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U.S. Futures Rise Modestly; Asia, Europe Shrug Off More Weak Chinese Economic News

This morning. Today, U.S. equity futures are modestly higher after fair value adjustment, but off earlier highs. In Asia, equity markets closed mixed, with better strength in Shanghai despite another poor economic report. Economic news focused on last evening's weaker than expected Chinese industrial production report. The dollar is weaker. Commodities are mixed. Thursday's Nikkei 225 March 2014 (NKH4) equity futures up +0.273%.

Since February 7th, the U.S. equity market outlook is "confirmed uptrend", following a brief, but sharp "in correction" episode that commenced on January 23rd. The S&P 500 Index (SPX) rose +3.96% subsequently. The quarter's earnings reports are nearly complete, with U.S. materials reports particularly strong, followed by financials.

Since last Tuesday's strong rally, world equity markets have given back most or all of last week's rally. The SPX, DJ Industrials (Private:DJI), Nasdaq, and NYSE composite closed down -0.51%, -0.41%, -0.63%, and -0.58%, respectively. The DJ Transports (TRAN) fell -0.43%. Only the DJI is lower on the year. NYSE volume rose +2.34% to 0.90x its 20-day moving average.

Trading desks note that world markets generally shrugged off more disappointing Chinese economic news, which add to doubts that the economy can meet the +7.5% GDP growth target. With regard to yesterday's trade, the emphasis is on the fact that trading has been recently so uneventful. Those who expected a larger sell-off based on recent Chinese disappointments have themselves been disappointed, with the SPX never really testing the 1852 20-day moving average (yesterday's intraday low was 1854).

Despite what appears to be a higher bias to the market, with the market near records and with an elevated P/E multiple, traders continue to doubt a breakout. With SPX equities trading at a 17.0x 2013 earnings multiple, attention focuses on 2014 earnings and valuations (17.0x times survey $117.57 2014 SPX operating earnings suggests a 1994.12 SPX level next year, a +6.74% rise).

Technicals were little changed. All indexes closed above their respective 5-, 10-, 20-, 50-, 100-, and 200-day moving averages. Most market segments closed lower. Market breadth was modestly positive, and up volume led down volume. Volatility fell. Treasury bond markets strengthened. The U.S. Treasury 10-year bond yield fell -3.80 bps to 2.7300%, compared to 2.7680% at the prior close.

This morning, 10-year U.S. Treasury yields are up +1.26 bps at 2.7426%, compared to the prior close. Spanish and Italian 10-year debt yields are 3.34% and 3.40%, respectively, compared to 3.35% and 3.42% the prior day. The U.S. dollar is mixed.

U.S. options markets weakened to neutral, compared to neutral to bullish the prior day. The CBOE SKEW rose +1.73% to 132.33, compared to 130.08 the prior day, above a neutral range (115-120) and again above 130, which generally correlates well with short-term market tops.

In pre-market futures trading, March SPX equity futures (SPH4) price near the middle of a 1867-1875 trading range. After a fair value adjustment of +0.15 points, SPX equity futures price at 1871.75, up +3.85 points. The SPX opens +0.86%, +2.15%, +3.40%, and +7.64% above its respective 20-, 50-, 100-, and 200-day moving averages. Initial resistance is 1872.93. Initial support is 1858.93, then 1849.65.

In Asia, equity markets closed mixed, with the greater strength in Shanghai despite a weaker than expected Chinese industrial production report. In Japan, the Nikkei 225 index (NYSEARCA:NKY) fell -0.10%. The Hang Sang index (HSI) fell -0.67%. The SHCOMP rose +1.07%. Today's volumes are unavailable.

Commentary focused on the day's poor Chinese production report and analysis of the cumulative effect of recent worse than expected economic report. In China, short-term interbank lending rates remain surprisingly volatile, with 7-day Shibo rates at 2.50%, compared to 2.20% the prior day, at levels last seen in March 2013 and down from the February 7th 5.41% recent high.

Regional relative strength indexes (RSI) show Tokyo in a neutral range, while Hong Kong and Shanghai are now in the lower end of a neutral ranges. The NKY RSI fell to 47.45, compared to 47.73 the prior day, up from an oversold 27.92 on February 4th. The HSI RSI ended at 36.60, compared to 38.86 the prior day and an oversold 24.02 on February 5th. The SHCOMP's RSI closed at 41.37, compared to 35.25 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, HSI, and SHCOMP are down -3.00%, -3.99%, and -1.89%, respectively. Last week, the NKY gained +2.92%, the HSI fell -0.77%, and SHCOMP rose +0.08%. In March, the NKY is down -0.17%, while the HSI and SHCOMP are down -4.73% and -1.81%, respectively. In February, the NKY closed down -0.49%, while the HSI and the SHCOMP gained +3.64% and +1.14%, respectively.

