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U.S. Equity Distributions Pressure Uptrend, Futures Modestly Positive

|Includes: BAC, BLK, C, CLX, COLB, GS, IBKC, JPM, Mastercard, Inc. (MA), MFA, MS, PB, PFE, PNC, XL
This morning.  After trading lower through most of the morning, U.S. equity futures are modestly higher following the ADP employment report.  Yesterday, except for the DJI, all major indexes recorded a distribution day, moving the market outlook to under pressure from confirmed uptrend.  The dollar is slightly weaker.  Commodity prices are generally lower.  U.S. Treasury prices are slightly weaker.  After a fair value adjustment of +0.70 points, June SPX equity futures are at 1352.20, up +0.10 points.  The SPX opens at 1356.62, -0.34% below the April 29 multi-year high and +2.89% above its 50-day moving average.  Next resistance is at 1361.80.  Next support is at 1350.48.
On Tuesday, most U.S. equity markets closed broadly lower, but a late rally pared losses.  Notably, there was evidence of market rotation, as losses were concentrated in the industrials, basic materials, and oil and gas stocks, while telecommunications, utilities, and financials were broadly higher.  Market breadth was negative.  Economic reports were generally favorable,  with better than expected March factory orders (+3.0% versus survey +2.0%). The DJI closed fractionally higher, while the SPX, NYSE, and Nasdaq closed down -0.34%, -0.75%, and Nasdaq -0.78%, respectively.  Volatility rose, though it ended well off the day’s highs.  The SPX, NYSE, and Nasdaq added distribution days, which now number 4 on the NYSE, 2 on the DJI, and 2 on the Nasdaq and SPX in the past 25 trading days.  Distribution days, which indicate institutional selling, pressure uptrends and push markets back into correction.
Earlier today, Asian equity markets closed lower.  The Nikkei was again closed for holiday.  In China, the Hang Seng and Shanghai composite closed with their worst losses in several months, down -1.35% and -2.26%, respectively.  On the SHCOMP, volume rose +15.6% from the prior day, and recorded its 2nd distribution day in the past week.  These action suggests that these markets are again in correction, ending a substantial recovery began on January 25th.  The index closed at 2866.02, down -6.26% from the April 18th high close 3057.33.   After yesterday’s positive reversal, the SHCOMP gapped lower and generally lost ground through the day.  A late rally failed, and the index ended just above its intraday low.  Traders attributed the day’s mixed result to interest rate concerns and expectations that monetary policy will be further tightened.  Financials were the 6th worst performing segment, down -2.07%.  European equity markets are lower.  The EuroStoxx 50, FTSE, and DAX, are down -0.55%, -0.98%, and -0.418%, respectively.  On the EuroStoxx, financials are 2nd best performing segment, up +0.04%. 
Despite sovereign debt and other macro-concerns, LIBOR levels are well below those seen prior to last year’s sovereign debt crisis.  Overnight USD LIBOR declined to 0.13350%, compared to 0.13400%, Tuesday and 0.25188% at year-end.  USD 3-month LIBOR is 0.27025%, compared to 0.27225% Tuesday and 0.30950% at year-end.  In early trading, the dollar is slightly weaker against the euro, yen, and 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$1.4856, compared to US$1.4825 Tuesday and US$1.4830 the prior day.  The Euro trades well above its 50-, 100-, and 200-day moving averages.  The dollar trades at ¥81.07, compared to ¥80.94 Tuesday and ¥81.23 the prior day.  The yen trades better than its 200-day moving average ¥82.26, which is trending lower.  U.S. Treasury yields are little changed, with 2- and 10-year maturities yielding 0.617% and 3.255%, respectively, compared to 0.601% and 3.247% Tuesday.  The yield curve narrowed to +2.638%, from +2.646% 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 generally lower, with lower petroleum, natural gas, precious metals, higher aluminum and copper, and mostly lower agricultural prices.
U.S. news and economic reporting.  Economic releases focus on April vehicle sales, MBA mortgage applications (+4.0%), and ADP Employment (slowing to +179K versus +198K).
Overseas news.  Yesterday, Portugal agreed to terms of a €78 billion bailout with the European Union and IMF over three years.   In April, the Euro-zone purchaser managers index rose, matching expectations.  Today’s Russia’s Micex index closed at a -10% retracement from its April highs, moving the index into correction. 
Company news/research:
·         XL – reports 1Q11 GAAP and operating EPS -$0.72 and -$0.52, compared to estimates of -$0.46. 
