U.S. Equity Futures Slip Toward the Open

This morning.  U.S. equity markets are in correction.  U.S. equity futures are modestly lower after fair value adjustment. Asian equity indexes closed higher. European markets are also higher. Commodity prices are mostly higher.  The dollar is slightly lower.  U.S. Treasury prices are mixed.  After a fair value adjustment of +1.43 points, June SPX equity futures are at 1325.20, down -1.63 points.  The SPX opens at 1328.98, -2.54% below the recent April 29 multi-year high and +0.40% above its 50-day moving average.  Next resistance is at 1333.43.  Next support is at 1321.52.

 

On Monday, U.S. equities ended mixed on increased volume. The Nasdaq rose fractionally, the SPX and NYSE composite saw fractional losses, while the DJI closed with another moderate loss. After weaker than expected economic reports, markets opened lower, rallied briefly, then sold off after 10:30, falling through the 50-day moving average on the SPX to intraday lows shortly after 11:30. Markets rallied thereafter, moving higher through the afternoon to end mostly unchanged. As indicated by the DJI underperformance, industrials were the worst performing market segment. Financials were the best performer, followed utilities and telecommunications. Market breadth was negative.  The Nasdaq rose +0.04%. The DJI, SPX, and NYSE closed down -0.55%, -0.04%, and -0.04%, respectively.  The distribution day count is 7 on the NYSE, 6 on the SPX, and 5 on the DJI and Nasdaq in the past 25 trading days.  Distribution days indicate institutional selling.  Volatility declined -3.78%, and the VIX closed at 17.55, from 18.24 at Tuesday’s close. 

 

Asian equity markets are also in correction, but ended higher on lower volume.  The Nikkei rose +0.99%.  Financials were the 3^rd best performing segment, up +1.62%, adding to the prior day’s moderate gains.  In China, the Hang Seng and Shanghai composite closed up +0.48% and +0.70%, respectively.  The SHCOMP traded lower in early trading, but quickly rallied and trended higher through the mid-day. Equity prices slipped through most of the afternoon session, but rallied in the final half-hour. Volume declined -19.7%.  The index closed -6.04% below its recent April 18^th high close of 3057.33 and below its 50- and 100-day moving averages.  Consumer goods, financials, and technology were the best performing segments.  Financials gained +1.00%.  In Europe, equity markets gapped lower on Eurozone concerns, but rallied back to breakeven at mid-day.  The EuroStoxx 50, FTSE, and DAX are up +0.08%, +0.50%, and +0.11%, respectively.  On the EuroStoxx, financials are middling performers, up +0.09%.

 

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 is unchanged at 0.13050%, compared to 0.13150% Tuesday and 0.25188% at year-end.  USD 3-month LIBOR rose to 0.26000%, compared to 0.25975% Tuesday and 0.30950% at year-end.  The U.S. dollar is mixed, stronger against the euro, but slightly weaker against the yen and pound.  The dollar, which has trended lower since last June, trades below its 50- and 100-day moving averages, but has rallied back above its 200-day moving average.  The euro trades at US$1.4229, compared to US$1.4237 Tuesday and US$1.4156 the prior day.  The Euro trades well above its 100- and 200-day moving averages, but is now below its US$1.4325 50-day moving average.  The dollar trades at ¥81.15, compared to ¥81.42 Tuesday and ¥80.79 the prior day.  The yen trades better than its 50-day moving average ¥81.98, which is trending lower.  U.S. Treasury yields are mixed, with 2- and 10-year maturities yielding 0.524% and 3.097%, respectively, compared to 0.520% and 3.116% Tuesday.  The yield curve narrowed to +2.573% from +2.596% 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 energy and precious metals, lower aluminum and copper, and higher agriculture. 

 

U.S. news and economic reporting.  Economic releases are MBA mortgage applications for the latest week, up +7.8% compared to 8.2% the prior week. Tomorrow, focus returns to jobs with the release of week initial and continuing jobless claims. 

 

Overseas news.  This morning, the Bank of England’s May 5^th meeting minutes expressed the potential for weaker monetary policy than anticipated and a greater-than-expected focus on economic downside risks.  Today, a European Central Bank official dismissed the need for a  Greek debt restructuring provided the country meets its economic and fiscal reform targets.  In April, China’s annual housing inflation pace slowed compared to the prior month.  Today, Moody’s downgraded Australia’s four largest banks’ credit ratings from Aa1 to Aa2.   