In 2014, the NKY, HSI, and SHCOMP are down -9.06%, -6.65%, and -4.58%, respectively. In 2013, the NKY rose +56.7%. The HSI closed up +2.87%. The SHCOMP closed down -6.75%.

In Japan, the NKY closed at 14,815.98, compared to 14,830.39 the prior day and -61.9% below its late-1989 38,915.87 high close. The index traded narrowly around 14,870 through late afternoon, when the index rallied to the 14,919.84 intraday high, but the index weakened in the final half hour and reversed lower in the session's final minutes. The index closed -0.11%, -2.30%, and -1.73% below its respective 20-, 50-, and 100-day moving averages, and +2.07% above its 200-day moving average. Market segments closed mostly lower. Leaders were telecommunications and technology, which rose at least +0.78%, and basic materials, which fell -0.03%. Laggards were consumer good, health care, and financials, which fell at least -0.27%.

In China, the HSI closed at 21,756.08, compared to 21,901.95 at the prior close. In early trading, the index trended higher to a late morning 22,041.33 intraday high, but reversed lower to 21,850 in early afternoon and eased lower to a late 21,743.34 intraday low. Most market segments closed lower. Leaders were industrials, consumer goods, and basic materials, which rose at least +0.31%. Financials fell -0.67%. Laggards were oil and gas, consumer services, and technology, which fell at least -0.96%. The index closed -9.01% below its recent December 3rd 23,910.47 high, but +19.6% above its 18,185.59 June 4, 2012 low.

In Shanghai, the SHCOMP closed at 2,019.11, compared to 1,997.69 at the prior close, +3.54% above the 1,950.01 June 27th close, last year's low. In early trading, the index rallied to a mid-morning 2,029.10 intraday high, then eased and traded narrowly around 2,020 through the close. All market segments closed at least +0.22% higher. Leaders were technology, consumer goods, and utilities, which rose at least +1.79%. Financials rose +1.27%. Laggards were consumer services, oil and gas, and telecommunications.

In Europe, major equity indexes are mixed. The Euro Stoxx50, CAC 40, and DAX are up +0.11%, +0.05%, and +0.22%, respectively, while the FTSE 100 is down -0.19%. The Spanish IBEX 35 is unchanged, and the Italian FTSE MIB is up +0.85%. Commentary focuses on currency and commodity developments.

European bourses have recently outperformed U.S. equity indexes. Euro Stoxx50 relative strength (RSI) is 44.39, compared to 43.72 the prior day, still in a neutral (30-70) range and better than its recent February 5th 33.57 low, its 2014 low. The indexes lowest recent RSI level was 25.77 on June 24th, which marked the 2013 2,494.54 closing low.

Today, the Euro Stoxx50 trades at 3,069.70, -3.05% below its 3,168.76 January 15th post-2008 high close, and -41.5% below its 5,249.55 March 31, 2000, all-time closing high. From its prior day 3,065.46 close, the index opened higher, but then traded around breakeven with an early 3,060.00 intraday low and mid-morning 3,077.04 intraday high. Market segments mixed. Leaders are utilities, consumer goods, and oil and gas, which are up at least +0.53%. Financials are up +0.22%. Laggards are basic materials, telecommunications, and consumer services, which are down at least -0.43%.

This week, the Euro Stoxx50, FTSE 100, CAC 40, and DAX are down -0.75%, -1.46%, -1.24%, and -1.50%, respectively. Last week, the Euro Stoxx50, FTSE 100, CAC 40, and DAX closed down -1.71%, -1.42%, -0.95%, and -3.52%, respectively. In March, Euro Stoxx50, FTSE 100, CAC 40, and DAX are down -2.45%, -2.87%, -2.17%, and -4.97%, respectively. In February, the indexes closed at least +4.14% higher. In January, the indexes close at least -2.57% lower.

In 2014, the indexes are mixed. The CAC 40 is up +0.38%, while the Euro Stoxx50, FTSE 100, and DAX are down -1.19%, -1.99%, and -3.58%, respectively. In 2013, the indexes closed up +18.0%, +14.4%, +18.0%, and +25.5%, respectively.

