In Asia, equities closed lower, with a -2.65% loss in Shanghai on weak corporate earnings and guidance. In Europe, stock exchanges are mixed. The dollar is weaker. U.S. options markets suggest a neutral short-term outlook. Commodities prices are mostly lower. U.S. Treasury yields are higher, with the 10-year at 2.207%, up from 2.184% the prior day. U.S. repo rates are at 16 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. 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 +0.67 points, June SPX equity futures are at 1407.50, up +0.43 points. The SPX opens at 1412.52, +1.94% and +4.10% above its respective 20- and 50-day moving averages, and +8.61% and +11.7% above its respective 100- and 200-day moving averages. Next resistance is at 1417.13. First support is at 1409.93.
Tuesday. Equity markets drifted through a trendless day, holding gains until the final hour, but ending modestly lower with greater weakness in oil and gas and financials. The Nasdaq closed off -0.07%, followed by the SPX, DJI, and NYSE composite, which fell -0.28%, -0.33%, and -0.60%, respectively. NYSE volume fell -3.27% to 0.91x the 50-day moving average. Market breadth was negative. Treasuries strengthened modestly. Leaders were utilities, health care, and technology, which closed up at least +0.16%. Laggards were telecommunications, financials, and oil and gas, which closed off at least -0.87%.
DJ transports outperformed the industrials, falling -0.24% to close at 5276.31, down from 5289.02 the prior day, and -1.73% off its 5,368.93 February 3rd closing high. The index closed +1.24% and +0.70% above its respective 20- and 50-day moving averages. The TRAN has not confirmed multiple DJI new highs subsequent to February 3rd. The DJI closed -0.42% below its recent high.
Technical indicators are generally positive. All major exchanges closed above their respective 20-, 50-, 100-, and 200-day moving averages. Volatility rose +9.33%, as the VIX closed at 15.59, up from 14.26 the prior day. The CBOE put/call skew rose to 121.13, up from 118.02 the prior session, and moving back above a neutral range.
From its prior 1412.52 close, the SPX opened modestly higher, reaching its 1419.15 intraday high before 10:00. The index traded above 1415 until the session's final half-hour, when energy and financial stocks weakened. Economic reports were mostly negative, with January housing prices falling, though less than survey. Consumer confidence fell slightly from the prior month. The Richmond Fed reported slower manufacturing activity.
Given that the prior day's rally surprised traders, trading desks were not surprised by yesterday's absence of follow-through. The focus remained on Bernanke. Monday's speech at NABE was followed by excerpts from an ABC interview that finally aired after the close. PIMCO's Gross reiterated in a CNBC interview that Bernanke was preparing a QE3 proposal for the Fed's April 25 meeting and subsequent press conference. Otherwise, trading was slow, with sell-offs brief and shallow. Sentiment remains skeptical. Some expect clearer direction next Monday, with the beginning of 2Q2012. Volumes remained short of 50-day moving averages.
Immediate support is 1404, then 1384 (the 20-day moving average), 1372 (the February high), 1366 (a -23.6% Fibonacci retracement from December 19th), 1354 (50-day moving average), 1336 (a -38.2% Fibonacci retrace), and then 1297 (the January 12th high), and 1293 (the October 27th high). Immediate resistance is 1423, followed by 1429 and 1449.
The DJI and BKX recorded distributions. Counts are 2 on the Nasdaq, 3 on the DJI and SPX, and 5 on the NYSE composite. The BKX count is 4.
In Asia, equity indexes closed lower, with greater weakness in Shanghai. Volumes rose in Shanghai, but declined in Tokyo and Hong Kong. Commentary focused on mixed U.S. economic reports, falling Chinese corporate earnings, and lowered earnings guidance. In Japan, the NKY closed down -0.71%, after setting a new yearly high the prior day. Volume fell -12.4%. In China, the HSI closed down -0.77% on a -1.83% decrease in volume. The SHCOMP closed down -2.65% on a +37.4% increase in volume. In 2012, the indexes are up +20.4%, +13.3%, and +3.89%, respectively.
In Japan, the NKY closed at 10,182.57, down from 10,255.15 at the prior close, which marked a new yearly high. The index gapped lower to open below 10,160, but rallied back to 10,180 mid-morning, then slipped down to a 10,124.28 intraday low in early afternoon. The index rallied back to test resistance at 10,200. The index traded back to 10,160 late in the session, and rallied modestly into the close. The index closed +2.71% and +8.54% above its respective 20- and 50-day moving averages. Most market segments closed lower. Leaders were technology, which rose +0.07%, and consumer goods and industrials, which closed down at least -0.20%. Financials lost -1.24%. Laggards were telecommunications, health care, and utilities, which lost at least -1.69%.
In China, the Hang Seng closed at 20,885.42, down from 21,046.91 at the prior close. The index closed -3.67% below its recent February 29th high. The index gapped lower to open at 20,950 and drifted lower through mid-afternoon, testing support successfully at 20,800. The index rallied modestly into the close. Volatility was unchanged. The HSI closed -11.2% below its 20-day moving average, but +0.12% above its 50-day moving average. All market segments closed at least -0.07% lower. Leaders were utilities, financials, and technology, which closed down at least -0.54%. Laggards were consumer services, industrials, and oil and gas, which closed off at least -1.16%.
