In Asia, equities closed lower on growth and monetary policy concerns, with Chinese equity markets now approaching corrections of about -5% from recent highs. In Europe, for a 2nd consecutive day, stock exchanges are moderately lower, and near their intraday lows. The dollar is weaker against the euro, pound, but stronger compared to the Japanese yen. U.S. options markets suggest a neutral short-term outlook. Commodities prices are higher. U.S. Treasury yields are lower, with the 10-year at 2.224%, down from 2.278% the prior day. U.S. repo rates are at 9 bps.
The ECB's bank LTRO lending facilities are credited with easing interbank lending and associated liquidity problems. Overnight and 3-month LIBO and Euribor-OIS spreads have stabilized in recent weeks lower levels than in December, when Eurozone solvency concerns were at their peak. The 3-month Euro basis swap is at its best level since early August and a third of its worst level of late December.
After a fair value adjustment of -1.72 points, June SPX equity futures are at 1388.40, up +1.42 points. The SPX opens at 1392.78, +0.96% and +3.18% above its respective 20- and 50-day moving averages, and +7.48% and +10.3% above its respective 100- and 200-day moving averages. Next resistance is at 1400.87. First support is at 1386.71.
Thursday. Equity markets closed moderately lower on mixed volume, with the sole distribution on the NYSE composite, where volume rose. The Nasdaq fell -0.39% on lower volume. The DJI, SPX, and NYSE composite fell -0.60%, -0.72%, and -0.95%, respectively, on increased volume. NYSE volume rose +5.02% to 0.94x the 50-day moving average. Market breadth was negative. Treasuries strengthened, particularly through the afternoon session. Segments ended mixed. Leaders were utilities and consumer goods, which ended up at least unchanged, and consumer services, which closed off -0.10%. Laggards were financials, basic materials, and oil and gas, which closed off at least -1.29%.
DJ transports underperformed the industrials, falling -2.08% to close at 5220.81, down from 5331.81 the prior day, and -2.76% off the 5,368.93 February 3rd closing high. FedEx reported 3Q2012 earnings, lowering guidance for 4Q2012 on slowing global growth. The index closed +0.37% above and -0.32% below its 20- and 50-day moving averages. The TRAN has not confirmed multiple DJI new highs subsequent to February 3rd.
Technical factors are generally positive. All major exchanges closed above their respective 20-, 50-, 100-, and 200-day moving averages. Volatility rose +2.91%, and the VIX closed at 15.557, down from 15.13 the prior day. The CBOE put/call skew fell to 121.17, down from 124.60 the prior session, but still well in excess of a neutral range.
From its prior 1392.78 close, the SPX gapped lower to open at 1394. Twice during the day, at mid-morning and gain in the final hour, the index tested support successfully at 1390. For a 2nd consecutive day, financials were among the laggards with adding a moderate loss to the prior day's modest decline.
Despite the losses, trading desks reported a quiet day. Shorting activity picked up modestly, but without much conviction, and volumes remained well short of the 50-day moving average. In sum, the sell-off seemed more like profit taking and consolidation after the prior months' strong run-ups. Treasuries and currencies are noteworthy, too, for a lack of direction.
Immediate support is 1386, then 1380 (the 20-day moving average), 1372 (the February high), 1366 (a -23.6% Fibonacci retracement from December 19th), 1350 (50-day moving average), 1338 (a -38.2% Fibonacci retrace), and then 1297 (the January 12th high), and 1293 (the October 27th high). Immediate resistance is 1400, followed by 1409 and 1423.
Yesterday, only the NYSE composite recorded a distribution. Combined with the February 15th distribution having gone stale, distribution days number 2 on the DJI, 3 on the SPX and Nasdaq, and 5 on the NYSE composite. The BKX count fell to 3.
In Asia, indexes closed moderately lower, ending their worst week since December. Volumes rose in Hong Kong, but declined in Tokyo and Shanghai. Commentary focused on Eurozone PMIs, which weigh on Asian growth prospects. In Japan, the NKY closed down -1.14%. Volume fell -17.3%. In China, the HSI closed down -1.11% on a +33.8% increase in volume. The SHCOMP closed down -1.10% on a -2.80% decrease in volume. In 2012, the indexes are up +18.4%, +12.1%, and +6.83%, respectively, but Chinese equities closed about -5% below their recent highs.
In Japan, the NKY closed at 10,011.47, down from 10,127.08 at the prior close. The NKY closed -1.29% below its recent March 19th high. The index gapped lower to open near 10,015 and traded within a ±15 point range through the day, testing resistance at 10,030 multiple times and then 10,000 late in the session. The index closed +1.71% and +7.87% above its respective 20- and 50-day moving averages. Most market segments closed lower. Leaders were telecommunications, which closed up +0.31%, and health care and utilities, which fell at least -0.38%. Laggards were consumer goods, financials, and technology, which closed down at least -1.45%.