4Q2013 SPX Earnings. Of 495 (of 499) reporting companies, 363 or 73.8% surprised positively on earnings, with an average +4.58% surprise average. Of reporting companies, 303 or 61.6% reported sales or revenues above estimates. The average sales/revenue surprise is +0.86%. Materials lead with +13.6% EPS and +0.72% revenue surprises. Financials follow with a 9.59% earnings surprise and +3.47% revenue surprise.

Valuation. The SPX trades at 17.0x estimated 2013 earnings ($110.15), 15.9x estimated 2014 earnings ($117.57), 14.3x estimated 2015 earnings ($130.84), and 12.9x estimated 2016 earnings ($144.44). The 10-year average median price/earnings multiple is 15.9x. Analysts expect 2013, 2014, 2015, and 2016 earnings to grow +6.52%, +6.74%, +11.3%, and 10.4%, respectively.

The BKX trades at 13.7x 2013 adjusted EPS ($5.16), 12.7x estimated 2014 earnings ($5.55), 11.5x estimated 2015 earnings ($6.14), and 10.2x 2016 earnings ($6.90). Analysts expect 2013, 2014, 2015, 2016 EPS will grow +19.4%, +7.66%, +10.5%, and +12.3%, respectively.

Composite, index, and equity options. Options markets worsened to neutral, compared to neutral to bullish the prior session. Composite options are neutral, index options are neutral, and equity options are neutral. The composite put/call ratio is 0.96, compared to 0.82 the prior day, and worse than 5- and 10-period moving averages of 0.85 and 0.84, respectively. The index put/call ratio is 1.00, compared to 0.82 the prior day, and worse than its 5- and 10-period moving averages of 0.94 and 0.98, respectively. The equity put/call ratio closed the day at 0.94, compared to 0.82 the prior day, and worse than its 5- and 10-period moving averages of 0.83 and 0.81, respectively.

NYSE Volume, Breadth Indicators. Volume rose +2.36% to 657.94 million shares, compared to 642.77 million shares the prior day, 0.93x the 707.93 million share 20-day moving average. Market breadth was positive, and up volume led down volume. Advancing stocks led by +328 (compared to -1,053 the prior day), or 1.24:1. Up volume was 1.13:1 down volume.

Distribution day count and market outlook. On February 7th, with the SPX at 1797.02, the market outlook improved to "confirmed uptrend". The subsequent distribution day count is 2 for the SPX and 6 for the Nasdaq. The SPX's subsequent rise is +3.96%.

Libor, LOIS, Currencies, Treasuries, Commodities:

· USD LIBOR is 0.08890%, compared to 0.08850% the prior day. USD 3-month LIBOR is 0.23410%, up from 0.23330% the prior day, and compares to the January 4, 2013, recent peak of 0.58250%.

· The US Libor-OIS (LOIS) spread is 15.210 bps, compared to 15.230 bps the prior day, and compares to the recent June 12, 2012, 46.785 bps high. Euribor-OIS is 13.800 bps, up from 13.400 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 -4.380 bps, compared to -4.151 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.

· German 10-year debt yields are 1.59%, compared to 1.60% the prior day. Japanese 10-year debt yields are 0.64%, compared to 0.63% the prior day. Spanish 10-year debt yields are 3.34%, compared to 3.35% the prior day. Italian 10-year debt yields are at 3.40%, compared to 3.42% the prior day.

· U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.366% and 2.735%, respectively, compared to 0.362% and 2.730% Wednesday. The yield curve widened +0.030 bps, with the 2- to 10-year spread at +2.369%, compared to 2.368% 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 weaker compared to the euro, Japanese yen, and British pound. The dollar trades at US$79.356, compared to a US$79.268 intraday low and US$79.608 the prior day, and worse compared to its $80.492 50-day, US$80.480 100-day, and US$80.988 200-day averages. The euro trades at US$1.3957, compared to a US$1.3967 intraday high and US$1.3903 the prior day. The euro trades better compared to its US$1.3676 50-day and US$1.3648 100-day averages, and compares to a multi-year low of US$1.1877 on June 7, 2010. In Japan, the dollar trades at ¥102.61, compared to ¥102.76 the prior day. The yen trades better than its 50-day moving average ¥102.91, and better than its January 1st 105.31 closing low, its weakest prior multi-year closing low.

· Citigroup Economic Surprise Index worsened to -34.10, compared to -33.60 the prior day, its 16th consecutive negative reading. The index is worse compared to its respective -31.70 5-day and -24.70 10-day moving averages. The index fell to a 52-week 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 to a +72.70 high on January 15th, but then subsequently trended lower and turned negative on February 19th. After a lag, the CESIUSD correlates with EPS revisions.