In Shanghai, the SHCOMP closed at 2,284.88, down from 2,347.18 at the prior close. The SHCOMP closed -7.65% below its recent March 14th high. The SHCOMP opened at 2,340 and trended lower to a late session 2,281.61 intraday low. The index closed -4.94% and -3.26% below its 20- and 50-day moving averages. All market segments closed lower. Leaders were financials, oil and gas, and utilities, which closed down at least -1.42%. Laggards were health care, basic materials, and technology, which fell at least -4.13%.
In Europe, equities are modestly mixed. News flows are light. An Italian sovereign debt sold with the lowest yields since 2010. The Euro Stoxx 50 is up +0.07%, but the FTSE 100 and DAX are down -0.04% and -0.11%, respectively. The FTSE 100 trades below its 20-day moving average, but slightly better than its 5,863.47 50-day moving average. The DAX remains above its 20-, 50-, 100-, and 200-day moving averages. Compared to the prior day's 2,539.87 close, the Euro Stoxx 50 trades at 2,526.10, compared to the 2,525.21 intraday low. The index is -0.56% below and +0.84% above its respective 20- and 50-day moving averages. Market segments are mixed. Leaders are health care, technology, and consumer services, which are up at least +0.65%. Laggards are financials, industrials, and oil and gas, which are down at least -0.25%.
Libor, LOIS, Currencies, Treasuries, Commodities:
- USD LIBOR rose to 0.15300%, unchanged from 0.15300% the prior day, up from a low of 0.13850% on March 1st, but down from the December 30th 0.15400% high. USD 3-month LIBOR is 0.46965%, down from 0.47065% the prior day, and down from the January 4th peak of 0.58250%.
- The US Libor-OIS (LOIS) spread rose to 34.17 bps, from 34.06 bps the prior day, but compares to the recent January 6th high of 50.05 bps. Euribor-OIS fell to 42.70 bps from 43.40 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 -49.50, unchanged from -49.50 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 16 bps, compared to an August 2nd high of 33 bps.
- U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.337% and 2.207%, respectively, compared to 0.319% and 2.184% Tuesday. The yield curve widened to +1.870%, from +1.864% 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 slightly weaker against the euro, British pound, and Japanese yen. The dollar trades at US$79.003, compared to a US$78.879 intraday low and US$79.047 the prior day, and mixed compared to its US$79.328 50-day, US$79.449 100-day, and US$77.621 200-day averages. The euro trades at US$1.3358, compared to an intraday high of US$1.3374 and compares to a close of US$1.3313 the prior day. The euro trades better than its US$1.3194 50-day and $1.3174 100-day averages. In Japan, the dollar trades at ¥83.01, compared to ¥82.97 the day prior. The yen trades worse than its 50-day moving average ¥79.89.
- Commodities prices are mixed, with lower energy, lower precious metals, higher aluminum and copper, and higher agriculture prices.
- The VIX ended at 15.59, up +9.33% from 14.26 at the prior close. The VIX is -5.52% below its 16.50 20-day moving average.
- The Euro Stoxx 50 volatility index (V2X) is down -0.51% to 22.29, compared to 22.40 at the prior day's close. The V2X index trades -0.51% below its 22.32 20-day moving average, -23.3% below the 29.07 30-day high, and +29.1% above the 17.26 30-day low.
- The Hang Seng volatility index (VHSI) closed at 18.72, unchanged from 18.72 the prior day. The VHSI index trades -11.2% below its 21.24 20-day moving average.
- CBOE skew rose +2.64% to 121.13 from 118.02 at the prior day's close, 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:
· MBA mortgage applications for the latest week fell -2.7%, compared to -7.4% in the prior week.
· February durable goods orders rose +2.2%, worse than survey +3.0%, but up from revised prior -3.6%. Ex-transportation, durable goods were +1.6%, compared to survey +1.7% and -3.0% prior.
Overseas News. Today, Italy auctioned €8.5 billion of 6-month bills at the lowest yields since September 2010. In March, Italy's consumer confidence rose unexpectedly, climbing to 92.1 from 91.7 prior and expectations of a decline to 91.5. Today, Iran announced it will restart the 6-party talks over its nuclear program on April 14th.