In China, the Hang Seng closed at 20,668.80, down from 20,901.56 at the prior close. The index closed -4.66% below its recent February 29th high. The index gapped lower to open at 20,740 and tested support at 20,640 before rallying back to 20,740 by mid-morning. The index trended lower through mid-afternoon, falling to an intraday low of 20,596.89, then rallied modestly into the close. The HSI closed -2.44% below its 20-day moving average, and closed -0.43% below its 50-day moving average, its first such close since early January. Most market segments closed lower. Leaders were consumer goods, which closed up +0.16%, and telecommunications and oil and gas, which closed down at least -0.11%. Financials lost -1.46%. Laggards were utilities, industrials, and consumer services, which declined at least -1.51%.
In Shanghai, the SHCOMP closed at 2,349.54, down from 2,375.77 at the prior close. The SHCOMP closed -5.03% below its recent March 14th high. The SHCOMP opened lower and traded to a mid-morning test of 2,355, but rallied back to 2,371.10 at mid-day, the intraday high. The rally sold off through late afternoon, falling to an intraday low of 2,342.23, but rallied modestly into the close. The index closed -2.84% below its 20-day moving average, and closed -0.21% below its 50-day moving average, it first such closed since January 20th. All market segments closed at least -0.18% lower. Leaders were oil and gas, financials, and consumer goods. Laggards were technology, industrials, and health care, which dropped at least -1.60%.
In Europe, equities opened higher, but have sold off moderately and trade near their intraday lows. News flows are light, and the declines appear to be a carryover from yesterday's weak Eurozone PMIs. Sovereign debt yields are rising in Italy and Spain. The Euro Stoxx 50, FTSE 100, and DAX are down -0.74%, -0.22%, and -0.31%, respectively. The Euro Stoxx50 trades -0.61% below its 20-day moving average. The FTSE 100 trades below both its 20- and 50-day moving averages. The DAX remains above its 20-, 50-, 100-, and 200-day moving averages. Compared to the prior day's 2,567.58 close, the Euro Stoxx 50 trades at 2,510.96, compared to the 2,508.05 intraday low. The index is -1.09% below and +0.64% above its respective 20- and 50-day moving averages. Most market segments are lower. Leaders are consumer services, up +0.45%, and consumer goods and basic materials, which are off at least -0.36%. Laggards are technology, financials, and oil and gas, which are down at least -0.98%.
Libor, LOIS, Currencies, Treasuries, Commodities:
- USD LIBOR rose to 0.15350%, up from 0.15250% the prior day, rising from a low of 0.13850% on March 1st, but down from the December 30th 0.15400% high. USD 3-month LIBOR is 0.47365%, down from 0.47415% the prior day, but down from the January 4th peak of 0.58250%.
- The US Libor-OIS (LOIS) spread fell to 33.57 bps, from 33.97 bps the prior day, and compares to the recent January 6th high of 50.05 bps. Euribor-OIS fell to 44.70 bps from 45.55 bps the prior day and the December 27th high of 98.80 bps. A fall in the LOIS indicates a decreased intra-bank lending risk premium.
- The Euro 3-month basis swap is -53.000 bps, unchanged from -53.000 bps the prior day, at their best levels since August 1st, and up from a trough of -147.00 bps on December 14th. A normal range is between 25 bps and 50 bps.
- The U.S. government overnight repo rate is 9 bps, compared to an August 2nd high of 33 bps.
- U.S. Treasury yields are lower, with 2- and 10-year maturities yielding 0.360% and 2.257%, respectively, compared to 0.363% and 2.278% Thursday. The yield curve narrowed to +1.897%, from +1.915% 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 +2.77% on April 8, 2011.
- The U.S. dollar is mixed, slightly weaker against the euro and British pound, but stronger against the Japanese yen. The dollar trades at US$79.392, compared to a US$79.214 intraday low and US$79.736 the prior day, and mixed compared to its US$79.456 50-day, US$79.395 100-day, and US$77.558 200-day averages. The euro trades at US$1.3254, compared to an intraday high of US$1.3294 and compares to a close of US$1.3201 the prior day. The euro trades better than its US$1.3158 50-day and US$1.3185 100-day averages. In Japan, the dollar trades at ¥82.65, compared to ¥82.54 the day prior. The yen trades worse than its 50-day moving average ¥79.53.
- Commodities prices are mostly higher, with higher energy and precious metals, but lower aluminum and copper, and higher agriculture prices.
- The VIX ended at 15.57, up +2.91% from 15.13 at the prior close. The VIX is -7.45% below its 16.82 20-day moving average.
