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U.S. Equity Futures Strengthen, Shrugging Off Tepid Economic News

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This morning.  U.S. equity markets remain in correction.  After fair value adjustment, U.S. equity futures are moderately higher and have generally been strengthening. World equity markets are mixed, better in Europe after the conclusion of G-8 heads of state meetings.  After yesterday’s strong auction of 7-year notes, U.S. Treasuries prices are lower.  The U.S. dollar is lower.  Commodities markets are higher.  After a fair value adjustment of -2.31 points, June SPX equity futures are at 1329.70, up +5.51 points.  The SPX opens at 1325.69, -2.78% below its recent April 29 multi-year closing high and -0.19% below its 50-day moving average.  The SPX is +1.57% above April’s lowest closing low of 1305.14.  Next resistance is at 1331.33.  Next support is at 1317.23.
On Wednesday, U.S. equities shrugged off disappointing economic reports and ended higher, on mixed volume.  The Nasdaq managed the best gain, up +0.78%, while the NYSE composite, SPX, and DJI closed +0.56%, +0.40%, and +0.07% higher, respectively.  Volume rose on the DJI, but declined elsewhere.  Indexes traded within wider ranges than on Tuesday, 14.1 points on the SPX and 123.7 points on the DJI. As on Tuesday, markets rebounded after poor economic reports.  Wednesday, the rebound came later than on Tuesday. Markets trended lower until 11:00, then rallied to turn positive at 12:30, touched intraday highs at 2:30 and 3:30, and then faded into the close. Most market segments closed higher, with telecommunications, consumer services, and technology best, while basic materials, utilities, and health care were the worst, with the latter two segments lower on the day. Market breadth was positive.  The distribution day count was unchanged at 6 on the NYSE, but were unchanged at 6 on the SPX and Nasdaq, and 5 on the DJI in the past 25 trading days.  BKX has seen 4 distribution days.  Distribution days indicate institutional selling.  Volatility mirrored equities’ performance, falling at the open, trending higher until the afternoon rally ensued, weakening and then strengthening into the close.  The VIX ended at 16.09, down -5.74% from 17.07 at Wednesday’s close.
Asian and Eurozone equity markets are also in correction.  Earlier today, the Nikkei closed -0.46% lower. Volume fell -6.84% to 1.09 billion shares from 1.17 billion shares the prior day.  Growth concerns were cited for the pullback. Oil and gas, health care, and financials were the best performing segments. Financials fell -0.05%. In China, the Hang Seng and Shanghai composite closed mixed, +0.95% and -0.97%, respectively.  On the SHCOMP, volume rose +4.48% from the prior day.  The SHCOMP closed at 2709.95, -11.4% below its recent April 18th 3057.33 high, -3.49% below its 2010 close, and below the 2841.70 200-day moving average.  However, the SHCOMP closed +1.82% above its 2011 low of 2661.45, set on January 25. On the day, the SHCOMP opened briefly higher, struggled through the morning near par, and lost ground through the day’s remainder to close at the intraday low. Weakness was attributed to concerns that monetary policy would be further tightened. Telecommunications, oil and gas, and financials were the best performing segments, with financials off -0.24%. Utilities, technology, and consumer goods were the worst performers, down at least -2.16%. In Europe, equity markets are modestly higher, with better strength in oil and gas, financials, and health care.  Basic materials, consumer services, and technology are the laggards, with the latter segment particularly weak, off -1.33%.  The EuroStoxx 50, FTSE, and DAX are higher, up +0.75%, +0.83%, and +0.36%, respectively.  On the EuroStoxx, financials are best performing segment, up +1.18%.  Financials are benefiting from a generally upbeat G-8 statement, but also on a Citigroup upgrade of European banks.
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.  Overnight USD LIBOR declined to 0.12700% from 0.12900% Thursday and 0.25188% at year-end.  USD 3-month LIBOR declined to 0.25388% from 0.25400% Thursday and 0.30950% at year-end.  The U.S. dollar is lower, 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$1.4261, compared to US$1.4145 Thursday and US$1.4088 the prior day.  After a sharp decline in early May, the Euro appears to have stabilized. After bouncing off its US$1.3998 100-day moving average, it still trades well above its 200-day moving average, but below its US$1.4352 50-day moving average.  The dollar trades at ¥81.18, compared to ¥81.29 Thursday and ¥81.97 the prior day.  The yen trades better than its 50-day moving average ¥82.10.  U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.492% and 3.079%, respectively, compared to 0.484% and 3.057% Thursday.  The yield curve widened to +2.587% from +2.573% 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, precious metals, aluminum, lower copper, and mixed agriculture. 
U.S. news and economic reporting.  Today’s focus is April personal income and spending, PCE deflator at 8:30, and at 9:55, the University of Michigan Confidence revision for May. Personal income rose +0.4%. The PCE deflator was +2.2% YOY. Both were in line with survey.
