Equity Futures Signal Strong Open as Positive Economic Data Surprise

|
Includes: DIA, QQQ, SPY
by: Gary Townsend

This morning. After closing lower the past 3 trading days, equity futures are sharply higher this morning, after China’s November PMI beat expectations and exceeded October. Also, European sovereign debt concerns eased slightly overnight on news that the ECB purchased sovereign debt and rumors that in a meeting Thursday, Trichet will back away from hawkish exit policy rhetoric and that monetary policy will become more accommodative. Finally, U.S. economic news continues to beat expectations, with a stronger than expected November ADP employment report. Asian and European markets are up impressively, having concluded a lackluster November, though equities outperformed credit for the 1st time since in several months. Also, equity markets saw inflows in the latest week, whereas bond funds ended a 99-week inflow streak, losing $4.3 billion. The dollar is weaker. Commodities are higher across the board.

Having ended the 10-week long uptrend on November 16th, equity markets are in correction, but despite the another day of losses, trading desks continue to report that selling pressure is modest, with support particularly evident at 1175 on the SPX, approximating the 200-week moving average. After fair value adjustment, December SPX futures are up +17.3 points at 1196.80, near the best levels of the morning and above 1st and 2nd resistance points. Next resistance is at 1187.25; next support is at 1173.99.

Asian equity markets closed higher, with the Nikkei +0.51% and Hang Seng +1.05%. European equity markets are higher, too, with the Eurostoxx50 +1.95%, FTSE +1.56%, and DAX +1.95%. On the EuroStoxx, financials are up +3.61%, rebounding from oversold conditions and the best performing market sector. Eurozone sovereign CDS spreads are slightly narrower.

LIBOR trends remain unremarkable, but have regained a slight upward bias. Overnight USD LIBOR is 0.24000%, up from 0.23625% yesterday and above the November 0.22563% lows. USD 3-month LIBOR rose to +0.30344%, compared to 0.30031% yesterday and +0.28438% on November 22, rising 1.5 bps in the past week and above +0.30% for the 2nd consecutive day. The dollar is weaker against the euro, pound, and yen. The euro trades at US$1.3108, compared to US$1.2983 the prior day. The dollar trades at ¥84.14, compared to ¥83.69 yesterday. U.S. Treasury yields are higher compared to yesterday, with 2- and 10-year maturities yielding 0.500% and 2.898%, respectively, compared to 0.453% and 2.797%. The yield curve spread widened to +2.398% compared to +2.344% yesterday. In the past year, the 2- and 10-year spread has varied from a low of +1.959% on August 26, 2010, and a high of +2.90% on January 11, 2010. Commodities are higher, with higher petroleum and natural gas, precious metals, aluminum, and copper, and higher agricultural prices.

U.S. news. Wednesday, ADP November employment report greatly exceeded survey at +93K jobs, compared to survey +70K and prior +43K. Non-farm productivity was a robust +2.3% and unit labor costs declined -0.1%. The Labor Department’s November employment report will be released Friday.

Overseas news. China’s November purchasing managers’ index rose to 55.2 from 54.7 in October, beating estimates for a smaller gain. The U.K. and the Euro-zone November purchaser managers’ indexes both rose from October, but the Eurozone missed expectations while the U.K. beat. Yesterday, S&P placed Portugal on watch for a ratings downgrade. Today’s €500 million, 12-month Portuguese debt auction saw yields rise 46 basis points over the November 17th auction, to 5.281% from 4.813%. Iran agreed to talks on its nuclear program next week with an EU-led group that also includes the U.S., China, and Russia.

