This morning. U.S. equity markets are in correction. After fair value adjustment, U.S. equity futures are modestly higher, following a tepid rebound in world equity markets, strength in commodities markets, and a weaker U.S. dollar. U.S. Treasury prices are lower. After a fair value adjustment of +0.42 points, June SPX equity futures are at 1319.30, up +3.68 points. The SPX opens at 1317.37, -3.39% below its recent April 29 multi-year closing high and -0.62% below its 50-day moving average. Recall that April’s lowest closing low was 1305.14. Next resistance is at 1329.33. Next support is at 1309.14.
On Monday, U.S. equities declined substantially, though on lower volume. For the 2nd consecutive day, all major indexes fell, as the Nasdaq, NYSE composite, SPX, and DJI declined -1.58%, -1.45%, -1.19%, -1.05%, respectively. Most of the downward arc came at the open, as markets gapped lower and subsequently traded within narrow ranges through the remainder of the day and ending slightly better than the intraday lows. Eurozone debt concerns and disappointing PMI reports from China and Europe seemed to trigger the pullback. U.S. economic news was comparatively light. All market segments closed lower, with industrials, oil and gas, and technology were the day’s worst performers. Market breadth was negative. The distribution day count is unchanged at 7 on the NYSE, 6 on the SPX and Nasdaq, and 5 on the DJI in the past 25 trading days. BKX has seen 5 distribution days. Distribution days indicate institutional selling. Volatility spiked at the open, but trended lower through most of the day, ending at 18.26, up +4.82%, from 17.43 at Friday’s close.
Asian and Eurozone equity markets are also in correction. Earlier today, the Nikkei closed +0.17% on lower volume. Defensive segments (utilities, telecommunications, and health care) were the best performers. Financials were middling performers, down -0.11%. In China, the Hang Seng and Shanghai composite closed mixed, +0.09% and -0.27%, respectively. On the SHCOMP, volume fell -23.9% from the prior day’s busy trade. The SHCOMP closed at 2767.06, -9.49% below its recent April 18th high 3057.33 and now -1.46% below its 2010 close. In the morning, the index trended lower to a 2744.86 intraday low at 11:00, then rallied through the close just short of the prior day’s close. Financials were the 8th worst performing segment, down -0.38%. Trading desks cited inflation concerns for the early weakness, and oversold conditions to explain the afternoon’s better trade. In Europe, equity markets are higher, with particular strength in basic materials and industrials. The EuroStoxx 50, FTSE, and DAX are up +0.33%, +0.38%, and +0.66%, respectively. On the EuroStoxx, financials are worst performing segment, down -0.16%.
Despite sovereign debt and other macro-concerns, LIBOR levels are at their lowest levels since early 2009, well below those seen prior to last year’s sovereign debt crisis, and continue to drift lower. Overnight USD LIBOR declined to +12.9000%, compared to 0.13000% Monday and 0.25188% at year-end. USD 3-month LIBOR declined to 0.25500%, compared to 0.25675% Monday 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 above its 200-day moving average. The euro trades at US$1.4086, compared to US$1.4048 Monday and US$1.4161 the prior day. Since early May, the Euro has trended lower. It still trades well above its 200-day moving average, but has moved below its US$1.4342 50-day moving average and is approaching its US$1.3969 100-day moving average. The dollar trades at ¥81.87, compared to ¥82.01 Monday and ¥81.70 the prior day. The yen trades better than its 50-day moving average ¥81.99, which is trending lower. U.S. Treasury yields are mixed, with 2- and 10-year maturities yielding 0.531% and 3.140%, respectively, compared to 0.523% and 3.129% Monday. The yield curve widened to +2.609% from +2.606% 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 higher, with higher energy and precious metals, lower aluminum and copper, and mixed agriculture.
U.S. news and economic reporting. Today’s report focus in April new home sales and Richmond Fed manufacturing index, all at 10:00.
