This morning. U.S. equity futures are moderately higher. Overseas equity markets are generally higher. U.S. equity markets are in a confirmed uptrend, though last Thursday’s confirmation signal was a weak one. The U.S. dollar is stronger. Commodity prices are generally higher. After a fair value adjustment of +0.18 points, the June SPX equity futures are at 1326.70, up +7.42 points. The SPX opens at 1325.83, -1.28% below its February 18th post-Lehman high and +1.35% above its 50-day moving average. Next resistance is at 1328.72. Next support is at 1323.98.
Thursday, U.S. equity markets traded within tight ranges and closed mixed, with a gain on the Nasdaq, but losses on the other major exchanges. Volumes rose, but only to the 50-day moving average. The DJI recorded its first distribution day of the current uptrend. Financials were the worst performing market segment. Market breath was positive, but up volume lagged down volume. Market volatility rose slightly, with the VIX closing at 17.74, up +0.02% on the day, but down and -39.7% since March 16th. The March 24th follow-through was not particularly robust as only the Nasdaq rose more than +1.0%, and both the DJI and the NYA indexes rose on lower volume.
Today, Asian markets closed mixed, with weakness in Japan and strength in China. For the first time in 3 trading days, the Nikkei closed lower, falling -0.48% on increased volume. Oil prices and domestic crises were cited for the decline. On manufacturing gains, the Hang Seng and Shanghai composite rose +1.17% and +1.34%, respectively, though both on lower volume. The Eurostoxx50, FTSE, and DAX are moderately higher, up +0.87%, +0.94%, and +1.17%, respectively, with gains attributed to an improving U.S. economy. On the EuroStoxx, financials are middling performers, up +0.97%.
Libor continues to trend lower, despite sovereign debt and inflation concerns. Overnight USD LIBOR is lower at 0.18400%, down from 0.18450% Thursday and compared to 0.25188% at year-end. USD 3- month LIBOR is lower at 0.30100%, compared to 0.30300% the prior day’s 0.30700%, and 0.30950% at year-end. In early trading, the dollar is stronger against the euro, pound, and yen. The dollar has trended lower since last June and now trades well below its 50-, 100-, and 200-day moving averages. The Euro trades at US$1.4157, compared to US$1.4158 Thursday and US$1.4127 the prior day. The Euro trades above its 50-, 100-, and 200-day moving averages. The dollar trades at ¥83.80, compared to ¥83.13 Thursday and ¥82.89 the prior day. Treasury yields are slightly higher at the longer maturities, with 2- and 10-year maturities yielding 0.845% and 3.489%, respectively, compared to 0.821% and 3.470% Thursday. The yield curve narrowed to +2.644% from +2.649% from the prior day. 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 +2.889% on February 3, 2011. Commodities prices are mostly higher, with higher petroleum but lower natural gas, higher precious metals, copper and aluminum, and mixed agricultural prices.
U.S. news and economic reporting. Today’s economic reports focus on the March employment report at 8:30; at 10:00, construction spending for February and March ISM manufacturing.
Overseas news. In March, China’s purchaser managers index rose less than expected and remained above the expansionary threshold. This morning, Standard & Poor’s downgraded Ireland’s sovereign debt rating to BBB+ from A-. In March, the Euro-zone purchaser managers index fell more than expected. Today, Japanese officials discovered radioactive ground water in the area surrounding the troubled Dai-ichi nuclear plant.
· NDAQ – makes a combined bid with ICE for NYX at $42.50 per share in cash and stock, or $11.3 billion ($1.8 billion, or +19%, higher than the Deutsche Bourse bid).
· HBAN – raised to buy at Jeffries, price target remains at $8.00
4Q2010 Earnings. The latest quarterly earnings results have exceeded EPS and revenue expectations. Of the 497 S&P500 companies that reported earnings to date, 71% (356 of the 497) beat operating EPS estimates, versus the historical average of 62%. Companies beat by an average of +5.5% (versus a historical average of +2%). EPS is up +36.3% over the prior year. Though challenged in the current operating environment, 386 companies (78%) reported increased revenues and 327 companies (66%) beat revenue estimates. In the fourth quarter of 2010, the SPX earned $22.47 per share, a +4.9% and +28.3% increase over 3Q10 and 4Q09 EPS of $21.42 and $17.51, respectively.