 

Company news/research:

 

·         Debit card fees – Yesterday, Senate Majority Leader Reid announced a floor vote will be held to delay the Durbin amendment’s debit card fee caps.  Our sources say that community bank pressures motivate Reid’s surprising move.

 

1Q2011 Earnings.  The first quarter’s earnings results have so far exceeded EPS and revenue expectations.  Of the 442 S&P500 companies that reported earnings to date, 72% (318 of the 424) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies have beat by an average of +7.2% (versus a historical average of +2%).  EPS is up +20.1% over the prior year.  Though challenged in the current operating environment, 331 companies (75%) reported increased revenues and 296 companies (67%) 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 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 +4.4% increase over 4Q10 EPS of $0.91 and 180% above 1Q10 EPS of $0.34. 

 

Valuation.  The SPX trades at 13.4x estimated 2011 earnings ($99.09) and 11.8x estimated 2012 earnings ($112.44), compared to 13.4x and 11.8x 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 +4.7%, and +4.8%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +16.9% and +32.6%, respectively.

 

Large-cap banks trade at a median 1.52x tangible book value and 12.9x 2011 consensus earnings, compared to 1.47x tangible book value and 12.7x 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 70.9%, respectively. 

 

Tuesday’s equity markets.  On higher volume, the equity markets closed mixed, but well above the day’s lows. The DJI, SPX and NYSE closed lower, with the DJI off -0.55% and the SPX and NYSE both off -0.04%. The Nasdaq finished the day up +0.03%.  Markets began the day lower, after a report from the Commerce Department showed that housing starts and building starts had slowed in April. The DJI and SPX saw their highs in the first hour of trading.  Mid-morning, all indexes sold off sharply to intraday lows just before noon. Stocks consolidated in early afternoon, and gradually recovered through the afternoon. The Nasdaq market set its intraday high just before the close.  Other economic news included industrial production, which stalled in April as output at factories, mines, and utilities was unchanged.  Corporate news included HPQ besting 2^nd quarter analyst’s estimates, but guiding the full year estimates downward.  On the macro front, the EU and Greece continue to dominate international business news as the S&P has extended a two-week decline amid investor’s concern that Greece may have to restructure its debt.  Trading desks report a lack of conviction in either direction by accounts.  Buyers are not chasing prices to the upside and shorts are quick to cover. The VIX finished the day at 17.55, off -3.78%.

 

Technical indicators were generally positive. Even though the majority of markets finished lower, the rally in the afternoon on heavier volume is encouraging. The SPX held support at 1319 and managed to finish the day above the 50-day moving average of 1323.  The Nasdaq, which traded below its 50-day moving average most of the day, closed above that average after its strong afternoon rebound.  The NYSE closed below its 50-day moving average for a 3^rd straight session.  All the major averages held their 100- and 200-day averages.  The Bloomberg NYSE new net highs fell to +10 from Monday’s +46. The relative strength indicator fell modestly to 42.12 from Monday’s reading of 42.32, the lower end of a neutral range.

 

Market segments were mixed.  Financials, utilities, and telecommunications were the leaders, while technology, basic materials, and industrials were the laggards.

 

Financials were positive.  The BKX, XLF and KRX closed up +1.65%, +0.96%, and +0.76%, respectively.  Banks were the  leaders among larger financials. The leaders were WFC (+3.19%), COF (+2.60%), and FITB (+2.57%).  The BKX index began the day lower, but rallied through the morning, holding its gains through midday and early afternoon.  The BKX rallied again in the last hour of trading.  The BKX finished the day with all 24 names up for the day.  The KRX finished with 44 names up, 4 down and 1 unchanged.  Among the smaller regionals, BPFH, TCB, and FHN led, up at least +2.52%.  An announcement by Senate Majority Leader Reid that he plans to hold a vote on legislation that would delay rules to cap debit-card “swipe” fees, a bill he opposes, gave a lift to names with large card exposure, primarily TCB (+3.49%), COF (+2.60%), and AXP (+1.38%).  The KRX, BKX and XLF finished below their respective 50- and 100-day moving averages, but above the 200-day average.  While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -13.1% below its April 2010 high and-39.0% below its best level of 82.55 in September 2008.

