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This morning. U.S. equity markets are in correction. After fair value adjustment, U.S. equity futures are modestly lower. Asian equity indexes closed mixed. European markets are moderately higher. Commodity prices are mostly higher. The dollar is slightly lower. U.S. Treasury prices are mixed. After a fair value adjustment of +0.10 points, June SPX equity futures are at 1337.70, down -4.10 points. The SPX opens at 1343.60, -1.47% below the recent April 29 multi-year closing high and +1.44% above its 50-day moving average. Next resistance is at 1348.16. Next support is at 1337.70.
On Thursday, U.S. equities rose for the 2nd consecutive day, but gains were modest, and trading was light. All major indexes rose, and the DJI rose +0.36%, compared to the Nasdaq, NYSE composite, and SPX, which recorded respective gains of +0.30%, +0.24% and +0.22%. While markets extended the rally that commenced in the mid-day Tuesday, there was little real follow-through, as markets traded within a narrow range and without much conviction. Perhaps the most impressive aspect was that equities ended higher despite adverse economic news. The latest week’s initial jobs claims were unimpressive, but equities opened to the upside. Early gains were erased after 10:00, when April existing home sales disappointed and leading economic indicators surprised with a negative -0.3% read. The April Philadelphia Fed manufacturing report was much weaker than expected. Commodities and related stocks weakened, and basic materials were the worst performing market segment. Financials rose, but were among the day’s laggards. Market breadth was positive. The distribution day count is 6 on the NYSE, 5 on the SPX and Nasdaq, and 4 on the DJI in the past 25 trading days. Distribution days indicate institutional selling. Volatility declined -4.53%, and the VIX closed at 15.52, compared to 16.23 at Wednesday’s close.
Asian equity markets are also in correction, and ended mixed on lower volume. The Nikkei declined -0.14% on economic growth concerns. Financials were middling performers, down -0.52%. In China, the Hang Seng and Shanghai composite closed mixed, +0.16% and -0.04%, respectively. The SHCOMP traded narrowly within a 14 point range. Volume fell -9.03%. Two early rallies failed, and the index faded toward the end of the morning session, before rallying again into the afternoon. The index weakened mid-afternoon, then rallied weakly into the close. Trading desks cited growth concerns for the day’s weak trade. The index closed -6.50% below its recent April 18th high close of 3057.33 and below its 50- and 100-day moving averages. Oil and gas, basic materials, and financials were the best performing segments. In Europe, equity markets are mixed. The EuroStoxx 50, FTSE, and DAX are up -0.36%, +0.12%, and -0.29%, respectively. On the EuroStoxx, financials are among the market laggards, down -0.55%.
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 0.13000%, compared to 0.13025% Thursday and 0.25188% at year-end. USD 3-month LIBOR declined to 0.25750%, compared to 0.25850% Thursday and 0.30950% at year-end. The U.S. dollar is slightly weaker against the euro, 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$1.4236, compared to US$1.4309 Thursday and US$1.4250 the prior day. The Euro trades well above its 100- and 200-day moving averages, but is now below its US$1.4343 50-day moving average. The dollar trades at ¥81.67, compared to ¥81.61 Thursday and ¥81.68 the prior day. The yen trades better than its 50-day moving average ¥81.96, which is trending lower. U.S. Treasury yields are mixed, with 2- and 10-year maturities yielding 0.524% and 3.151%, respectively, compared to 0.524% and 3.171% Wednesday. The yield curve narrowed to +2.627% from +2.647% 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 mixed, with mixed energy, precious metals, lower aluminum and copper, and mixed agriculture.
U.S. news and economic reporting. There are no economic releases today.
Overseas news. Today, the Bank of Japan did not reiterate a prior proposal to further loosen policy, surprising some observers. Today, Libyan leader Qadaffi offered to withdraw his military forces from occupied Libyan cities in exchange for an end to NATO bombings. In April, Canada’s consumer price index increased +0.3% over the prior month, less than the +0.5% estimate.