With all 24 BKX members reporting, 75% (18 out of 24) beat operating EPS estimates. Bank revenues disappointed slightly, missing estimates by -0.59% on average. Fifteen banks (63%) reported increased revenues over the prior year’s quarter and 17 banks (71%) beat revenue estimates. In the fourth quarter of 2010, the BKX earned $0.93 per share, a +31.0% increase over 3Q10 EPS of $0.71, and compared to 4Q09 EPS of -$0.52.
Thursday’s equity markets. On heavier volume, the major indexes closed mixed. The DJI, NYSE composite, and SPX were modestly lower, off -0.25%, -0.14%, and –0.18%, while the Nasdaq was higher, up +0.15%. The major averages opened slightly lower and spent the day in a relatively tight range. The SPX, NYSE, and Nasdaq saw their lows before 11:30 and their intraday highs at mid-afternoon. Economic news was generally positive with initial jobless claims better than expected. The ISM Chicago purchasing manager index fell to 70.6 in March versus February’s 71.2 reading. Macro news was largely unchanged, with incremental news on the European debt situation after Ireland announced the results of bank stress tests. Hawkish comments from the Minneapolis Fed governor seemed to contribute to yesterday’s weakness through the afternoon. Trading desks reported very light end-of the quarter trading. The VIX closed at 17.74, up slightly +0.17%.
Technical indicators remain generally positive. The SPX traded in a tight 4 point range. The SPX finished the 1st quarter with its best result in 13 years, up 5.42%. All the major indices closed above their 200-week and 50-, 100-, and 200-day moving averages. The Investment Company Institute (OTC:ICI) reported outflows for domestic equities for the 4th week in a row. The week ending March 23rd had net outflows of -$2.508 billion versus the week of March 16th, which had outflows of -$1.654 billion. The AAII bullish sentiment was 41.81 (March 31) versus last week’s 37.76 (March 24th), but well off its best level of 55.88 (January 6th). The Bloomberg NYSE new net highs were +256 versus Wednesday’s +100, and well above its 50-, 100-, and 200-day moving averages. The relative strength index finished at 57.90, lower than Wednesday’s 58.72 and in the middle of a neutral range.
Market segments were mixed. Industrials, basic materials, and telecommunications were positive, up +0.33%, +0.21% and +0.02%, respectively. Oil and gas, consumer services, and financials were the laggards.
Financials were mixed. The BKX and XLF finished lower, down -0.40% and -0.36%, while the KRX finished higher, up +0.61%. Smaller regional banks outperformed the large caps with COLB, FCF, and CVBF setting the pace, up at least +1.95%. The KRX had 39 members up and 9 down, while the BKX had 7 members up and 16 down. Among the large cap regional’s, CFR, CBSH and BK led the way, up +0.89%, +0.72% and +0.67%, respectively. The BKX finished the quarter off -0.56%, while the KRX was up +0.97% for the same time period. The BKX finished below its 20- and 50-day moving average. The XLF finished below its 50-day average. The BKX and XLF finished above their 200-week and 100-day averages. The KRX finished above all of its major moving averages. While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -10.41% below its April 2010 high and -37.10 below its best level of 82.55 in September 2008.
NYSE Indicators. Volume rose +19.7% to 1.076 billion shares, compared to 899.14 million shares Wednesday, and 1.03x the 50-day moving average. Market breadth was positive, but up volume lagged down volume. Advancing stocks led decliners by +515 (compared to +1338 Wednesday), or 1.41:1. Up volume led down volume by 0.70:1.
Valuation. The SPX trades at 13.7x estimated 2011 earnings ($96.93) and 12.1x estimated 2012 earnings ($109.97), compared to 13.6x and 12.0x respective 2011-12 earnings yesterday. The 10-year average median Price/Earnings multiple is 20.0x. Since the beginning of 2010, analysts increased 2011 and 2012 earnings estimates by +4.8%, and +5.6%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +14.4% and +29.9%, respectively.
