U.S. Equity Futures Modestly Higher, But on Muted Investor Conviction

This morning.  U.S. equity futures are moderately higher.  Overseas equity markets are generally lower.  U.S. equity markets are in a confirmed uptrend, though the uptrend is based on a weak market confirmation signal on March 24^th .  Since the uptrend commenced, only the DJI has recorded a distribution day.  The U.S. dollar is mixed.  After a fair value adjustment of +0.27, June SPX equity futures are at 1326.80, up +2.73 points.  The SPX opens at 1337.44, -1.10% below its February 18^th post-Lehman high and +1.46% above its 50-day moving average.  Next resistance is at 1337.44.  Next support is at 1320.92.

 

Friday, U.S. equity markets traded modestly lower on higher but unimpressive volumes.  Market breath was negative, and up volume lagged down volume.  Markets opened higher, but traded off after news of another strong earthquake and tsunami warning off Japan’s northeast coast.  U.S. budgetary talks achieved no breakthroughs.

 

Today, Asian equity markets closed modestly lower.  The Nikkei closed down -0.50% on a investment downgrade of its automakers and a widening of its evacuation perimeter around the Dai-Ichii nuclear power plant.  In China, the Hang Seng and Shanghai composite closed down -0.38% and +0.24%, respectively.  Volume rose +28.9% on the SHCOMP, with financials off -0.38%.  The SHCOMP reached its intraday high mid-session, then low ground through the afternoon to end near its intraday low.  The weakness was attributed to government comments concerning the need to “control” increasing housing prices.  Real estate development stocks were particularly weak.  Chinese equity markets are in a confirmed uptrend, recovering from this past November-January correction.  The SHCOMP closed at 3022.75, up +12.9% since it correction-low close on January 25^th.  In Europe, the Eurostoxx50, FTSE, and DAX are lower, down -0.30%, -0.11%, and -0.04%, respectively.  Financials are the 7^th weakest performing market segment, down -0.26% on the day.

 

Libor continues to trend lower, despite sovereign debt and inflation concerns.  Levels are now comparable to those seen prior to last year’s sovereign debt crisis.  Overnight USD LIBOR is lower at 0.15075%, down from 0.15475% Friday, and compared to 0.25188% at year-end.  USD 3- month LIBOR is lower at 0.28275%, down from 0.28525% Friday and 0.30950% at year-end.  In early trading, the dollar is weaker against the euro and yen, but stronger against the pound.  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$1.4444, compared to US$1.4483 Friday and US$1.4308 the prior day.  The Euro trades well above its 50-, 100-, and 200-day moving averages.  The dollar trades at ¥84.67, compared to ¥84.76 Friday and ¥84.91 the prior day.  The yen trades off its 200-day moving average ¥82.44.  U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.814% and 3.583%, respectively, compared to 0.806% and 3.577% Friday.  The yield curve narrowed to +2.769% from +2.771% 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 lower, with lower petroleum and natural gas, mixed precious metals, higher copper and aluminum, and mixed agricultural prices.

 

U.S. news and economic reporting.  There are no economic reports today.  Releases continue tomorrow with the NFIB small business optimism report for March, import prices, trade balance and IBD/TIPP economic optimism for April.

 

Overseas news.  Energy prices are lower on prospective peace prospects in Libya.  The IMF lowered G-8 economic growth forecasts.  Portugal will start negotiations with the EU and IMF for assistance of as much as $115 billion.  Japan widened its evacuation perimeter around the Dai-Ichi nuclear power plant.

 

Company news/research:

 

·         AMG – Downgraded to neutral from buy at Goldman Sachs, $112 target

·         BX –  Downgraded to neutral from conviction buy at Goldman Sachs, $20 target

·         JNS – Upgraded to outperform from market perform at Wells Fargo Capital, target up from $14 to $15

 

4Q2010 Earnings.  The latest quarterly earnings results have exceeded EPS and revenue expectations.  Of the 500 S&P500 companies that reported earnings, 71% (382 of the 500) beat operating EPS estimates, versus the historical average of 62%.  Companies beat by an average of +5.6% (versus a historical average of +2%).  EPS is up +36.1% over the prior year.  Though challenged in the current operating environment, 391 companies (78%) reported increased revenues and 329 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.    

 

Friday’s equity markets. On lower volume, equity markets closed moderately lower.  The Nasdaq, SPX, DJI, and NYSE finished down -0.56%, -0.40%, -0.24%, and -0.06%, respectively.  The markets opened near Thursday’s close, but the absence of a final FY 2011 budget agreement weighed on the markets through the day.  The major indices saw their highs within the 1^st  five minutes of the day and their intraday lows around 3:00.  All experienced a nice bounce in the last hour.  Macro and economic news was light, with only a neutral wholesale inventories  release at 10:00.  Monday begins earnings season and a full week of important economic numbers such as advance retail sales, business inventories, initial jobless claims, and the producer price and consumer price indexes.  The VIX finished the day up +4.44%, at 17.87.