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

Volatility, Skew:

· The CBOE SPX Volatility Index (VIX) fell -2.23% to 14.47, compared to 14.80 at the prior close. The VIX is +0.86% above the 14.35 20-day moving average. Its 30-day high is 21.48. Its 30-day low is 13.44. 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 19.92, down -1.44% from 20.21 at the prior day's close. The V2X index trades +10.3% above its 18.07 20-day moving average, -19.0% below the 24.60 30-day high, and +24.6% above the 15.99 30-day low.

· The Hang Seng volatility index (VHSI) closed at 18.19, up +0.22% from 18.15 at the prior close. The VHSI index trades +4.09% above its 17.48 20-day moving average. Its lowest historical close was 11.72, on June 30, 2005.

· CBOE SKEW (SKEW) rose +1.73% to 132.33, compared to 130.08 the prior day, above a neutral (115-120) range, and above 130 for a 5th consecutive session, 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:
 

  • February MoM advance retail sales were +0.3%, compared to +0.2% survey and -0.6% revised prior.
  • February MoM retail sales ex auto and gas were +0.3%, compared to +0.2% survey and -0.5% revised prior.
  • The latest weeks' initial and continuing jobless claims were 315K and 2855K, compared to 330K and 2903K survey and 324K and 2903K revised prior.
  • February MoM import prices rose +0.9%, compared to +0.5% survey and +0.4% revised prior. YoY import prices fell -1.1%, compared to -1.9% survey and -1.2% revised prior.
  • At 10:00, January business inventories, with +0.4% survey and +0.5% prior.


Overseas Economic Reporting and News:
 

  • Australia - February unemployment rate was 6.0%, compared to 6.0% survey and prior. Participation was 64.8%, compared to 64.5% survey and 64.6% revised prior.
  • China - February YoY industrial production rose +8.6%, compared to 9.5% survey. February YoY retail sales rose 11.8%, compared to 13.5% survey.
  • Hong Kong - 4Q2013 YoY industrial production rose +0.5%, compared to -0.9% prior.
  • Japan - January MoM machine orders rose 13.4%, compared to +7.1% survey and -15.7% prior.
  • Spain - January YoY retail sales fell -0.2%, compared to -0.1% revised prior.
  • United Kingdom - February RICS house price was 45%, compared to 52% survey and revised prior.


Company Ratings/News:
 

  • None.


Wednesday's Trade. On lower and below average NYSE volume, U.S. equity indexes modestly mixed. Equities opened sharply lower on Chinese growth and other macro concerns, but quickly found support and rallied back to breakeven by mid-morning, then traded narrowly to the close. The SPX and Nasdaq rose +0.03% and +0.37%, respectively, while the Nasdaq and NYSE composite lost -0.07% and -0.06%. The SPX, Nasdaq, NYSE composite, and RTY are all higher this year. The DJI is -1.43% lower in 2014.

Since February 7th, the U.S. equity market outlook is "confirmed uptrend". The subsequent distribution count is 2 on the SPX and 6 on the Nasdaq. The SPX closed +3.96% above the February 7th 1797.02 close.

Market breadth was modestly positive, with gainers 1.24x losing stocks. Most SPX market segments closed lower. Leaders were utilities, technology, and consumer services, which rose at least +0.04%. Laggards were financials, telecommunications, and industrials, which fell at least -0.12%.

NYSE volume rose +2.36% to 657.94 million shares, compared to 642.77 million shares the prior day, 0.93x the 707.93 million share 20-day moving average volume. On the day, bond markets strengthened. The U.S. 10-year yield opened at 2.7689%, and traded narrowly through mid-morning, then fell to a mid-afternoon 2.7119% intraday low. The yield ended at 2.7300%, down -3.80 bps compared to the 2.7680% prior close.

From its prior day 1867.63 close, SPX futures signaled a sharply lower open. The index opened below 1862 and fell to an early 1854.38 intraday low, but then strengthened, rallied, and reversed briefly higher by late morning. The index weakened to 1864 through most of the afternoon, then rallied to a fractional gain in the session's final minutes. The index ended at 1868.20. The index closed +73.8% above the 1074.77 October 4, 2011, intraday low.

The DJ Transportation index (TRAN) rose +0.34%, compared to the DJI's -0.07% loss. From its prior 7,560.07 record close, the TRAN fell to the 7,508.41 intraday low in early trading, but reversed higher by mid-morning, rose to 7,580 by mid-session, then traded narrowly to the close, with a mid-afternoon 7,587.40 intraday high. The index closed at 7,585.98. Volume rose -23.2% to 11.921 million shares, compared to 9.673 million shares the prior session, and 0.97x the 15-day moving average volume. The TRAN closed +2.87% and +3.36% above its respective 20- and 50-day moving averages, and +4.94% and +11.1% above its respective 100- and 200-day moving averages.