Overseas news. This morning, Moody’s said a Greek debt restructuring could result in downgrades to Portugal’s and Ireland’s debt ratings to junk status. Today, Goldman Sachs cut its estimate of China’s 2011 and 2012 growth rates to +9.4% and +9.2%, from +10.0% and +9.5%, respectively, and predicted 2011 inflation would accelerate to a +4.7% rate, from the prior forecast +4.3%. Today, Moody’s placed 14 U.K. banks on review for a potential downgrade.
· EWBC – cut to neutral at Credit Suisse
1Q2011 Earnings. The first quarter’s earnings results have so far exceeded EPS and revenue expectations. Of the 455 S&P500 companies that reported earnings to date, 72% (329 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, 342 companies (75%) reported increased revenues and 304 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 13.3x estimated 2011 earnings ($99.12) and 11.7x estimated 2012 earnings ($112.44), compared to 13.4x 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 +4.8%, 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 1.46x tangible book value and 12.6x 2011 consensus earnings, compared to 1.49x 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 +32.7% and 70.9%, respectively.
Monday’s equity markets. On lighter volume, the equity markets closed lower for a 2nd consecutive day. The Nasdaq, NYSE, SPX, and DJI all finished lower, off -1.58%, -1.45%, -1.19%, and -1.05%, respectively. The markets began the day with a focus on macroeconomic concerns, after a Fitch downgrade of its outlook of Greek debt. Disappointing Chinese and Eurozone PMI accentuated investor concerns. U.S economic news and corporate news was relatively light. After gapping several points lower, U.S. equities traded in a tight range (SPX in a nine point range) for the balance of the day, with most equities at their intraday lows around 11:00. The lows for the day were reached after Fitch lowered its outlook for Belgium’s sovereign debt to negative. It left the rating at AA+, but said that the negative outlook means there is a chance the bonds could be downgraded in future months. S&P had warned earlier in the day that it might downgrade the sovereign debt of Italy and Spain. Markets rallied mildly through the afternoon, but weakened again into the close.
Trading desks report that while activity was unusually quiet, few accounts were rotating toward defensive names. Selling was not panicked. Traders surmise that the weakness stemmed more to a lack of buyers than actual selling pressure. Volatility initially spiked, then trailed off through the day. The VIX spiked briefly above 20, but finished the day at 18.27, up +4.82%.
Technical indicators are negative. The SPX broke its 100-day moving average intraday and closed below its 50-day moving average for the first time since April 20th. The SPX has not traded below its 100-day average since mid-March. The SPX did manage to hold support at 1312 and then rallied minimally from that level. The DJI finished below its 50-day moving average, but above the 100- and 200-day moving averages. The Nasdaq finished below the 50- and 100-day moving averages. The relative strength indicator finished lower at 37.99 compared to Friday’s reading of 44.58, moving into an oversold range.
All market segments were negative. Telecommunications, consumer goods, and consumer services were the leaders, while industrials, oil and gas, and technology were the laggards.
Financials were the 6th worst performing segment. The KRX, BKX and XLF closed lower, off -1.60%, -1.45%, and -1.40%, respectively. The BKX saw its highest point at the open and sold off throughout the day to close near its low for the day. The BKX and XLF finished the day at levels last seen early December 2010. The BKX had 23 names down and 1 unchanged. The laggards were STT (-2.54%), FITB (-2.52%), and STI (-2.47%). The KRX had 49 names down and 1 unchanged. FHN finished the day unchanged. The laggards were WBS, FFIN, and EWBC, respectively. The XLF and BKX finished the day below their respective 50-, 100-, and 200-day moving averages. The KRX was below the 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 -15.5% below its April 2010 high and -40.7% below its best level of 82.55 in September 2008.
NYSE Indicators. Volume fell -12.7% to 866.82 million shares, from 992.37 million shares Friday, 0.91x the 50-day moving average. By large margins, market breadth was negative, and up volume lagged down volume. Advancing stocks lagged decliners by -1784 (compared to -951 Friday), or 0.26:1. Up volume lagged down volume by 0.11:1.