·         BLK – upgraded to buy at Ticonderoga
·         C – initiated at buy at UBS, price target of $5.60
·         GS – initiated at buy at UBS, price target of $200
·         JPM – initiated at buy at UBS, price target of $54
·         BAC – initiated at neutral at UBS, price target of $13.50
·         MS – initiated at neutral at UBS, price target of $28
1Q2011 Earnings.  The first quarter’s earnings results have so far exceeded EPS and revenue expectations.  Of the 350 S&P500 companies that reported earnings to date, 73% (257 of the 313) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies beat by an average of +7.9% (versus a historical average of +2%).  EPS is up +21.8% over the prior year.  Though challenged in the current operating environment, 267 companies (76%) reported increased revenues and 243 companies (69%) beat revenue estimates.  In the first quarter of 2011, analysts estimate the SPX will earn $24.32 per share, compared to $22.47 and $19.49 per share in 4Q10 and 1Q10, a +8.2% and +24.8% increase, respectively.  
With all 24 BKX members reporting, 75% (18 out of 24) beat operating EPS estimates.  Bank revenues disappointed slightly (by -0.78% on average), with 58% of BKX members missing revenue  estimates.  Eleven banks (46%) reported increased revenues over the prior year’s quarter.  In the first quarter of 2011, the BKX earned $0.95 per share, a +4.40% increase over 4Q10 EPS of $0.91 and 180% above 1Q10 EPS of $0.34.
Valuation.  The SPX trades at 13.7x estimated 2011 earnings ($98.75) and 12.1x estimated 2012 earnings ($111.86), compared to 13.8x and 12.2x respective 2011-12 earnings yesterday.  The 10-year average median Price/Earnings multiple is 20.0x.  Since the beginning of 2011, analysts increased 2011 and 2012 earnings estimates by +4.4%, and +4.2%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +16.5% and +31.9%, respectively.
Large-cap banks trade at a median 1.54x tangible book value and 13.0x 2011 consensus earnings, compared to 1.54x tangible book value and 13.1x 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 and 2012 BKX earnings to exceed 2010 operating earnings by +32.7% and 71.6%, respectively. 
Tuesday’s equity markets.  On higher volume, equity markets closed broadly lower.  Recent market leadership groups – industrials, basic materials, and oil and gas – were particularly hard hit, while recent laggards – telecommunications, utilities, and financials – performed well.  The Nasdaq, SPX, and NYSE all closed lower, down -0.78%, -0.75%, and -0.34%, respectively, while the DJI closed fractionally higher.  Markets opened lower and were range bound through the morning.  Positive economic releases – stronger March factory orders and better than expected domestic vehicle sales – left investors unimpressed.  In early afternoon, markets lost additional ground, and losses accelerated through mid-afternoon.  In the final hour, markets rebounded strongly, paring losses.
Some of the weakness was attributable to earnings releases that were more mixed than in recent days.  Large companies such as MA, PFE and MRO beat analysts’ estimates, while ANR, MFA, and CLX missed.  SHLD reported that domestic sales fell -5.2% for the quarter ended April 30th, 2011, pressuring consumer service stocks.  Weakness was especially pronounced in commodities, with notable losses in silver (-7.2%) and oil (-2.54%).  Interestingly, there was some rotation out of the high beta names and into financials, especially the banks which had been out of favor throughout earnings season, despite beating estimates.  Trading desks report profit taking and some short selling, while buyers seem fatigued and not willing to chase names. The VIX finished the day at 16.70, up +4.44%, but off the day’s high 17.29.
Technical indicators are mixed.  The SPX, DJI and NYSE broke through support levels, but the SPX held 1350 and bounced nicely off that support into the close.  The Nasdaq tested resistance early in the session.  One technical analyst believes that markets will retest 1337-1344 on the SPX, and is more likely to break 1300-1325, than exceed 1385 in the 2nd quarter, followed by a  large 4th quarter rally to 1420-1440 on the SPX.  All the major indices finished above their 50-, 100-, 200-day and 200-week moving averages. The Bloomberg NYSE new net highs were +308 versus Monday’s +320 and well above the key moving averages.  The relative strength indicator is in a neutral range, at 59.31 compared to 65.61 at Monday’s close.
Market segments were mixed. Telecommunications, utilities, and financials were the leaders, while industrials, basic materials, and oil and gas were the laggards.
Financials were positive with the BKX, XLF, and KRX finishing up, +0.94%, +0.43%, and +0.26%, respectively. The major financial averages opened lower, but gained strength through the day, finishing at or near their highs.  ONB led all financials higher, up +5.2%, while FHN (+3.13) and FITB (+2.68%) rounded out the top three gainers.  Among larger institutions, MA, BAC, and PNC performed well, up at least +1.97%.  The smaller regional’s were led by IBKC, COLB and PRSP, up at least +1.61%. In the BKX index, 21 names advanced, while 3 were down.  In the KRX index, 30 names advanced, while 17 were down and 3 unchanged. The BKX finished below its 50- and 100-day moving average , but above the 200-day and 200-week average.  The XLF and KRX finished above all the major moving averages.  While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -10.6% below its April 2010 high and -37.2% below its best level of 82.55 in September 2008.