Market volatility fell -2.23%, as the CBOE SPX volatility index (VIX) closed at 14.47, compared to 14.80 at the prior close. The VIX opened at 15.30, rose to 15.64 in early session, then reversed lower by mid-morning. The index traded narrowly through the afternoon with a late 14.43 intraday low. The VIX's all-time closing low was 9.31, on December 22, 1993. Its lifetime average is 20.09.

The market's technical factors were little changed. All exchanges closed above their 20-, 50-, 100-, and 200-day moving averages. SPX relative strength (RSI) rose to 60.88, compared to 60.68 the prior day, in a neutral range, and much better than an oversold 31.24 on February 3rd. The RSI is also down from an overbought 71.26 on December 31st, when the SPX closed an earlier record high, but above earlier oversold levels of 35.14 on August 27th and 39.19 on October 9th. The CBOE put/call SKEW rose +1.73% to 132.33, compared to 130.08 the prior day, well above a neutral 115-120 range and above 130 for a 3rd consecutive day, a level that correlates well with short-term market tops.

This week, the SPX and DJI are down -0.52% and -0.68%, respectively, while the Nasdaq and NYSE composite are up +3.51% and +0.18%. Last week, the SPX, DJI, Nasdaq, and NYSE composite closed up +1.00%, +0.80%, +0.65%, and +0.83%, respectively. In March, the SPX, DJI, and Nasdaq are up +0.47%, +0.11%, and +0.35%, while the NYSE composite is down -0.07%. In February, the SPX, DJI, Nasdaq, and NYSE composite closed up +4.31%, +3.97%, +4.98%, and +4.60%, respectively.

In 2014, the SPX, Nasdaq, and NYSE composite are up +1.07, +3.51%, and +0.18%, respectively, while the DJI is down -1.43%. 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 notably lower and below average volume, the BKX closed at 70.52, down -0.11% from 70.60 at the prior day's close, its 6th consecutive close above 70.00. The index sold off in early trading, set an immediate 69.92 intraday low, then improved through early afternoon to the 70.52 intraday high. The index traded narrowly through the close. Volume fell -8.60% to 38.457 million shares, compared to 42.074 million shares the prior day, and 0.74x the 51.791 million shares 15-day moving average.

Large cap banks outperformed the regional banks, as the KBW regional banking index (KRX) fell -0.14%.

This week, the BKX is down -1.15%. Last week, the BKX closed up +3.36%, compared to a gain of +0.70% the prior week. In March, the BKX is up +2.17%. In February, the BKX closed up +2.41%, compared to January, when the BKX closed down -1.07%. In 2014, the BKX is up +1.82%. In 2013, the BKX rose +35.1%, better than the SPX's +29.6% rise.

The BKX is now +19.1% better than the June 24th 59.19 close, its worst since May 13, 2013. The index crossed above 50 on December 17, 2012, 60 on May 15, 2013, and 70 on January 8, 2014, but then dropped back below 70 on January 24th, which persisted until March 6th. The BKX closed +116.6% 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 +73.8% in the same period.

The BKX index closed -41.8% below its February 20, 2007, record 121.06 high. The BKX is up +278.7% from its 18.62 March 6, 2009, closing low.

Technical indicators were little changed. The index closed +1.98%, +2.09%, +4.09%, and +7.59% above its respective 20-, 50-, 100-, and 200-day moving averages. The 20-day moving average rose +10 bps to 69.15. The 69.08 50-day moving average rose +3 bps. Its 100-day moving average rose +8 bps to 67.75, and the 200-day moving average rose +5 bps to 65.55. The 20-day closed (by +0.08 points) above the 50-day, and the gap widened +8 bps. The 50-day moving average closed (by +3.53 points) above the 200-day moving average, and the gap narrowed -2 bps. The 100-day moving average closed (by +2.21 points) above the 200-day moving average, and the gap widened +1 bp.

The directional movement indicator narrowed to +10.137, compared to +15.777 the prior day, its 8th consecutive positive reading. Relative strength fell to 59.25, compared to 59.91 the prior day, in a neutral range, up from the recent 32.95 low on February 3rd, but down sharply from an overbought 75.56 and 71.88 on January 9th and 10th, respectively. The recent low RSI level 31.08 on November 14, 2012, which is also the date of the BKX's 2012 closing low. Next resistance is 70.72; next support is 70.12.