Company news/research:

  • STT – announced an efficiency initiative which will save $575-$625 million pre-tax by 2014 and cut 1,400 jobs; expected to take a $160 million restructuring charge in 4Q10.
  • European banks – new stress tests may be conducted in 2011.
  • MS – received approval from Chinese regulators to sell its 34.3% stake in China International Capital Corp (OTCPK:CICC).
  • AXP – initiated as buy at JPM, price target of $50
  • COF – initiated as neutral at JPM, price target of $41
  • DFS – initiated as neutral at JPM, price target of $18
  • The Senate Banking Committee holds a mortgage servicing hearing today

Tuesday’s equity markets. For the 3rd consecutive trading day, markets closed lower, but for the 2nd consecutive day, the SPX tested support successfully at the 50-day moving average and closed well above the day’s lows. Reflecting eurozone equity weakness, U.S. markets immediately traded more than -1% lower, with financials among the worst performers. The SPX traded to an intraday low of 1174.14 within the 1st quarter hour, but rebounded above the 50-day moving average 1178 before 10:00, recovering to a intraday high of 1187.40 at 1:30. Volume was heavy, well in excess of the 50-day moving average. The long awaited positive reversal proved elusive. When the White House “summit” with the new Republican House leadership disappointed, markets lost ground into the close. Market breadth was negative. Most market segments were lower. Telecommunications, utilities, and basic materials were the best performers. Financials, health care, and technology were the worst.

Market sentiment is mixed, as markets moved into correction after November 16th. Major indexes are at least +3.42% higher in 2010, but the SPX closed -3.02% below its April 23rd close, the high point prior to the May-August correction. While the broader indices have recovered most of their correction losses, financial stocks have not, with the BKX closing -22.8% below its April highs and mired well into bear market territory.

The latest week’s (November 25th) AAII Investor Bullish Sentiment index rose +11.9% to 47.40 from 40.00 on November 18th. This is a bullish reading, but just below the November 4th level, while markets were still in a confirmed uptrend. Sentiment indicators are highly variable, but this reading is probably best read as bearish.

Technical indicators are trending toward the negative. The SPX closed below its 200-week moving average and closed below this level yesterday by -7.94 points (1180.55 vs. 1188.49). The NYSE composite also closed below its 200-week moving average (7430.94 vs. 7711.09). The NASDAQ, DJI, SPX, and NYA closed below their respective 20-day moving averages. All closed above their respective 100- and 200-day averages, but the DJI and NYA closed below their 50-day moving averages. Markets are in a generally bullish configuration, with 50-day moving averages above respective 200-day moving averages. Directional movement indicators are negative, with a strengthening trend. Short-term relative strength indicators are in the lower end of a neutral range. Market volatility has generally increased. Yesterday, the VIX closed up +9.34% to 23.54 from 21.53 at Monday’s close, above 20.0 for the 4th time in the past 8 trading days.

Financials underperformed the SPX, with large caps generally outperforming the regional and smaller banks. The XLF, BKX, and KRX closed down -0.55%, -0.71%, and -1.31%, respectively.

NYSE Indicators. Volume increased to 1.536 billion shares, up +66.2% from 924.1 million shares Monday, and above the1.039 billion share 50-day moving average. Market breadth was negative, and up volume lagged down volume. Advancing stocks trailed decliners by -964 (compared to -500 Monday), or 0.51:1. Up volume lagged down volume by 0.58:1.

3Q2010 Earnings. Earnings results have generally exceeded EPS and revenue expectations. Of the 466 S&P500 companies that reported earnings to date, 76% (354 of 466) beat operating EPS estimates, versus the historical average of 62%. Companies beat by an average of +6.5% (versus a historical average of +2%). EPS is up +31.5% over the prior year. Though challenged in the current operating environment, 371 companies (80%) reported increased revenues and 287 companies (61%) beat revenue estimates. With all 24 BKX members reporting, 79% (19 out of 24) beat operating EPS estimates, with a +25.3% average operating EPS surprise. Bank revenues disappointed slightly, missing expectations by -0.30% on average.

3Q2010 Earnings. Earnings results have generally exceeded EPS and revenue expectations. Of the 466 S&P500 companies that reported earnings to date, 76% (354 of 466) beat operating EPS estimates, versus the historical average of 62%. Companies beat by an average of +6.5% (versus a historical average of +2%). EPS is up +31.5% over the prior year. Though challenged in the current operating environment, 371 companies (80%) reported increased revenues and 287 companies (61%) beat revenue estimates. With all 24 BKX members reporting, 79% (19 out of 24) beat operating EPS estimates, with a +25.3% average operating EPS surprise. Bank revenues disappointed slightly, missing expectations by -0.30% on average.