SPX. On lower volume, the SPX fell -15.90 points, or -1.19%, to 1317.37. Volume fell -12.42% to 667.20 million shares, down from 761.84 million shares Friday and below the 757.59 million share 50-day moving average. For the 148th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1325.62 vs. 1239.45, respectively). The SPX closed above its 200-week moving average (1167.17).
The SPX gapped lower at the open, immediately crossing first and second support levels at 1328 and 1323, respectively. The index opened at 1315. At 10:00 and 10:30, the index made two rally attempts to the 1319 level, but both rallies were sold. Following the second rally’s sell-off, the index fell through noon and reached its intra-day low of 1312.88 by 12:15, below the SPX’s 100-day moving average. Through 2:35, the index rallied back through 1320 and set the intra-day high of 1321.25 at 2:35. By 3:10, the index partially retraced back through the 1320 level and fell through the closing bell to finish at the 1317 level.
Technical indicators are turning negative. The index’s failure at 1370 and subsequent fall placed equity markets in correction, and the index broke down through its 50-day moving average yesterday, finding support at the 100-day moving average. 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 in the next few weeks. The index closed above 1300 for the 42nd straight session. The index closed above its April 2010 highs for the 118th straight session. The SPX closed (by -2.03%) below its 20-day moving average (1344.64) for the seventh straight session. The index closed (by -0.62%) below its 50-day moving average for first time in 23 sessions. The index closed (by +0.28%) above its 100-day moving average (1313.68) for the 46th straight session. The SPX closed +6.32% above its 200-day moving average. The 20-day moving average fell for the second straight session. The directional momentum indicator is negative for the ninth straight session, and the trend is weak and increasing. Relative strength fell to 41.28 from 47.95, the lower end of a neutral range. Next resistance is at 1329.33; next support is at 1309.14.
BKX. On lower volume, the KBW bank index fell -0.72 points, or -1.45%, to 48.97. Volume fell -8.34% to 65.89 million shares, down from 71.89 million shares Friday and below the 106.21 million share 50-day average. Recent low volume levels versus historical averages relates to Citigroup’s May 6th 10-1 reverse split. The BKX closed +13.94% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -15.50% and -11.97% below its April 23, 2010, and February 14, 2011 closing highs, respectively.
Financials underperformed, and regionals underperformed large-cap banks. The BKX gapped lower at the open, immediately crossing resistance and its 200-day moving average. The index opened at the 49.18 level. Like the broader market, the BKX made two rally attempts to the 49.40 level at 10:00 and 10:30. Following the 10:30 rally’s sell-off, the index retreated to the 49.05 level by 12:15. At 12:50 and 2:45, the index made two more rally attempts, but only to the 49.20 level. Unlike the SPX, the BKX fell through its noon-level low in at 3:30, and continued setting intra-day lows through the close. The BKX broke down through the 49.00 level at 3:45 and set the intra-day low of 48.95 at 3:53. The index closed below 49.00 for the first time since December 7, 2010.
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 51.25 and falling), has broken through 100-day moving average support, and closed below the 200-day moving average (49.72) for the second straight day. The 20-day moving average (50.65) has remained below the 50-day moving average since March 11th and crossed below the 100-day moving (52.42) 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-, 100-, and 200-day moving averages for the ninth, 32nd, 28th, and second consecutive sessions, respectively. The index closed below 50 for the fourth time in seven sessions. The 20-, 50-, and 100-day moving averages fell. The 20-day closed (by -0.59 points) below the 50-day for the 49th straight day, and the gap expanded. The 50-day moving average closed (by +1.52 points) above the 200-day moving average for the 90th straight session, but gap narrowed. The 100-day moving average closed (by +2.70 points) above the 200-day moving average for the 72nd straight session, but gap narrowed. The directional movement indicator is negative for the 13th straight session, and the trend is increasing. Relative strength fell to 33.86 from 38.81, indicating an increasingly oversold condition. Next resistance is 49.45; next support at 48.72.