· AXP – initiated at buy at Goldman Sachs, price target of $59
· COF – initiated at neutral at Goldman Sachs, price target of $56
· DFS – initiated at neutral at Goldman Sachs, price target of $27
· JPM – initiated at hold at Stifel
1Q2011 Earnings. The first quarter’s earnings results have so far exceeded EPS and revenue expectations. Of the 454 S&P500 companies that reported earnings to date, 72% (328 of the 424) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies have beat by an average of +7.1% (versus a historical average of +2%). EPS is up +19.9% over the prior year. Though challenged in the current operating environment, 341 companies (75%) reported increased revenues and 303 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 13.6x estimated 2011 earnings ($99.07) and 11.9x estimated 2012 earnings ($112.44), compared to 13.5x and 11.9x 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 13.0x 2011 consensus earnings, compared to 1.53x tangible book value and 13.0x 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 +32.8% and 70.9%, respectively.
Thursday’s equity markets. On slightly less volume, the equity markets ended modestly higher. The DJI, Nasdaq, NYSE, and SPX all finished higher, up +0.36%, +0.30%, +0.24%, and +0.22%, respectively. The markets began the day higher, despite disappointing initial jobless claims for the latest week. The markets gained ground through 10:00, but sold off sharply after release of existing home sales data, which dropped unexpectedly, and leading indicators, which fell -0.08%, the worst reading since March 2009. The Philadelphia general economic index fell to 3.9, its weakest reading since October, from 18.5 a month earlier. The markets continued to sell off through the morning, but began to recover some ground in the early afternoon and extended those gains through the afternoon. The session was notable for slightly lighter volumes than the previous session and the day’s tight trading range. Trading desks report a convictionless trading environment with short sellers not pressing and long buyers not chasing equities. The VIX finished the day lower at 15.52, off -4.37%.
Technical indicators were generally positive. The SPX tested resistance at 1346.50, the May 2 top down channel. The next resistance level for the SPX is 1351-1355. Support levels begin at 1336, followed by 1330. Thursday’s lighter volume was indicative of this market’s lack of direction or conviction. The major indices all closed above their 50-, 100-, and 200-day moving averages. The Bloomberg NYSE new net highs were +118, higher than Wednesday’s reading of +65. The relative strength indicator rose to 49.20 from Wednesday’s reading of 47.74, the lower end of a neutral range.
Market segments were mixed. Industrials, telecommunications and consumer goods led the market, while financials, health care, and basic materials were the laggards.
Financials were among the laggards, but ended with a slight positive. The KRX and BKX closed up, +0.25% and +0.10%, while the XLF finished flat. The BKX followed the broader markets throughout the day, beginning the day higher and selling off after poor economic numbers. The BKX rallied through the afternoon, alternating between positive and negative, and ending with a nice rally to finish in positive territory. The BKX finished with 13 names up, 10 down and 1 unchanged. Leaders included COF (+1.52%) and PBCT (+0.97%). The KRX finished with 24 names up, 22 down and 3 unchanged. Leaders included SUSQ (+2.47%), MBFI (+1.82%), and PVTB (+1.51%). The broader financials were led by BLK (+2.51%), PGR (+2.30%), and UNM (+2.05%). BLK announced a repurchase of BAC’s remaining ownership interest in BLK represented by its Series B Convertible Preferred for approximately $2.545 billion. The BKX, KRX and XLF finished below their respective 50- and 100-day moving averages, but above their 200-day moving averages. While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -12.7% below its April 2010 high and-38.7% below its best level of 82.55 in September 2008.
NYSE Indicators. Volume fell -1.31% to 872.19 million shares, from 883.79 million shares Wednesday, 0.91x the 50-day moving average. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by +552 (compared to +1698 Wednesday), or 1.45:1. Up volume led down volume by 1.21:1.