 

NYSE Indicators.  Volume rose +7.07% to 971.43 million shares, from 907.30 million shares Monday, 1.01x the 50-day moving average.  Market breadth was negative, and up volume lagged down volume.  Advancing stocks lagged decliners by -483 (compared to -1067 Monday), or 0.72:1.  Up volume lagged down volume by 0.87:1.

 

SPX.  On higher volume, the SPX fell -0.49 points, or -0.04%, to 1328.98.  Volume rose +4.64% to 778.66 million shares, up from 744.11 million shares Monday and above the 762.41 million share 50-day moving average.  For the 145^th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1323.74 vs. 1234.85, respectively).  The SPX closed above its 200-week moving average (1167.86).

 

The SPX gapped lower at the open to 1322-level support.  Bouncing off support at 9:33, the index’s momentum reversed.  Through 10:30, the SPX rallied back to break-even and briefly into positive territory.  The index set the intra-day high of 1330.42 at 10:30 before momentum quickly reversed.  By 11:40, the index had fallen through 1322 support and to the intra-day low of 1318.51.  Through the day’s remainder, the index rallied unevenly with successively higher highs and higher lows.  By 3:00, the index retook 1329, just below break-even.  Unable to climb above its prior day’s close, the index held the 1328-level through trading’s close. 

 

Technical indicators are mixed.  The index’s failure at 1370 and subsequent fall placed equity markets in correction, but the index has remained above its rising 50-day moving average.  Meanwhile, the index’s correction has stalled the 50-day average’s positive momentum, and the 50-day will likely cross below the 100-day moving average before month’s end.  The index closed above 1300 for the 38^th straight session.  The index closed above its April 2010 highs for the 114^th straight session.  The SPX closed (by -1.09%) below its 20-day moving average (1343.67) for the third straight session.  The index closed (by +0.40%) above its 50-day moving average for the 19^th straight session.  The index closed (by +1.40%) above its 100-day moving average (1310.66) for the 42^nd straight session.  The SPX closed +7.62% above its 200-day moving average.  All moving day averages increased.  The directional momentum indicator is negative for the fifth straight session, and the trend is weak but increasing.  Relative strength fell to 45.88 from 46.10, a neutral range.  Next resistance is at 1333.43; next support is at 1321.52. 

 

BKX.  On lower volume, the KBW bank index rose +0.82 points, or +1.65%, to 50.39.  Volume fell -10.93% to 73.31 million shares, down from 82.31 million shares Monday and below the 110.94 million share 50-day average.  The recent volume decline relative to historical averages relates to Citigroup’s May 6^th 10-1 reverse split.  The BKX closed +17.24% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -13.05% and -9.42% below its April 23,  2010, and February 14, 2011 closing highs, respectively. 

 

Financials were the market’s best performing sector, and large-cap banks’ outperformed regionals.  The BKX opened lower, immediately setting its intra-day low of 49.44.  By 9:33, the index moved into positive territory, where it would remain through the day.  By 9:50, the index retook the 50.0 threshold, but failed at resistance near 50.03.  Through mid-afternoon, the index failed repeatedly near the 50.05 level.  At 2:45, a healthy rally took hold and lifted the BKX through that resistance.  Just prior to the close, the index set the intra-day high of 50.40 and held onto gains into the bell.   

 

Technical indicators are negative.  Weakness in the broader markets has removed support for financial stocks.  The index has remained bound on the upside by the 50-day moving average (now at 51.45 and falling), has broken through 100-day moving average support, but retook the 200-day moving average (49.70) yesterday.  The 20-day moving average (50.75) has remained below the 50-day moving average since March 11^th  and crossed below the 100-day moving (52.52) average on April 15^th.  The 50-day moving average crossed below the 100-day moving average on April 21^st.  The index closed below the 20-, 50-, and 100-day moving averages for the fifth, 28^th, and 24^th consecutive sessions, respectively.  The index retook the 50.0 level after two prior closes below it.  The 20-, 50-, and 100-day moving averages fell.  The 20-day closed (by -0.70 points) below the 50-day for the 45^th straight day, but the negative divergence contracted.  The 50-day moving average closed (by +1.75 points) above the 200-day moving average for the 86^th straight session, but the positive divergence contracted.  The 100-day moving average closed (by +2.82 points) above the 200-day moving average for the 68^th straight session, but the positive divergence contracted.  The directional movement indicator is negative for the ninth straight session, and the trend is weak and stable.  Relative strength rose to 44.51 from 34.27, the low end of a neutral range.  Next resistance is 50.72; next support at 49.74.