Large-cap banks trade at a median 1.54x tangible book value and 13.1x 2011 consensus earnings, compared to 1.52x tangible book value and 12.8x 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 and 2012 BKX earnings to exceed 2010 operating earnings by +28.3% and 72.0%, respectively.
SPX. On higher volume, the SPX fell -2.43 points, or -0.18%, to 1325.83. Volume rose +20.4% to 819.23 million shares, up from 680.40 million shares Wednesday but below the 820.79 million share 50-day moving average. For the 112th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1308.17 versus 1194.21, respectively). The SPX closed above its 200-week moving average (1174.36).
The SPX opened slightly lower to the 1327 level. The index fluctuated between gains and losses all session. At 9:35, the index rallied to positive territory and breached 1329. The SPX promptly reversed momentum and by 10:05, the ensuing sell-off brought the index down to 1325. Buyers bought the dip and rallied the index back to break-even by 10:20 and by 10:35, the index again breached 1329. Stocks fell through 11:35, crossing back into negative territory and setting the intra-day low of 1325.03 at that time. The index reversed itself again, and retook breakeven at 12:25. By 2:18, the rally had brought the index to its intra-day high of 1329.77. Stocks retraced gains back to breakeven, trading sideways through the afternoon. At 3:30, a few sharp sell-offs sent the index into negative territory for good, and the SPX closed at the bottom end of its day’s trading range.
Technical indicators are positive. The index closed above 1300 for the sixth straight session. The index closed above its April 2010 highs for the 83rd straight session. The SPX closed above its 20-day moving average (1302.87) for the sixth straight session. The index closed +1.35% above its 50-day moving average, closing above that average for the fifth sixth session. The index closed (by +4.21%) above its 100-day moving average for the 10th straight session. The SPX closed +11.02% above its 200-day moving average. The 20-day moving average declined. The directional momentum indicator is positive for the second consecutive day, and the trend is declining. Relative strength fell to 58.04 from 59.15, a neutral range. Next resistance is at 1328.72; next support is at 1323.98.
BKX. On higher volume, the KBW bank index fell -0.21 points, or -0.40%, to 51.92. Volume rose +10.1% to 111.64 million shares, up from 101.36 million shares Wednesday but below the 127.28 million share 50-day average. The index closed +20.8% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -10.4% and -6.06% below its April 23, 2010 and February 15, 2011 closing highs, respectively.
Financials were the market’s worst performing sector, and large-cap banks’ losses underperformed regionals’ gains. The BKX gapped lower at the open to 51.85-level support. Unable to mount a healthy rally from the opening level, the index fell further. By 10:12, the BKX reached its intra-day low of 51.71. Buyers bought the dip and momentum attempted to reverse. By 10:30, the index returned to 51.85. A second sell-off at 11:00 retraced the index back near its lows by 11:30. Through 2:00, financials mounted a healthy rally, and crossed 52.00 by 1:00. By 2:15, the index had reached its intra-day high of 52.05. Financials managed sideways trading through the close, but could not hold the 52.00 level.
Technical indicators are trending positive. The index closed above 50 for the 71st straight day. The BKX closed above its 100- and 200-day moving averages (51.48 and 49.22) for the 11th and 78th straight sessions, respectively. The index crossed back below its 20-day moving average (51.98) by -0.11% after retaking it the prior day for the first time since February 22nd. The index closed below the 50-day moving average (53.16), closing below that average 23rd straight session. The 20- and 50-day moving averages fell. The 20-day closed (by -1.18 points) below the 50-day for the 13th straight day, and the negative divergence expanded. The 50-day moving average closed (by +3.93 points) above the 200-day moving average for the 54th straight session, with the positive divergence contracting. The 100-day moving average closed (by +2.26 points) above the 200-day moving average for the 37th straight session, with the positive divergence expanding. The directional movement indicator is negative but contracting, and the trend is declining. Relative strength fell to 46.71 from 48.44, a neutral range. Next resistance is 52.12; next support at 51.71.