This morning. U.S. equity markets remain in correction, despite the past 4 days’ consecutive advances and a move by the major averages back above their respective 50-day moving averages. U.S. equity futures are modestly higher this morning, in front of this morning’s June ISM report at 10:00. Asian markets closed mixed, but in a confirmed uptrend. In Europe, equity markets are mixed and remain in correction. U.S. Treasury prices are mixed. The dollar is slightly weaker. Commodities markets are lower, with particular weakness in corn prices after the USDA reported more planted acreage than any year since the end of World War II. After a fair value adjustment of +0.14 points, September SPX equity futures are at 1316.30, up +0.64 points. The SPX opens at 1320.641, -3.15% below its recent April 29 multi-year closing high, but again +0.27% above its 50-day moving average. The SPX is +5.01% above its 1257.64 year-end close. Next resistance is at 1325.86. Next support is at 1311.53.
Thursday, U.S. equity markets again rallied strongly on increased volume, and closed near their intraday highs. All market segments closed higher, with the greatest strength in industrials, technology, and oil and gas. Financials lagged, but closed up +0.27%, consolidating after the prior day’s market leading +2.48% gain. Of the major indexes, the DJI posted the best gain, up +1.25%, compared to +1.21%, +1.10%, and +1.01% on the Nasdaq, NYSE composite, and SPX, respectively. Market breadth was positive. Volatility again declined, but trended higher after a sharp early decline. The VIX ended at 16.52, its lowest closing level in June, down -4.34% from 17.27 the prior day. Volume rose +9.10% to 1.02x the 50-day moving average. Despite the advance, trading desks reported a relatively quiet day, with stronger trading in late afternoon, after news from the Federal Reserve on debit card interchange fees. The de-risking process seems to have concluded. Short sale covering seems to explain in part yesterday’s late upward move.
On the major indexes, the distribution day count was unchanged, numbering 6 on the DJI, Nasdaq, SPX, and NYSE. The BKX count is 7. Distribution days signal institutional selling in the prior 25 trading days.
Asian equity markets, which are in a confirmed uptrend, closed mixed. European markets remain in correction, but are also mixed in trading today, but have rallied from a modestly weaker open. Both regions cite easing sovereign debt concerns and improving economic data for the better recent equity market performances. In Japan, the Nikkei closed up +0.53% on a -17.7% decrease in volume. The NKY closed at 9868.07, up +5.58% since June 20th. Market segments closed mixed, with strong gains in industrials, financials, and consumer goods, while basic materials, utilities, and consumer services lagged with losses of at least -0.30%. Financials rose +1.16%. In China, the Hang Seng exchange is closed on holiday. The Shanghai composite fell -0.10% on a +12.0% increase in volume, but has rallied +5.27% from its June 20th correction low. On the SHCOMP, trading lacked much conviction; the index weakened after a positive open, rallied again through the morning trade, then weakened through the afternoon, before rallying weakly into the close. Segments ended mixed, with basic materials, consumer services and health care higher, while oil and gas, financials, and telecommunications lagged. The SHCOMP ended at 2759.362, -9.75% below its recent April 18th 3057.33 high, -1.73% below its 2010 close, and -1.40% below the 2798.46 50-day moving average. In Europe, the EuroStoxx 50, FTSE, and DAX are mixed, -0.03%, +0.23%, and -0.04%, respectively. Equity markets opened slightly higher, but sold off modestly in early trading. On the Eurostoxx 50, financials are the leading segment, up +0.87%, followed by utilities and basic materials. Consumer goods, technology, and consumer services are the laggards.
Despite sovereign debt and other macro-concerns, LIBOR levels are at their lowest since early 2009, well below those seen prior to last year’s sovereign debt crisis. Overnight USD LIBOR fell to 0.12550% from 0.12800% the prior day, and down from 0.25188% at year-end. USD 3-month LIBOR is unchanged at 0.24575%, compared to 0.24575% the prior day, but down from 0.30950% at year-end. The U.S. dollar is slightly stronger against the euro, pound, and yen. The dollar trades slightly below its 74.68 50-day moving average, but well below its respective 75.45 and 77.09 100- and 200-day moving averages. The euro trades at US$1.4486, compared to US$1.4502 Thursday and US$1.4435 the prior day. The Euro trades above its US$1.4402 50-day moving average. The dollar trades at ¥80.70, compared to ¥80.56 Thursday and ¥80.78 the prior day. The yen trades better than its 50-day moving average ¥80.89. U.S. Treasury yields are mixed, with 2- and 10-year maturities yielding 0.454% and 3.150%, respectively, compared to 0.458% and 3.160% Thursday. The yield curve narrowed to +2.696%, from +2.702% 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 lower, with lower energy, precious metals, and aluminum, higher copper, and mixed agriculture, with particular weakness in corn.