- The Euro Stoxx 50 volatility index (V2X) is up +0.56% to 22.03, compared to 21.91 at the prior day's close. The V2X index trades -2.41% below its 22.58 20-day moving average, -24.2% below the 29.07 30-day high, and +27.6% above the 17.26 30-day low.
- The Hang Seng volatility index (VHSI) closed at 21.02, up +2.54% from 20.50 the prior day. The VHSI index trades -2.43% below its 21.54 20-day moving average.
- CBOE skew fell -2.75% to 121.17 from 124.60 at the prior day's close, well above a neutral (115-120) range. Spikes in excess of 130 (as on March 12, 15, and 16) correlate well with short-term market tops. The index tracks 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. news and economic reporting:
· At 9:00, February new home sales are expect to rise +1.3% to 325K from 321 prior.
Overseas News. According to press reports, Chinese banks misclassified nearly 20% of their loans to local government financing vehicles, totaling nearly $286 billion, on overly optimistic cash flow assumptions. In March, French business confidence rose unexpectedly, climbing to 96 from 93 prior and flat expectations.
· DFS - upgraded to buy at Goldman, $39 price target
· HBAN - upgraded to neutral at Evercore, $6.50 price target
· BAC - downgraded to neutral at Evercore, $10 price target
· FHN - downgraded to neutral at Evercore
· STI - downgraded to neutral at Evercore
· MS - upgraded to neutral at RBC
· GS - upgraded to neutral at RBC
4Q2011 Earnings. The fourth quarter's earnings reports have so far exceeded expectations. Of the 489 S&P500 companies that reported earnings to date, 67% (330 out of 489) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat EPS expectations by an average of +3.3% (versus a historical average of +2%). EPS is up +5.1% over the prior year. Though challenged in the current operating environment, 73% of companies reported increased revenues over the prior year and 56% beat revenue estimates. In the fourth quarter of 2011, analysts estimate the SPX will earn $24.34 per share, compared to $25.19 and $22.25 per share in 3Q11 and 4Q10, a -3.4% and +9.4% change, respectively.
With all 24 BKX members reporting fourth quarter earnings, 42% beat operating EPS estimates, with aggregated results disappointing by -16.7%, while 46% beat revenue estimates, with aggregated results missing by -0.9%. EPS is down by -20.4% over the prior year while revenue has decline by -3.8%. In the fourth quarter, the BKX earned $1.25 per share, compared to $1.24 and $0.91 per share in 3Q11 and 4Q10, a +0.8% and +37.4% change, respectively.
Valuation. The SPX trades at 13.3x estimated 2012 earnings ($104.36) and 11.8x estimated 2013 earnings ($117.94), compared to 13.4x and 11.9 respective 2011-12 earnings yesterday. The 10-year average median Price/Earnings multiple is 20.0x. Since the beginning of 2012, analysts changed 2012 and 2013 earnings estimates by -4.0%, and +0.1%, respectively. Analysts expect 2012 and 2013 earnings to exceed 2011 earnings ($94.97) by +9.9% and +24.2%, respectively.
Large-cap banks trade at a median 1.41x tangible book value, and 11.6x and 9.9x 2012and 2013 consensus earnings, respectively, compared to 1.43x tangible book value and 11.7x/10.0x 2012/2013 earnings yesterday. These compare to the 10-year average median multiples of 3.08x tangible book value and 15.9x earnings. In 2012, analysts expect the BKX to earn $4.32 per share, compared to $4.30 and $2.96 in 2011 and 2010, a +0.6% and +46.1% increase, respectively.
Options. Options markets are neutral. Composite options markets are neutral, index options markets are neutral, and equity options markets are neutral. The composite put/call ratio closed at 1.09, compared to 0.98 the prior day and above its 5- and 10-period moving averages of 0.91 and 0.89 respectively. The index put/call ratio closed at 1.70, compared to 1.39 the prior day, and above the 5- and 10-period moving averages of 1.24 and 1.24, respectively. The equity put/call ratio closed the day at 0.69, compared to 0.56 the prior day, above its 5- and 10-period moving averages of 0.56 and 0.59, respectively.
Price Exhaustion/Trend Reversal. On a daily timeframe, technical price exhaustion metrics show the SPX and S&P futures began reaching potential upward price exhaustion levels as early as January 18th, the first such signals since April, and repeatedly through February with the most recent reading on February 21st on both indices and March 16th and 21st on the BKX. Intra-day timeframes of 120- and 60-minute intervals show the SPX and BKX reached multiple levels of potential price exhaustion in January and February with the most recent indicator coming on March 14th and 15th.
