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U.S. Futures Point Lower After Yesterday's Impressive Positive Reversal

|Includes: BAC, BK, C, CMA, Capital One Financial Corporation (COF), CYN, FFI, FFIN, GS, HCP, PB, PRK, SPG, STT, VLY, WTFC
This morning.  U.S. equity markets are in correction, but yesterday’s late, strong positive reversal suggests the possibility of a renewed upturn should markets follow-through next week.  This morning, U.S. equity futures markets are moderately lower and have trended lower in the pre-market.  In Asia, equity markets closed lower, on mixed volume.  European equity indexes are modestly higher, with better results in Germany. U.S. Treasury prices are slightly lower.  The U.S. dollar is mixed.  Commodities markets are generally higher. Equity options markets suggest a generally bullish short-term outlook.  After a fair value adjustment of -2.46 points, September SPX equity futures are at 1156.20, down -13.08 points.  The SPX opens at 1172.53, -14.0% below its recent April 29 multi-year closing high, and -8.57% and -9.33% below its respective 20- and 50-day moving averages.  The SPX is -6.77% below its 1257.64 year-end close.  Next resistance is at 1196.43.  Next support is at 1125.09.
Tuesday. Volatility remained elevated in U.S. equity markets, as markets swung from losses to moderate gains to sharp losses and finally to significant gains in the final hour’s trade. Futures indicated a better open, but the mid-afternoon sell-off following the FOMC report underscored the market’s continuing uncertainty. NYSE volume declined -5.28%, but was 2.20x its 50-day moving average.   All the major indexes ended at least +3.98% higher, led by a +5.29% gain on the Nasdaq, followed by gains of +5.25%, +4.74%, and +3.98% on the NYSE composite, SPX, and DJI.  The SPX touched an intraday low of 1101.54 before reversing higher. All market segments closed at least +2.65% higher, led by financials +8.10%, basic materials, and consumer services, while health care, utilities, and consumer goods lagged. Financials gained +8.10%. Volatility was again volatile, opening lower off the prior day’s 48.00 close, but spiking after the 2:15 FOMC report to 47.56 before falling rapidly to close at 35.06, down -27.0%.
Total distribution days were unchanged at 9 on the NYSE composite and 8 on the SPX, DJI, and Nasdaq.  The BKX count is 13.   Distribution days signal institutional selling in the prior 25 trading days, or since the commencement of the most recent uptrend.
In Asia, Japanese and Chinese equity markets are also in correction.  Responding to the yesterday’s FOMC action, markets closed moderately higher on lower volume, but well off the day’s highs.  In Japan, the Nikkei closed at 9038.74, up +1.05%, but the intraday high was 9144.33. Volume rose +0.72%.  All market segments closed higher, led by utilities, consumer services, and telecommunications. Technology, financials, and industrials were the laggards. Financials closed up +0.23%. The NKY set its intraday high immediately after the open, trended lower through the morning session, and sideways through the afternoon into the close. The NKY closed below all moving averages.  It closed -11.6% below its 2010 close.
In China, the Hang Seng and Shanghai composite closed up +2.34% and +0.91%, respectively.  In Hong Kong, volume fell -36.6%.  Most market segments closed higher. Telecommunications, oil and gas, and technology led with gains of at least +3.53%. Basic materials, utilities, and consumer services lagged, with the latter down -0.31%. The index gapped higher to the day’s intraday high, but trended lower through the remainder of the session. In Shanghai, the prior day’s losses were more moderate, so the day’s gains were less pronounced. Volume fell -10.3%.  Most market segments gained. Technology, consumer goods, and industrials led, while oil and gas, financials, and telecommunications were the laggards. Financials rose +0.57%.  The SHCOMP also gapped higher, but set its intraday high just before mid-day, before trending lower through the afternoon to close at 2549.18.  The SHCOMP ended -16.6% below its recent April 18th 3057.33 high, -9.22% below its 2010 close, and -6.48% below its 2729.51 50-day moving average.
In Europe, equity markets are generally higher, but also well of their intraday highs. The Eurostoxx50, DAX, and FTSE are -0.01%, +0.68%, and +1.40%, respectively.  The Eurostoxx50 gapped to an intraday high of 2346.75, but turned lower after the first hour. A subsequent rally was also sold. Segments are mixed.  Telecommunications, technology, and basic materials are the leaders, up at least +0.89%. Industrials, oil and gas, and financials are the laggards, with financials down -1.30%. 
Libor, LOIS, Currencies, Treasuries, Commodities:
·         The S&P downgrade of U.S. debt had relatively little impact on interbank lending rates.  Overnight USD LIBOR rose to 0.13833%, from 0.13611% the prior day, and 0.25188% at year-end.  USD 3-month LIBOR rose to 0.28061%, compared to 0.27839% the prior day, but down from 0.30950% at year-end. 