U.S. news and economic reporting. The July employment report will be reported next Friday, July 8th. Today's economic reporting includes the University of Michigan confidence report for June, the May construction spending revision, and June ISM manufacturing, all after the market open.
Overseas news: In June, the Eurozone purchaser managers index fell to 52.0 from 54.6 in May, in-line with estimates and the lowest level since December 2009. Press reports indicate the second Greek bailout package could be worth as much as $124 billion. In May, Japan’s jobless rate fell unexpectedly, declining to 4.5% from 4.7% versus estimates of an increase to 4.8%. Today, Venezuelan President Hugo Chavez confirmed he has cancer and is receiving treatment.
1Q2011 Earnings. The first quarter’s earnings results have exceeded EPS and revenue expectations. Of the 498 S&P500 companies that reported earnings to date, 72% (358 of the 498) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat by an average of +7.0% (versus a historical average of +2%). EPS is up +19.6% over the prior year. Though challenged in the current operating environment, 372 companies (75%) reported increased revenues and 335 companies (67%) beat revenue estimates. In the second quarter of 2011, analysts estimate the SPX will earn $24.36 per share, compared to $23.06 and $21.17 per share in 1Q11 and 2Q10, a +5.6% and +15.1% 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. For the second quarter of 2011, analysts estimate the BKX will earn $0.97 per share, compared to $0.96 and $0.61 per share in 1Q11 and 2Q10, a +1.0% and +59% increase, respectively.
Valuation. The SPX trades at 13.4x estimated 2011 earnings (revised down to $98.52 from $98.91) and 11.8x estimated 2012 earnings ($112.37), compared to 13.2x and 11.6x 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 +4.1%, and +4.7%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +16.2% and +32.5%, respectively.
Large-cap banks trade at a median 1.42x tangible book value and 13.3x 2011 consensus earnings, compared to 1.42x tangible book value and 13.5x 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 +31.1% and +70.9%, respectively.
Thursday’s equity markets. On the week’s best volume, equity markets closed higher. The DJI, Nasdaq, NYSE, and SPX ended up +1.25%, +1.21%, +1.10% and +1.01%, respectively. The last four days of gains have produced the biggest 4 day gain for the SPX since last September. Markets opened slightly higher after jobless claims fell minimally, but advanced after 9:45 when the June Chicago PMI came in much higher than expected at 61.1 versus an expected decline to 54. The markets received another boost just before 10:00, when Greek lawmakers passed a 2nd vote on austerity, confirming the previous day’s vote. Markets continued higher through the late morning, but began to pare gains during the afternoon. The markets rallied into the close, presumably on window dressing activity. Trading desks reported a generally lackluster day. Interestingly, there were reports that many long-only and hedge fund accounts seemed frustrated at missing the late June move, and some may be chasing the recent upward trend. As window dressing may also explain the move, many accounts will look for confirmation on a new uptrend. The VIX finished the day at 16.52, down -4.34%.
Technical indicators are improving. The major indices all broke through multiple support levels Thursday. The SPX, while rallying for the past four days, has broken through some key resistance levels at 1300 and 1314, leaving 1325 as the next resistance level. Thursday marked an important transition as the SPX, which has bounced off the 200-day moving average twice in June, finished above the 50- and 100-day moving for the first time since the end of May. Today’s action, on a Friday that is also the first day of the month, is important. If it closes higher today, it would be only the 2nd weekly high set on a Friday. The SPX hasn’t had a higher initial monthly trading day since April. During the first four months of the year, when the SPX rallied 8.40%, Fridays accounted for 10 of 17 weekly highs. The DJI, NYSE, and Nasdaq all closed above their respective 50-, 100-, and 200-day moving averages for the first time since the end of May as well. The Bloomberg NYSE new net highs were 89 versus 60 for Wednesday. The relative strength indicator rose to 58.27 versus Wednesday’s reading of 54.11, and is in the neutral range.
All market segments were positive. Industrials, technology, and oil and gas were the leaders, while utilities, health care, and financials were the laggards.
While positive, financials lagged all other segments, unable to extend the leadership of the prior trading day. The KRX, XLF, and BKX were up, +0.62%, +0.39%, and +0.29%, respectively. The BKX began the day higher, but gave back those gains during the first half hour and turned negative. Just before 10:00, the BKX bounced sharply and then began a series of incrementally higher prints, turning positive just before 11:00 and continuing to its highs just after noon. The afternoon trade was quiet, with the BKX giving back some gains, but remaining up for the session. The index rallied into the close to conclude the 2nd quarter with a loss of -6.93%. The BKX finished the day with 17 names higher and 7 lower. Leaders in the BKX were PBCT, JPM, and PNC, each up at least +1.14%. The laggards were NYB, COF, and BAC. The KRX finished the day with 37 names higher, 11 lower and 2 unchanged. Leaders in the KRX included BPFH, ONB, and PACW. Laggards were TCB, FULT, and HBHC. Among the broader financials, WY and MI were the leaders, up at least +2.44%. The KRX finished below its 50- and 100-day moving average but above its 200-day average. The BKX and XLF finished below all their key moving averages. While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -16.61% below its April 2010 high and -41.47% below its best level of 82.55 in September 2008.