Overseas news.  Today, parts of Mongolia are under martial law as unrest has gripped the northern Chinese province.  In May, Euro-zone consumer confidence fell more than expected.  Today, Egyptian activists held nationwide protests against the ruling military council’s handling of post-revolt affairs.  Today, a European Central Bank officials said Greece will receive its next round of funding on June 29th
Company news/research:
·         European banks – upgraded to outperform at Citigroup
·         FULT – initiated at hold at Jeffries, $12 price target
·         SUSQ – initiated at hold at Jeffries, $10 price target
·         NDAQ – resumed at buy at Goldman, $29 price target
·         ICE – resumed at neutral at Goldman, $135 price target
1Q2011 Earnings.  The first quarter’s earnings results have so far exceeded EPS and revenue expectations.  Of the 468 S&P500 companies that reported earnings to date, 72% (336 of the 468) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies have beat by an average of +7.0% (versus a historical average of +2%).  EPS is up +19.7% over the prior year.  Though challenged in the current operating environment, 353 companies (75%) reported increased revenues and 316 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 ($99.14) and 11.8x estimated 2012 earnings ($112.27), compared to 13.3x 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 +4.8%, and +4.6%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +16.9% and +32.4%, respectively.
Large-cap banks trade at a median 1.49x tangible book value and 12.6x 2011 consensus earnings, compared to 1.45x tangible book value and 12.5x 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 +32.4% and 70.9%, respectively. 
Thursday’s equity markets. On mixed volume, the markets finished in positive territory. The Nasdaq, NYSE, SPX and DJI finished the day higher, up +0.78%, +0.56%, +0.40%, and +0.07%, respectively. The markets began the day lower after the release of several economic reports which did not meet expectations. The gross domestic product for the first quarter was 1.8% versus estimates of 2.2%. Personal consumption was lower as well, 2.2% versus estimates of 2.8%. Initial jobless claims for the week ended May 21st were elevated at 424k versus estimates of 404k. The markets traded in a lower range through the morning session but began to gather a bid in the late morning and turned positive just before 1:00. This seemed to correspond with the seven year auction that drew yields of 2.429% and a very strong bid to cover ratio of 3.24. The markets continued their gains through most of the afternoon session giving some gains back in the last half hour. Thursday we received mildly negative economic news that was overwhelmed by strong investor demand for treasuries and positive corporate news. TIF, the second –largest luxury retailer raised its full year earnings forecast as profit beat estimates. Uncertainty and investor apathy are the descriptions we hear daily about this market. Trading desks report a quiet session with a lack of conviction remaining the ongoing theme for investors. Concerns about the outcome for Greece/Ireland sovereign debt, the US debt ceiling and the effects of the end of QE2 are constants that have investors wary and unwilling to commit capital in a meaningful way. The VIX finished the day at 17.26, off -4.96%.
Technical indicators were mixed. The SPX broke through resistance at 1326, but was unable to carry that gain through 1333, the next resistance level. Support was never in jeopardy for the SPX, with the low trade being 1314 and support at 1312 and then 1300. The gains on lighter volume show a lack of conviction for this up day. Technicians are watching 1330-1337 (May 23 breakdown and May 2 downtrend line)  and one analyst we follow is not expecting the next rally to exceed the 1340-1350 range. The SPX ,DJI, NYSE, and Nasdaq are all below their 50-day moving averages, but above their respective 100- and 200-day moving average. The Bloomberg NYSE new net highs were 2 versus Wednesday’s reading of 8. The relative strength indicator rose to 46.19 from Wednesday’s 42.68 and is the neutral range.
Market segments were mixed. Telecommunications, consumer services, and technology were the leaders, while basic materials, utilities, and health care were the laggards.
Financials closed higher. The BKX and KRX had their first positive close in 5 sessions.  The XLF, KRX, and BKX finished up, +0.52%, +0.47%, and +0.35%, respectively. The BKX began the day lower and lost ground through 11:00, but rallied to turn positive just after 1:00, before proceeding higher and spiking to its intraday high in the mid-afternoon.  In the last hour, the BKX gave back a little of its gains, but finished higher on increased volume.  Over the past two days, a number of high profile fund managers spoke publicly spoken about the sector’s compelling values.  The names that are most often mentioned are BAC, C and GS.  Thursday C benefited after a high profile bank investor spoke on CNBC about its merits. The BKX had 14 names advance, 9 decline and 1 end unchanged.  The KRX had 34 names advance, 14 decline, and 2 end unchanged.  BKX leaders were RF (+2.06%), PNC (+1.03%), and FITB (+0.95%).  The leaders among the smaller banks were BPFH (+5.05%), SNV (+2.12%), and FHN (+1.85%).  Among broader financials, HST (+3.85%), SLM (+3.74%), and MA (+2.78%) were the leaders.  The laggards included PBCT (-1.73%), NDAQ (-1.69) and WU (-0.83%).  The BKX finished below its 50-, 100-, and 200-day moving averages.  The KRX and XLF finished below their 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 -15.4% below its April 2010 high and -40.6% below its best level of 82.55 in September 2008.