Valuation. The SPX trades at 13.9x estimated 2010 earnings ($85.16) and 12.2x estimated 2011 earnings ($96.51), compared to 14.0x and 12.3x respective 2010-11 earnings yesterday. The 10-year average median Price/Earnings multiple is 20.0x. Since the beginning of the year, analysts increased 2010, 2011, and 2012 earnings estimates by +11.7%, +4.4%, and +5.3%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings by +13.3% and +28.7%, respectively.

Large-cap banks trade at a median 1.34x tangible book value and 12.4x 2011 earnings, compared to 1.37x tangible book value and 12.4x 2011 earnings yesterday. These compare to the 10-year average median multiples of 3.08x tangible book value and 15.9x earnings. Analysts expect 2011 large-cap bank earnings to exceed 2010 earnings by +34.3%. In 3Q2009, large-cap banks earned a combined $5.91 per share while the BKX Index earned -$1.24 per share. In 3Q2010, large-cap banks earned $13.78 and the BKX earned $0.71 per share.

SPX. On higher volume, the SPX fell -7.21 points, or -0.61% to end at 1180.55. Volume rose +51.5% to 1.113 billion shares, from 734.56 million shares Monday and above the 837.95 million share 50-day moving average. For the 28th consecutive day, its 50-day moving average closed above its 200-day moving average (1178.07 versus 1133.73, respectively). The SPX closed below its 200-week moving average (1188.49) for the third consecutive day.

In a repeat of Monday morning’s trading, the SPX gapped lower in sympathy with weak European markets. After reaching an intra-day low of 1174.14, the index quickly reversed at 9:45am on a better-than-expected Chicago purchasing managers’ index report and higher consumer confidence at 10 am. Subsequent trading lacked conviction until President Obama’s 1 pm press conference signaled his willingness to reach a tax-rate compromise, prompting the SPX to nearly re-take its prior day’s closing level. Standard & Poor’s 3:45 pm ratings watch downgrade of Portugal sank markets in the final minutes, and the SPX finished down -7.21 points or -0.61%. The SPX closed +0.21% above its 50-day moving average (1178.07), closing above that average for the 61th consecutive day, and +4.13% above its 200-day moving average (1133.73), which trended higher on the day. The SPX closed -3.02% below its April 23rd closing high of 1217.28. The 50-, 100-, and 200-day moving averages rose, while the 20-day fell.

Technical indicators are negative trending as the SPX closed below its April highs for the 13th consecutive day. The directional momentum indicator is negative, with a stable trend strength. Relative strength declined to 45.97 from 49.17, in the middle of a neutral range. Next resistance is at 1187.25; next support is at 1173.99.

BKX. On higher volume, the KBW bank index closed at 44.76, down -0.31 points, or -0.71%. The index closed +4.14% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -22.8% below its April 23rd closing high, well into bear market territory.

Financial stocks underperformed the broader indexes, and the regionals again underperformed the large cap financials. The BKX traded in close correlation to the SPX through the day, gapping lower to an intra-day low of 44.57 before rebounding at 9:45. Notably, the BKX again significantly outperformed European financials, continuing to decouple from the continent’s debt woes. The broader market’s 1 pm rally lifted financials while the late Portugal ratings action similarly sank bank stocks into the close, finishing near the middle of the day’s trading at 44.76. Volume was 201.68 million shares, up 67.4% from 120.5 million shares on Monday, and compares to 149.91 million share 50-day average.

Technical indicators are negative. The BKX closed below its 20-, 50-, 100-, and 200-day moving averages (46.39, 46.40, 46.69, 48.87, respectively). The 20-, 50-, 100-, and 200-day averages trended lower. The 50-day moving average closed (by -2.47 points) below the 200-day moving average, as it has since August 16. The directional movement indicator is negative, with a strengthening trend. Relative strength fell to 41.12 from 42.92, the lower end of a neutral range. Next resistance is 45.02; next support at 44.53.

Disclosure: Author is long STT, MS, AXP, COF