NYSE Indicators. Volume rose +9.10% to 996.05 million shares, from 913.0 million shares Wednesday, and 1.02x the 973.92 million share 50-day moving average. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by +1398 (compared to +1128 Wednesday), or 2.72:1. Up volume led down volume by 3.33:1.
SPX. On higher volume, the SPX increased +13.23 points, or +1.01%, to 1320.64. Volume rose +7.37% to 758.59 million shares, up from 706.53 million shares Wednesday but below the 759.51 million share 50-day moving average. For the 174th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1317.10 vs. 1267.11, respectively). The SPX closed above its 200-week moving average (1162.97).
The SPX gapped higher to open at the 1312 level, a resistance point. By 9:40, the index retraced slightly to 1310.38, the intra-day low. The index quickly regained positive momentum, and by 9:50, reached 1318. Stocks stair-stepped higher through the morning to reach the 1320 level by 11:05. Through 3:15, the index traded mostly sideways, retracing gains slightly to the 1318 level. A 3:15 rally took the index to 1321.97 by 3:45, setting the intra-day high, and the SPX closed just below that level.
Technical indicators are turning positive. The index’s May 2nd failure at the 1370 level moved stocks into correction, but the index found solid support at its 200-day moving average during June’s downtrend. For the first time since May 31st, the SPX closed above all moving averages. The 50-day average remains above the 100-day moving average, and the gap is now expanding as the 50-day average turned positive on Tuesday for the first time since June 14th. The SPX closed above 1300 for second straight session. The index closed above its April 2010 highs for the 145th straight session. The SPX closed (by +2.80%) above its 20-day moving average (1284.64) for the third straight session. The index closed (by +0.27%) above its 50-day moving average for the first time in 22 sessions. The index closed (by +0.34%) above its 100-day moving average (1316.11) for the first time in 22 sessions. The SPX closed +4.22% above its 200-day moving average. All moving averages increased, with the 20-day moving average increasing for the first time in 28 sessions. The directional momentum indicator is positive for the second straight session, and the trend is stable. Relative strength increased to 58.67 from 54.55, a neutral range and the highest reading since May 10th. Next resistance is at 1325.86; next support is at 1311.53.
BKX. On lower volume, the KBW bank index rose +0.14 points, or +0.29%, to 48.32. Volume fell -5.50% to 90.17 million shares, down from 95.42 million shares Wednesday but above the 83.86 million share 50-day average. The BKX closed +12.42% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -16.62% and -13.14% below its April 23, 2010, and February 14, 2011 closing highs, respectively.
Financials were the market’s worst performing segment, large-cap banks underperformed regionals. The BKX gapped higher to open at the 48.30 level. Financials quickly sold off, falling to 47.93 by 9:40 and setting the intra-day low. Through 10:25, the index fluctuated between gains and losses. Rallies at 10:25 and 11:00 took the index to 48.30 and 48.40, respectively. Through 1:15, the BKX traded sideways at the 48.40 level before retracing to 48.30 by 1:30. Through 3:00, the index again traded sideways at the 48.30 level. At 3:00, a small sell-off took the index back to break-even before a 3:15 rally reclaimed the 48.30 level. Financials closed above 48.30 and towards the higher end of the day’s range.
Technical indicators are mostly negative, with some modest recent improvement. Through the recent correction, bank stocks have significantly underperformed the broader markets. The BKX fell through all major moving averages, crossing decisively below the 200-day moving average (now at 50.00) on June 1st. The 20-day moving average (47.13) is below the 50- and 100-day moving averages (49.00 and 50.81, respectively). The 50-day average is below the 100-day moving average and has been below the 200-day moving average since June 15th. The index closed above its 20-day moving average for second straight session. The index closed below the 50-, 100-, and 200-day moving averages for the 59th, 55th, and 22nd consecutive sessions, respectively. The index closed below the 50.00 level for the 21st straight session. The 50- and 100-day moving averages fell. The 20-day closed (by -1.87 points) below the 50-day for the 76th straight day, but the gap narrowed. The 50-day moving average closed (by -1.00 points) below the 200-day moving average for the 11th straight session, and the gap expanded. The 100-day moving average closed (by +0.81 points) above the 200-day moving average for the 99th straight session, but the gap narrowed. The directional movement indicator is negative for the 39th straight session, and the trend is strong and declining. Relative strength increased to 53.95 from 52.91, a neutral range and the highest level since April 7th. Next resistance is 48.56; next support at 48.00.