· CIM - downgraded to hold at Deutsche Bank, $3.00 price target
· COF - removed from Top Picks at Citi, remains buy rated, $66 price target
· FHN - upgraded to neutral at Sterne Agee
4Q2011 Earnings. The fourth quarter's earnings reports have so far exceeded expectations. Of the 491 S&P500 companies that reported earnings to date, 67% (333 out of 491) 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 +4.9% 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, the SPX earned $24.68 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 13.5x estimated 2012 earnings ($104.34) and 12.0x estimated 2013 earnings ($117.94), compared to 13.6x and 12.0 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 1.42x tangible book value, and 11.7x and 10.0x 2012and 2013 consensus earnings, respectively, compared to 1.44x tangible book value and 11.9x/10.1x 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 to bearish. The composite put/call ratio closed at 0.98, compared to 1.01 the prior day and in between its 5- and 10-period moving averages of 1.02 and 0.91 respectively. The index put/call ratio closed at 1.56, compared to 1.41 the prior day, above the 5- and 10-period moving averages of 1.47 and 1.31, respectively. The equity put/call ratio closed the day at 0.57, compared to 0.65 the prior day, above its 5- and 10-period moving averages of 0.62 and 0.58, 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 2011, and repeatedly through February with the most recent reading on February 21st on both indices, March 26st on the SPX, and March 16th and 21st on the BKX. Intra-day timeframes of 120- and 60-minute intervals show that the SPX and BKX reached multiple levels of potential price exhaustion in January and February with the most recent indicators coming on March 26th, 15th and 14th.
NYSE Indicators. Volume fell rose -3.27% to 730.24 million shares, 0.91x the 50-day moving average, from 754.94 million shares Monday. Market breadth was negative, and up volume lagged down volume. Advancing stocks lagged decliners by -508 (compared to +1,565 the prior day), or 0.71:1. Up volume lagged down volume by 0.43:1.
SPX. On nearly flat volume, the SPX fell -3.99 points, or -0.28%, to 1412.52, the 49th straight close above 1300 and the seventh close above 1400 in the last nine sessions. Volume fell -0.52% to 554.20 million shares, down from 557.10 million shares Monday and below the 626.64 million share 50-day moving average. For the 66th consecutive day, the SPX closed above its 50-day moving average (1356.88) and remained above its 200-day moving average (1265.11) for the 62nd time in the past 63 sessions. The SPX closed above its 200-week moving average (1133.12) for the 117th straight session.
From its prior close at 1416.51, the SPX opened higher to 1418 and rose to the intra-day high of 1419.15 at 10:00. Gains retraced to the break-even line, and the index traded sideways there through 3:15. At 3:15, a sell-off ensued that lasted through the bell. The index set the intra-day low of 1411.95 at 3:57 and closed just above that level.
Technical indicators are positive. The SPX closed above 1200 for the 81st straight session, above 1300 for the 49th session, and above 1400 for the seventh time in the past nine 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 14th straight session, the SPX closed (by +1.94%) above its 20-day moving average (1385.58). The index closed (by +4.10%)above its 50-day moving average for the 67th straight session. The index closed (by +8.61%) above its 100-day moving average (1300.54) for the 81st straight session. The SPX closed +11.65% above its 200-day moving average for the 62nd time in the past 63 sessions. The directional momentum indicator is positive for the 14th straight session, and the trend is strong and stable. Relative strength fell to 66.70 from 69.42, a neutral range. Next resistance is at 1417.13; next support is at 1409.93.
BKX. On higher volume, the KBW bank index fell -0.66 points, or -1.31%, to 49.60, its 55th straight close above 40. Volume rose +3.03% to 71.21 million shares, up from 69.11 million shares Monday but below the 82.63 million share 50-day average. The BKX closed +15.40% above its August 30, 2010, closing low of 42.98, the trough of the 2010's correction, but -14.41% and -10.84% below its April 23, 2010 (the post-2008 high point), and February 14, 2011 (the most recent high point) respective closes.
Financials were the market's worst performing segment, and large-cap banks underperformed regional banks. From its prior close of 50.26, the BKX opened lower to 50.20, rose to positive territory and the intra-day high of 50.39 at 9:45, but quickly fell back into negative territory by 10:00 and remained negative through the day's remainder. By 11:00, the index reached 49.90 and traded mostly sideways at that level through 3:05 when a sell-off began that lasted through the close. The index set the intra-day low of 49.57 at 3:57 and closed just above that level.
Technical indicators are positive. On a percentage basis, bank stocks have outperformed the broader market's rebound from the October lows, rising +52.33% from the 32.56 October 4th intra-day low compared to a +31.52% rebound in the SPX. However, the BKX is still -10.8% below its 2011 high, compared to the SPX which is +3.6% 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 62nd time in the past 63 sessions, the 20-day closed (by +1.99 points) above the 50-day, and the gap expanded. The 50-day moving average closed (by +3.77 points) above the 200-day moving average for the 25th straight session, and the gap widened. The 100-day moving average closed (by +0.52 points) above the 200-day moving average for the seventh straight session, and the gap widened. The BKX closed +4.44% above its 20-day moving average for the 14th straight session. The index closed (by +9.02%) above its 50-day moving average for the 65th straight session. The index closed (by +17.41%) above the 100-day moving average for the 66th straight session. The index closed (by +18.87%) above its 200-day moving average for the 48th time in 49 sessions. The index closed above 40.0 for the 59th straight session. The directional movement indicator is positive for the 13th straight session, and the trend is moderate and stable. Relative strength fell to 64.61 from 70.22, the high end of a neutral range. Next resistance is 50.14; next support at 49.32.