The index improved and turned positive on July 30th and rose to 53.30 on October 1st, but subsequently fell on dollar weakness to -2.10 on October 31st. It subsequently strengthened ti a 72.70 high on January 15th, but then fell in each successive session. After a lag, the CESIUSD correlates with EPS revisions.

· Commodities prices are mixed, with mixed energy, lower precious metals, lower aluminum and copper, and mostly higher agriculture prices.

Volatility, Skew:

· The CBOE SPX Volatility Index (VIX) rose +16.5% to 21.44, compared to 18.41 at the prior close. The VIX is +46.6% above the 14.63 20-day moving average. Its 30-day high is 21.48. Its 30-day low is 11.69. The index's all-time closing low is 9.31 on December 22, 1993. The long-term average is 20.14.

· The Euro Stoxx 50 volatility index (V2X) is 23.54, down -1.99% from 24.02 at the prior day's close. The V2X index trades +27.9% above its 18.41 20-day moving average, -4.29% below the 24.60 30-day high, and +59.7% above the 14.74 30-day low.

· The Hang Seng volatility index (VHSI) closed at 22.11, up +20.8% from 18.30 at Thursday's close. The VHSI index trades +43.2% above its 15.44 20-day moving average. Its lowest historical close was 11.72, on June 30, 2005.

· CBOE SKEW (SKEW) fell -1.71%, to 126.17, compared to 128.37 the prior day, above a neutral (115-120) range but below 130, a level which correlates well with market tops. The recent high was a record 143.20 on December 20th. Its recent low was 112.47 on May 25, 2013. Spikes in excess of 130 correlate well with short-term market tops, though not in October or November. The prior record high was 139.25, on March 12, 2012. The index rarely falls below 110, last on July 31, 2009. The index correlates with market tail risks, the cost of buying out-of-the-money, long-dated options, i.e., options not affected by expirations. A rise suggests that investors are buying more puts than calls, a bearish signal.

U.S. Economic Reporting and News:

· At 9:45, January ISM New York, with 63.8 prior.

· At 10:00, December factory orders, with -1.8% survey and +1.8% prior.

Overseas Economic Reporting and News:

· Hong Kong - December YoY retail sales rose +5.7%, compared to +7.2% survey and 8.5% prior.

· China - On February 1st, Manufacturing PMI, with 50.5 survey and 51.0 prior.

· Japan - January YoY monetary base rose 51.9%, compared to 46.6% prior.

· Eurozone - December MoM PPI rose +0.2%, compared to +0.2% survey and -0.1% prior.

· Italy - January new car registrations rose +3.24%, compared to +1.40% prior.

· Spain - January MoM unemployment rose +113.1 thousand, compared to +100.0 thousand survey and -107.6 thousand prior.

· United Kingdom - January PMI construction rose to 64.6, compared to 61.5 survey and 62.1 prior.

Company Ratings/News:

  • None.

Monday's Trade. On lower but above average volume, U.S. equity markets closed sharply lower. The SPX, DJI, Nasdaq, and NYSE composite fell -2.28%, -2.08%, -2.61%, and -2.27%, respectively.

Since January 28th, the U.S. equity market outlook is "in correction", ending the market uptrend that commenced on September 8th.

Market breadth was negative, with gainers 0..18:1 losing stocks. All SPX market segments closed at least -0.88% lower. Leaders were utilities, oil and gas, and health care. Financials fell -2.41%. Laggards were consumer services, industrials, and telecommunications, which fell at least -2.52%.

NYSE volume fell -3.23% to 921.64 million shares, compared to 952.37 million shares the prior day, 1.24x the 744.50 million share 20-day moving average volume. On the day, bond markets strengthened. The U.S. 10-year yield opened at 2.6621% and traded narrowly higher through mid-session. After a mid-day 2.6785% intraday high, the index strengthened markedly, with a late 2.5680% low yield. The index closed at 2.5761%, down -6.81 bps compared to the 2.6440% prior close.

From its prior day 1782.59 close, SPX futures suggested a modestly higher open. In the session's opening minutes, the index set an early 1784.83 intraday high, but the index turned lower ahead of the 10:00 ISM report. The index quickly sold down to 1770 after 10:00, then trended steadily lower to a late 1739.66 intraday low. The index closed at 1741.89, +62.1% above the 1074.77 October 4, 2011, intraday low.

The DJ Transportation index (TRAN) fell -3.23%, compared to the DJI's -2.08% loss, and -6.00% off its January 23, 2013 record close. From its prior 7,289.18 close, the TRAN rose to an early 7,324.97 intraday high, then trended lower through the session to a late 7,049.06 intraday low. The index closed at 7,053.75. Volume rose +16.5% to 1.20:1 average 15-day volume. The TRAN closed -4.06% and -3.02% below its respective 20- and 50-day moving averages, and +0.16% and +5.36% above its respective 100- and 200-day moving averages.