SPX. On lower volume, the SPX rose +2.92 points, or +0.22%, to 1343.60. Volume fell -7.26% to 669.34 million shares, down from 721.74 million shares Wednesday and below the 761.22 million share 50-day moving average. For the 146th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1324.59 vs. 1237.03, respectively). The SPX closed above its 200-week moving average (1167.93).
The SPX gapped higher at the open to the 1345-level. At 9:45, a sharp but brief move higher crossed first support at 1346 and set the intra-day high of 1346.82 at 9:55. Failing to hold above first resistance at 10:00 following disappointing existing home sales data, the index retraced gains back to break-even by 10:10. By 11:10, the index had fallen into negative territory and set its intra-day low of 1336.36. Just after noon, a rally lifted stocks back above their break-even and to the 1344 level by 1:20. At 2:10, the index sold off and briefly returned to negative territory at 2:45. A rally into the close retook the break-even line at 3:00. The index closed just shy of 1344.
Technical indicators are mixed. The index’s failure at 1370 and subsequent fall placed equity markets in correction, but the index has found support at its 50-day moving average. Conversely, 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 40th straight session. The index closed above its April 2010 highs for the 116th straight session. The SPX closed (by -0.16%) below its 20-day moving average (1345.74) for the fifth straight session. The index closed (by +1.44%) above its 50-day moving average for the 21st straight session. The index closed (by +2.38%) above its 100-day moving average (1312.36) for the 44th straight session. The SPX closed +8.61% above its 200-day moving average. All moving day averages increased. The directional momentum indicator is negative for the seventh straight session but has narrowed considerably, and the trend is weak and decreasing. Relative strength rose to 53.13 from 51.76, a neutral range. Next resistance is at 1348.16; next support is at 1337.70.
BKX. On lower volume, the KBW bank index rose +0.05 points, or +0.10%, to 50.60. Volume fell -10.32% to 61.81 million shares, down from 68.93 million shares Wednesday and below the 107.56 million share 50-day average. The recent volume decline relative to historical averages relates to Citigroup’s May 6th 10-1 reverse split. The BKX closed +17.73% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -12.68% and -9.04% below its April 23, 2010, and February 14, 2011 closing highs, respectively.
Financials underperformed the market, and large-cap banks underperformed regionals. The BKX gapped higher at the open, immediately crossing 50.70-level resistance and setting the intra-day high of 50.72. Within trading’s first minutes, financials fell, and by 9:45, the index retraced gains and dipped into negative territory. At 9:45, the BKX rallied with the broader market and again tested first level resistance at 50.70. The 10:00 economic releases sank financials back to break-even by 10:10, and the index fell to its intra-day low of 50.37 by 10:55. Through the afternoon, the BKX made three rally attempts into positive territory. The first two, at 12:15 and 1:50, were sold back to negative territory. The third, beginning at 2:45, retook the break-even line by 3:20 and kept the index in positive territory at the bell.
Technical indicators are negative. Weakness in the broader markets has impaired support for most financial stocks. The index has remained bound on the upside by the 50-day moving average (now at 51.37 and falling), has broken through 100-day moving average support, but found support at the 200-day moving average (49.72). The 20-day moving average (50.77) has remained below the 50-day moving average since March 11th and crossed below the 100-day moving (52.48) average on April 15th. The 50-day moving average crossed below the 100-day moving average on April 21st. The index closed below the 20-, 50-, and 100-day moving averages for the seventh, 30th, and 26th consecutive sessions, respectively. The index closed above 50 for the third straight session. The 50- and 100-day moving averages fell. The 20-day closed (by -0.60 points) below the 50-day for the 47th straight day, but the negative divergence contracted. The 50-day moving average closed (by +1.65 points) above the 200-day moving average for the 88th straight session, but the positive divergence contracted. The 100-day moving average closed (by +2.77 points) above the 200-day moving average for the 70th straight session, but the positive divergence contracted. The directional movement indicator is negative for the 11th straight session, and the trend is stable. Relative strength rose to 46.84 from 46.27, a neutral range. Next resistance is 50.77; next support at 50.40.