This morning. Equity futures are lower this morning, “Black Friday”, but improving, suggesting a weaker trade today following Wednesday gains and Tuesday’s losses. Today’s equity market weakness correlates to a stronger dollar and weaker commodities. Equity markets are in correction, having ended the 10-week long uptrend on November 16th. Equity futures are lower this morning. December SPX futures are at 1185.70, down -10.65 points after fair value adjustment. Next resistance is at 1203.41; next support is at 1188.49. Markets close at 1:00 EST.
Overseas, the Koreas and Portugal are the foci, with the U.S. and Republic of (“South”) Korea set to stage weekend naval exercises in the Yellow Sea, while the Democratic Republic of (“North”) Korea warns of the “brink of war”. The KOSPI Index closed down -1.34%. The German government dismissed a EU Commission proposal to double the size of the Europe’s €440 billion bailout fund. European stock indexes are lower. In Portugal, government spokespeople describe as “totally false” news reports that the country is under pressure to accept a bailout. Its parliament will approve an austerity budget this weekend.
Asian equity markets closed lower, with the Nikkei -0.40% and Hang Seng -0.77%. European equity markets are lower, with the Eurostoxx50 -1.63%, FTSE -1.11%, and DAX -1.00%. On the EuroStoxx, financials are down -2.98%, extending the week’s dreadful performance. Eurozone sovereign CDS spreads are mixed, slightly wider for Spain, narrower for Ireland and Portugal.
LIBOR trends remain unremarkable. Overnight USD LIBOR is 0.23250%, ticking lower from 0.23313% Wednesday, after rising slightly over the prior 3 days. USD 3-month LIBOR rose to +0.29438%, from 0.29188% Thursday, rising about 1 bps in this week. The dollar is much stronger against the euro, pound, and yen. The euro trades at US$1.3214, compared to US$1.3360 the prior day. The dollar trades at ¥83.94, compared to ¥83.60 Thursday. U.S. Treasury yields are lower compared to Wednesday, with 2- and 10-year maturities yielding 0.500% and 2.852%, respectively, compared to 0.531% and 2.912%. respectively, compared to 0.453% and 2.773%. The yield curve spread narrowed to +2.350% compared to +2.381% Wednesday. 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 mixed but mostly lower, with lower petroleum and precious metals, higher aluminum and copper, and lower agricultural prices.
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 have disappointed slightly, missing expectations by -0.30% on average.
U.S. news. Due to Thanksgiving holiday, it is one of the year’s lightest weeks for economic releases. This morning, the latest week’s initial jobless claims beat at 407K versus 435K survey. Durable goods disappointed with a -3.3% move in October. Equity markets close Friday at 1:00.
Overseas news. According to reports, the European Central Bank may pressure Portugal to accept bailout aid to avoid a bailout of Spain. Today, S&P cut Anglo Irish Bank six notches, from BBB to B (junk). November German inflation increased more than expected, rising to 1.6% from 1.3%, compared to expectations of 1.4%. Today, South Korea reported hearing explosive shots fired from the direction of North Korea. China failed to draw enough demand at a bill sale today for the first time since June, reflecting a shortage of cash at banks after policy makers increased their reserve requirements twice this month.
· None of note
Wednesday’s equity markets. In a continuation of the recent inconsistent trade, major indexes erased Tuesday’s large losses, albeit on lower volume, and closed at the day’s high. Market breadth was positive. All market segments closed higher. Despite having moved into correction, market losses are been modest, on the NYA just -2.84% below the 7800.66 November 5th high.
Market sentiment is mixed, as markets moved into correction after November 16th. Major indexes are at least +5.49% higher in 2010, but the SPX closed -1.56% 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, closing -22.8% below their 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, but inconsistently so. The SPX closed above its 200-week moving average (1198.35 vs. 1189.87), after closing below that level Tuesday. The NYSE composite closed below its 200-week moving average (7579.26 vs. 7720.96). The NASDAQ closed above its 20-day moving average, while the DJI, SPX, and NYA closed below their respective 20-day moving averages. All closed above their respective 50-, and 100-, 200-day 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 stable trend. Short-term relative strength indicators moved up into the middle of a neutral range. Market volatility moved up. The VIX closed down -5.19% to 19.56 from 20.63 at Tuesday’s close, below 20.0 for the 4th time in the past 5 trading days.
Financials generally outperformed the SPX, with the best performance from the regionals outperformed. The XLF, BKX, and KRX closed up +1.53%, +1.17%, and +1.56%, respectively.
NYSE Indicators. Volume fell -19.5% to 924.0 billion shares, from 1.023 billion shares the prior day, and below the 1.057 billion shares 50-day moving average. A mirror image of the day before, market breadth was very positive, negative, and up volume led down volume by a large margin. Advancing stocks led decliners by +1986 (compared to -1697 Tuesday), or 4.85:1. Up volume lagged down volume by 10.9:1.
Valuation. The SPX trades at 14.1x estimated 2010 earnings ($85.13) and 12.4x estimated 2011 earnings ($96.51), compared to 13.9x and 12.2x 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 +5.4%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings by +13.4% and +28.9%, respectively.
Large-cap banks trade at a median 1.38x tangible book value and 12.2x 2011 earnings, compared to 1.36x tangible book value and 12.1x 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 lower volume, the SPX rose fell +17.62 points or +1.49% to end at 1198.35, more than erasing the prior day’s losses. Volume fell -17.9% to 679.50 million shares, from 827.63 million shares the prior day and above the 860.0 million share 50-day moving average. For the 25th consecutive day, its 50-day moving average closed above its 200-day moving average (1174.77 versus 1132.19, respectively). The SPX closed above its 200-week moving average (1189.87), after closing below that average Tuesday.
At the open, the SPX gapped about 10 points higher, and after a brief pause, rallied another 5 points in the first hour, trending higher throughout the session to close at the day’s high. The SPX closed +2.01% above its 50-day moving average (1174.77), closing above that average for the 58th consecutive day, and +5.84% above its 200-day moving average (1132.19), which trended higher on the day. The SPX closed -1.56% below its April 23rd closing high of 1217.28. The 20-, 50-, 100-, and 200-day moving averages rose.
Technical indicators are trending toward the negative as the SPX closed below its April highs for the 11th consecutive day. The directional momentum indicator is negative, with a stable trend strength. Relative strength rose to 53.99 from 45.89, moving into the middle of a neutral range. Next resistance is at 1203.41; next support is at 1188.49.
BKX. On lower volume, the KBW bank index closed at 45.04, up +0.52 points, or +1.17%. The index closed +4.79% 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 generally underperformed the broader indexes, though regionals performed better than the large cap financials. The BKX gapped higher to 44.90, but immediately gave up those gains, rallying again to 45.0 at 10:30, and then trading sideways through the day. Volume was 96.0 million shares, down -38.4% from 155.76 million shares the prior day, and compares to 153.4 million share 50-day average.
Technical indicators are negative. The BKX closed below its 20-, 50-, 100-, and 200-day moving averages (46.48, 46.54, 46.80, and 48.80, respectively). The 20-, 50-, 100, and 200-day averages trended lower. The 50-day moving average closed (by -2.33 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 rose to 41.53 from 37.52, still in an oversold range. Next resistance is 45.27; next support at 44.64.