Market volatility rose +16.5% to 21.44, compared to 18.41 at the prior close. The VIX opened near the prior close, then trended higher through the session to a late 21.48 intraday high. The VIX closed +46.6% above the 14.63 20-day moving average. The VIX's all-time closing low was 9.31, on December 22, 1993.

The broader market's technical factors worsened, as exchanges surrendered their 100-day moving averages. All exchanges closed below their respective 5-, 10-, 20-, 50-, and 100-day moving averages. SPX relative strength (RSI) fell to 31.24, compared to 39.82 the prior day, in the lower end of a neutral range. The RSI is down from an overbought 71.26 on December 31st, when the SPX closed an earlier record high, but again below oversold levels of 35.14 on August 27th and 39.19 on October 9th. The CBOE put/call skew fell -1.71%, to 126.17, compared to 128.30 the prior day, well above a neutral 115-120 range, but below 130 for a 6th consecutive session, which correlates well with short-term market tops.

Last week, the SPX, DJI, and NYSE composite closed down -0.43%, +1.14%, -0.59%, and +0.67%, respectively. The prior week, the SPX, Nasdaq, and NYSE composite closed down -2.63% -3.52%, -1.65%, and -2.99%, respectively. In January, the SPX, DJI, Nasdaq, and NYSE composite closed down -3.56%, -5.30%, -1.74, and -4.16%, respectively. In December, the SPX, DJI, Nasdaq, and NYSE composite closed up +2.36%, +3.05%, +2.87%, and +2.13%, respectively.

In 2014, the SPX, DJI, Nasdaq, and NYSE composite are down -5.76%, -7.26%, -4.30%, and -6.33%, respectively. In 2013, the SPX, DJI, Nasdaq, and NYSE composite closed up +29.6%, +26.5%, +38.2%, +23.2%, respectively. All closed at least +5.91% higher in 2012.

KBW Bank Index (BKX). On lower and above average volume, the BKX closed at 65.50, down -2.72% from 67.33 at the prior day's close, and its 7th consecutive close below 70.00. At the open, the index traded higher, set an early 67.48 intraday high, then reversed lower before the 10:00 ISM report, finding initial support at 66.50, then 66.00, before losing ground again through the final two hours to a late 65.39 intraday low. Volume rose +24.5% to 77.520 million shares, compared to 62.262 million shares the prior day, 1.26x the 61.652 million share 15-day moving average.

Large cap banks outperformed the regional banks, as the KBW regional banking index (KRX) fell -3.78%.

This week, the BKX is down -2.72%. Last week, the BKX closed down -1.62%, compared to the prior week's loss of -2.66%. In January, the BKX closed down -2.79%. In December, the BKX rose +2.18%. In 2014, the BKX is down -5.43%. In 2013, the BKX rose +35.1%, better than the SPX's +29.6% rise. In 2012, the index rose +18.1%, compared to a +13.4% rise in the SPX.

The BKX is now +10.7% better than the June 24th 59.19 close, its worst since May 13th. The index crossed above 50 on December 17, 2012, 60 on May 15, 2013, and 70 on January 8, 2014. The BKX closed +101.2% above the 32.56 intraday low on October 4, 2011. Large-cap bank stocks have outperformed the broader market's rebound, with the SPX up +62.1% in the same period.

The BKX index closed -45.9% below its February 20, 2007, record 121.06 high. The BKX is up +251.8% from its 18.62 March 6, 2009, closing low.

Technical indicators worsened. The index surrendered its 100-day moving average. The index closed -5.79%, -4.38%, and -1.20% below its respective 20-, 50-, and 100-day moving averages, but +2.04% above its 200-day moving averages. The 20-day moving average fell -20bps to 69.53. The 68.50 50-day moving average fell -2 bps. Its 100-day moving average rose +1 bp to 66.29, and the 200-day moving average rose +6 bps to 64.19. The 20-day closed (by +1.03 points) above the 50-day, and the gap narrowed -6 bps. The 50-day moving average closed (by +4.31 points) above the 200-day moving average, and the gap narrowed -5 bps. The 100-day moving average closed (by +2.10 points) above the 200-day moving average, and the gap narrowed -2 bps.

The directional movement indicator worsened to -29.132, compared to -18.199 the prior day, extending its string of negative readings since January 24th. Relative strength worsened to 32.95, compared to 40.09 the prior day, in the lower end of a neutral range, down sharply from an overbought 75.56 and 71.88 on January 9th and 10th, respectively. The lowest most recent RSI level was 31.08 on November 14, 2012, which is also the date of the BKX's 2012 closing low. Next resistance is 66.86; next support is at 64.77.