NYSE Indicators. Volume rose +2.71% to 746.14 million shares, 0.92x the 50-day moving average, from 726.47 million Wednesday. Market breadth was negative, and up volume lagged down volume. Advancing stocks lagged decliners by -1,511 (compared to -32 the prior day), or 0.33:1. Up volume lagged down volume by 0.16:1.
SPX. On nearly flat volume, the SPX fell -10.11 points, or -0.72%, to 1392.78, the 46th straight close above 1300 but first close below 1400 in six sessions. Volume fell -0.14% to 568.65 million shares, down from 569.46 million shares Wednesday and below the 629.13 million share 50-day moving average. For the 63rd consecutive day, the SPX closed above its 50-day moving average (1349.90) and remained above its 200-day moving average (1263.18) for the 59th time in the past 60 sessions. The SPX closed above its 200-week moving average (1132.89) for the 114th straight session.
From its prior close at 1402.89, the SPX opened lower to 1394, rallied to the intra-day high of 1396.28 at 10:00, then fell to 1389 by 11:05. Through 1:00, the index recovered back to 1395, but momentum waned through the afternoon, and the index sold off from 2:00 through 3:20, reaching the intra-day low of 1388.73. A rebound into the bell closed the index in the middle of the day's narrow negative range.
Technical indicators are positive. The SPX closed above 1200 for the 78th straight session, above 1300 for the 46th session, but below 1400 for the first time in six sessions. The 50-day moving average crossed above the 100-day moving average on December 6th, having been below that average since July 11th, and climbed above the 200-day moving average on January 31st, having been below that average since August 11th. The 100-day moving average crossed above the 200-day moving average February 23rd, having been below that average since September 7, 2011. All moving averages are increasing. For the 11th straight session, the SPX closed (by +0.96%) above its 20-day moving average (1379.55). The index closed (by +3.18%)above its 50-day moving average for the 64th straight session. The index closed (by +7.48%) above its 100-day moving average (1295.84) for the 78th straight session. The SPX closed +10.26% above its 200-day moving average for the 59th time in the past 60 sessions. The directional momentum indicator is positive for the 11th straight session, and the trend is strong and stable. Relative strength fell to 60.68 from 67.91, a neutral range. Next resistance is at 1400.87; next support is at 1386.71.
BKX. On lower volume, the KBW bank index fell -0.81 points, or -1.62%, to 49.09, its 54th straight close above 40. Volume fell -1.67% to 81.02 million shares, down from 82.39 million shares Wednesday and below the 83.22 million share 50-day average. The BKX closed +14.22% above its August 30, 2010, closing low of 42.98, the trough of the 2010's correction, but -15.29% and -11.76% below its April 23, 2010 (the post-2008 high point), and February 14, 2011 (the most recent high point) respective closes.
Financials underperformed the market, and regional banks underperformed large-cap banks. From its prior close of 49.90, the BKX lower, and at the intra-day high, at 49.58. The index fell to 49.01 at 11:00 before rebounding to 49.30 by 1:00. From 2:00 through 3:20, the index sold off, falling to the intra-day low of 48.84. Reversing sharply at the low, the BKX rallied into the bell to retake the 49.0 threshold and close in the middle of the day's negative range.
Technical indicators are positive. On a percentage basis, bank stocks have outperformed the broader market's rebound from the October lows, rising +50.77% from the 32.56 October 4th intra-day low compared to a +29.67% rebound in the SPX. However, the BKX is still -11.8% below its 2011 high, compared to the SPX which is +2.1% above its 2011 peak. Moving average alignment is fully bullish, as shorter term moving averages are above longer term moving averages and are increasing more rapidly. On February 22nd, the 50-day moving average crossed above the 200-day moving average for the first time since June 15th. On March 20th, the 100-day moving average crossed above the 200-day moving average for the first time since July 18th, 2011. For the 59th time in the past 60 sessions, the 20-day closed (by +1.68 points) above the 50-day, and the gap expanded. The 50-day moving average closed (by +3.44 points) above the 200-day moving average for the 22nd straight session, and the gap widened. The 100-day moving average closed (by +0.27 points) above the 200-day moving average for the fourth straight session, and the gap widened. The BKX closed +4.89% above its 20-day moving average for the 11th straight session. The index closed (by +8.80%) above its 50-day moving average for the 62nd straight session. The index closed (by +17.02%) above the 100-day moving average for the 63rd straight session. The index closed (by +17.78%) above its 200-day moving average for the 45th time in 46 sessions. The index closed above 40.0 for the 56th straight session. The directional movement indicator is positive for the 10th straight session, and the trend is moderate and increasing. Relative strength fell to 65.41 from 72.60, an overbought range. Next resistance is 49.55; next support at 48.73.