 

Technical indicators were generally positive. The SPX and NYSE also touched resistance (1339 and 8526) early in the day. All the major indices closed above their 200-week, 50-, 100-, and 200-day moving average. The SPX, DJI, Nasdaq and NYSE each tested support levels around 3:00 and rebounded strongly.  The Bloomberg NYSE new net highs were +131 versus Thursday’s +277 and below the 50-, 100-, and 200-day moving average. The relative strength index closed at 60.83, lower than Thursday’s 61.35, but in the higher end of a neutral range.

 

During the week, we saw improved inflows for domestic equity funds (+$345.00 mm) from the ICI (Investment Company Institute) and an improvement in the AAII bullish sentiment index to 43.59 from 28.49 the previous week.

 

Market segments were mixed. Oil and gas, telecommunications, and healthcare led the gainers, while financials, industrials, and technology led the laggards.

 
Financials were the weakest sector. The KRX, XLF, and BKX all closed lower, off -1.55%, -0.90%, and -0.89%, respectively.  All 24 members of the BKX closed lower, led by WFC, PBCT, and CMA off -1.71%, -1.57% and -1.33%, respectively.  Only one member of the KRX closed higher, UMBF.  FCF, CATY, BPFH and FNB were all off at least -3.49%. The week ended slightly lower for all the banking indexes, with nearly all the offsetting gain coming Wednesday. Earnings season begins Wednesday for the banks with JPM’s release Wednesday before the open. The BKX ended the day below its 50-day moving average, but above the 200-week, 100- and 200-day moving average. The KRX and XLF finished above all their key averages.  While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -9.54% below its April 2010 high and -36.50% below its best level of 82.55 in September 2008.

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·      NYSE Indicators.  Volume fell -10.1% to 815.79 million shares, from 907.05 million shares Thursday, but 0.80x the 50-day moving average.  Market breadth was negative, and up volume lagged down volume.  Advancing stocks trailed decliners by -966 (compared to -758 Thursday), or 0.51:1.  Up volume led down volume by 0.45:1.

 

SPX.  On lower volume, the SPX fell -5.34 points, or -0.40%, to 1328.17.  Volume was the slowest of the year, falling -17.2%, from 725.9 million shares Thursday, and below the 797.97 million share 50-day moving average.  For the 118^th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1336.16 vs. 1201.1, respectively).  The SPX closed above its 200-week moving average (1168.54).

 

The SPX opened higher, but with without momentum.  The index saw its high for the day of 1339.46 at 9:33.  By 10:30, the SPX had trended to the break-even line.  Dueling congressional press updates on budget negotiation added to the lethargy.  The index touched its intraday low of  1322.94 at 3:03, but rallied sharply in the final hour.

 

Technical indicators are positive.  The index closed above 1300 for the 12^th  straight session.  The index closed above its April 2010 highs for the 88^th straight session.  The SPX closed above its 20-day moving average (1309.003) for the 12^th straight session.  The index closed +1.14% above its 50-day moving average, closing above that average for the 12th straight session.  The index closed (by +3.80%) above its 100-day moving average for the 16^th straight session.  The SPX closed +10.58% above its 200-day moving average.  All moving averages increased.  The directional momentum indicator is positive for the eighth consecutive day, and the trend is stable.  Relative strength fell to 56.80 from 60.10, a neutral range.  Next resistance is at 1337.44; next support is at 1320.92. 

 

BKX.  On lower volume, the KBW bank index fell -0.47 points, or -0.89%, to 52.42.  Volume fell -31.8% to 93.96 million shares, down from 137.87 million shares Thursday and below the 122.32 million share 50-day average.  The index closed +22.0% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -9.54% and -5.77% below its April 23,  2010, and February 14, 2011 closing highs, respectively. 

 

Financials underperformed the market, and large-caps underperformed regionals.  The BKX opened flat and rallied through 10:00, setting its intra-day high of 53.40; by 10:20, the index retraced gains back to break-even.  Like the broader market, the BKX traded lower until 3:00, to an intraday low of 52.30, but its rally was less pronounced than the major indexes.

 

Technical indicators are trending positive, but the BKX has had difficulty rising above its 50 day moving average (53.11).  The index closed above 52 for a sixth consecutive session, and above 50 for the 76^th straight day.  The BKX closed above its 20-, 100-, and 200-day moving averages (51.994, 51.793, 49.325) for the 5^th, 15^th, and 82^nd straight sessions, respectively.  The 20-day and 50-day moving averages fell.  The 20-day closed (by -1.12 points) below the 50-day for the 19^th straight day, and the negative divergence expanded.  The 50-day moving average closed (by +3.78 points) above the 200-day moving average for the 60^th straight session, with the positive divergence contracting.  The 100-day moving average closed (by +2.47 points) above the 200-day moving average for the 43^nd straight session, with the positive divergence expanding.  The directional movement indicator is positive for the fifth straight session, and the trend is stable.  Relative strength fell to 50.17  from 54.78, a neutral range.  Next resistance is 52.99; next support at 52.08.

Disclosure: I am long JPM, CMA, WFC.