NYSE Indicators.  Volume fell -12.0% to 846.11 million shares, from 961.3 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 +1261 (compared to +934 Wednesday), or 2.43:1.  Up volume led down volume by 2.81:1.
SPX.  On lower volume, the SPX rose +5.22 points, or +0.40%, to 1325.69.  Volume fell -7.77% to 688.90 million shares, down from 745.76 million shares Wednesday and below the 740.39 million share 50-day moving average.  For the 151st consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1328.16 vs. 1242.17, respectively).  The SPX closed above its 200-week moving average (1167.21).
The SPX gapped lower at the open to the 1318 level.  At 9:50, a rally attempt to retake the break-even line was sold to the 1316 level.  Through 11:00, the index traded in a narrow 1315-1318 range.  At 11:10, momentum turned positive, and the index staged a healthy rally lasting through 2:35.  By 12:45, the index retook break-even and at 2:30, the index crossed first-level resistance at 1327.  At 2:35, the index reached its intra-day high of 1328.51.  The 1328 level proved difficult resistance, as the index was sold five times at that level in trading’s final two hours.  The SPX dipped into the close but finished near the day’s highs.   
Technical indicators are mixed.  The index’s failure at 1370 and subsequent fall placed equity markets in correction on May 4th.  The index broke down through its 50-day moving average, but found support at the 100-day moving average (1315.43), which is -12.73 points below the 50-day average.  The index’s correction has stalled the 50-day average’s positive momentum, and the 50-day may cross below the 100-day moving average in the next few weeks.  The index closed above 1300 for the 45th straight session.  The index closed above its April 2010 highs for the 121st straight session.  The SPX closed (by -1.04%) below its 20-day moving average (1339.59) for the 10th straight session.  The index closed (by -0.19%) below its 50-day moving average for 4th straight session.  The index closed (by +0.78%) above its 100-day moving average for the 50th straight session.  The SPX closed +6.72% above its 200-day moving average.  The 20-day moving average fell for the fifth straight session.  The directional momentum indicator is negative for the 12th straight session, and the trend is weak and stable.  Relative strength rose to 46.16 from 43.25, the lower end of a neutral range.  Next resistance is at 1331.33; next support is at 1317.23.
BKX.  On higher volume, the KBW bank index rose +0.17 points, or +0.35%, to 49.05.  Volume rose +1.08% to 59.72 million shares, up from 59.09 million shares Wednesday and below the 100.86 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 +14.1% above its August 30 closing low of 42.98, the trough of last year’s correction, but -15.4% and -11.8% below its April 23,  2010, and February 14, 2011 closing highs, respectively. 
Financials outperformed the market, and regionals outperformed large-cap banks.  The BKX opened flat.  By 9:40, the index had crossed above the 49.00 level.  The move higher was promptly sold, and the index fell sharply at 9:50, turning negative and reaching the 48.70 level.  At 10:20, the index made another rally attempt to the break-even line, but that too was sold.  At 11:05, the index fell to its intra-day low of 48.69.  In sympathy with the broader markets, the BKX rallied from 11:40 through 2:35, turning positive at 1:00, retaking the 49.00 level at 2:20,  and reaching the intra-day high of 49.21 at 2:35.  By 3:15, gains retraced back to the 49.0 level.  Through the close, the index fluctuated between 49.00 and 49.10, and finished in the middle of that range. 
Technical indicators are negative.  Weakness in the broader markets removed support for financial stocks, which have underperformed the broader markets since February.  The index has remained bound on the upside by the 50-day moving average (now at 51.10 and falling) and closed below the 200-day moving average (49.76) for the fifth straight day.  The 20-day moving average (50.30) has remained below the 50-day moving average since March 11th  and crossed below the 100-day moving (52.29) 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 12th, 35th, 31st, and fifth consecutive sessions, respectively.  The index closed below 50 for the fifth straight session.  The 20-, 50-, and 100-day moving averages fell.  The 20-day closed (by -0.80 points) below the 50-day for the 52nd straight day, and the gap expanded.  The 50-day moving average closed (by +1.34 points) above the 200-day moving average for the 93rd straight session, but gap narrowed.  The 100-day moving average closed (by +2.52 points) above the 200-day moving average for the 75th straight session, but gap narrowed.  The directional movement indicator is negative for the 15th straight session, and the trend is strong and increasing.  Relative strength rose to 35.65 from 33.27, the lower end of a neutral range.  Next resistance is 49.28; next support at 48.76.

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