NYSE Indicators.  Volume rose +7.26% to 1.003 billion shares, from 961.53 million shares the prior day, 1.01x the 50-day moving average.  Market breadth was negative, and up volume lagged down volume.  Advancing stocks trailed decliners by -911 (compared to -511 Monday), or 0.54:1.  Up volume lagged down volume by 0.66:1.
SPX.  On higher volume, the SPX fell -4.60 points, or -0.34%, to 1356.62.  Volume rose +8.0% to 791.60 million shares, up from 733.17 million shares Monday and above the 787.68 million share 50-day moving average.  For the 134th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1318.54 vs. 1222.85, respectively).  The SPX closed above its 200-week moving average (1170.04).
The SPX opened lower.  Immediately falling below 1360, the SPX continued to decline through 9:50.  Reaching first-level support at 1356, the index rebounded sharply.  Just before 10:00, the index retook 1360 and set the intra-day high of 1360.84 at 10:00.  Through 10:45, the index retraced back to 1356-support, which again held.  Momentum reversed again, and the index climbed through 11:45, again breaching 1360.  From noon until 3:00, the SPX sold off consistently, breaching 1356 support at 1:25.  At 2:55, the index broke below 1350 to reach the intra-day low of 1349.52.  A solid rally took hold at 3:00 as buyers bought the move below 1350.  The index climbed through the close and finished just above 1356, the middle of the day’s range and recording the index’s second consecutive loss.
Technical indicators are mostly positive.  The index’s failure to break above 1370 may have stalled the recent uptrend.  The index closed above 1300 for the 28th straight session.  The index closed above its April 2010 highs for the 104th straight session.  The SPX closed (by +1.69%) above its 20-day moving average (1334.13) for the ninth consecutive session.  The index closed (by +2.89%) above its 50-day moving average for the ninth straight session.  The index closed (by +4.28%) above its 100-day moving average (1300.91) for the 32nd straight session.  The SPX closed +10.94% above its 200-day moving average.  All moving day averages increased.  The directional momentum indicator is positive for the eighth straight session, and the trend is stable.  Relative strength fell to 63.95 from 67.36, the higher end of a neutral range.  Next resistance is at 1361.80; next support is at 1350.48. 
BKX.  On higher volume, the KBW bank index rose +0.48 points, or +0.94%, to 51.81.  Volume rose +19.9% to 121.31 million shares, up from 101.18 million shares Monday and below the 122.29 million share 50-day average.  The index closed +20.54% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -10.60% and -6.87% below its April  23,  2010, and February 14, 2011 closing highs, respectively. 
Financials’ gains outperformed the market’s loss, and large-caps outperformed regionals.  The BKX opened lower and at 9:40, the BKX set its intra-day low of 51.19.  At 9:41, the index commenced a 20-minute, +1.0% rally that took the BKX through 51.70 at 10:00.  Traders sold the move higher, and through 10:40, the index fluctuated between 51.65 and 51.50.  At 10:40, financials’ strength returned, and the index rallied back to the 51.70 level by 12:15.  Between 1:00 and 2:15, the index again retraced back to 51.50.  The afternoon rally in the broader markets lifted financials as well, and the BKX rallied from 2:15 through the close.  The intra-day high of 51.84 came at 3:55, and the BKX closed just below that level.   
Technical indicators are negative, but the broader market’s strength has provided the BKX support.  The BKX has remained bound on the upside by the 50-day moving average (now at 51.91 and falling), has broken through 100-day moving average support, but has held above the 200-day moving average (49.62).  The 20-day moving average (51.43) has remained below the 50-day moving average since March 11th  and crossed below the 100-day moving (52.54) average on April 15th.  The 50-day moving average crossed below the 100-day moving average on April 21st.  The index closed below the 50- and 100-day moving averages for the 18th, and 14th consecutive sessions, respectively.  The index retook its 20-day moving average, which continues to fall.  The index closed above 50 for the 92nd straight day.  The BKX closed above its 200-day moving average for the 98th straight session.  The 20- and 50-day moving averages fell.  The 20-day closed (by -0.48 points) below the 50-day for the 35th straight day, but the negative divergence contracted.  The 50-day moving average closed (by +2.29 points) above the 200-day moving average for the 76th straight session, but the positive divergence contracted.  The 100-day moving average closed (by +2.93 points) above the 200-day moving average for the 59th straight session, but the positive divergence contracted.  The directional movement indicator is positive, narrowly, for the fourth consecutive session, and the trend is declining.  Relative strength rose to 53.60 from 47.68, a neutral range.  Next resistance is 52.04; next support at 51.39.