·         The US Libor-OIS (LOIS) spread fell to 8.00 bps, compared to 8.80 bps the prior day and 11.98 bps at the end of 2010.  A rise in the LOIS indicates an increased intra-bank lending risk premium. 
·         The U.S. government overnight repo rate is 10 bps, unchanged from 10 bps Tuesday, from a recent high of 33 bps last week. 
·         The U.S. dollar is slightly weaker against the euro, pound, and yen.  The dollar trades at US$73.875, below its US$74.677 50-day, US$74.822 100-day, and US$76.791 200-day moving averages.  The euro trades at US$1.4379, compared to US$1.4376 Tuesday and US$1.4179 the prior day.  The euro trades below its US$1.4335 50-day and US$1.4349 100-day moving averages.  Intervention by Japanese monetary authorities has been ineffective, as the dollar trades at ¥76.49, compared to ¥76.96 Tuesday and ¥77.77 the prior day.  The yen trades better than its 50-day moving average ¥79.480.  
·         U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.168% and 2.254%, respectively, compared to 0.192% and 2.249 Tuesday.  The yield curve widened to +2.086%, from +2.057% 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 higher, with higher petroleum, precious metals, mixed aluminum and copper, and higher agriculture prices.
U.S. news and economic reporting.  Economic reporting is limited to MBA mortgage applications for the latest week (+21.7%, compared to +7.1% prior) and at 10:00, wholesale inventories. Tomorrow’s focus turns to the latest week’s initial and continuing job claims (survey 405K and 3725Km respectively).
Overseas news: In June, U.K. industrial production remained flat to the prior month, missing estimates for a +0.4% gain.  In July, China’s consumer and producer price indexes rose 6.5% and 7.5% over the prior year’s level, in-line with estimates and above the prior month’s increase.  Also in July, China’s retail sales increased at 17.2%, slower than expected and than last month’s increase.   In July, Chinese home sales fell -30% compared to the prior month.  Today, the South Korean government asked institutional investors to help stabilize markets and calm sentiment.  Today, according to press reports, the Japanese, Taiwanese, and South Korean governments directly entered equity markets to support prices.  Today, the Syrian regime increased its violent assaults on protestors to stem further uprising.  Today, London witnessed its third day of violent riots following the shooting death of a civilian linked to organized crime. 
Overseas news: Today, Chinese state-controlled media reports monetary policy will be on hold in the short term.  German press reports indicate a major ruling party revolt over Chancellor Merkel’s support for an enhanced European Union bailout fund.  Today, Italy sold €6.5 billion in treasury bills at yields 70 basis points lower than the prior auction and under heavier demand.  Today, the Swiss National Bank reiterated its intention to devalue the Swiss franc and proposed new policies to increase liquidity.  In June, France’s industrial production fell more than expected. 
Company news/research:
·         COF – announces purchase of HSBC’s $30 billion U.S. credit card business portfolio for an 8.75% premium.
·         GS – upgraded to neutral at Rochdale, price target of $120
2Q2011 Earnings.  The second quarter’s earnings results have so far exceed revenue and earnings expectations.  Of the 422 S&P500 companies that reported earnings to date, 76% (319 out of 422) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies beat EPS expectations by an average of +5.1% (versus a historical average of +2%).  EPS is up +17.6% over the prior year.  Though challenged in the current operating environment, 84% of companies reported increased revenues over the prior year and 71% 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 earnings, 88% (21 of 24) beat earnings estimates on an operating basis.  Revenues also exceeded expectations, with 79% of BKX members beating estimates.  For the second quarter of 2011, the BKX earned $1.12 per share, beating $0.97 estimates and compared to $0.96 and $0.61 per share in 1Q11 and 2Q10 (a +17% and +84% increase, respectively)
Valuation.  The SPX trades at 11.8x estimated 2011 earnings (reduced to $99.37 from $99.42) and 10.3x estimated 2012 earnings ($113.50), compared to 11.3x and 9.9x respective 2011-12 earnings Friday.  The 10-year average median Price/Earnings multiple is 20.0x.  Since the beginning of 2011, analysts increased 2011 and 2012 earnings estimates by +5.0%, and +5.8%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +17.2% and +33.9%, respectively.
Large-cap banks trade at a median 1.14x tangible book value, and 10.9x and 8.9x 2011 and 2012 consensus earnings, respectively, compared to 1.08x tangible book value and 10.4x/8.2x 2011/2012 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 +31.8% and +68.9%, respectively.
Options.  Options markets are generally bullish.  Composite options markets are bullish, equity options markets are neutral to bullish, and index options markets are neutral.   The composite put/call ratio closed at 1.29, in between its 5- and 10-period moving averages of 1.30 and 1.21, respectively.  The index put/call ratio closed at 1.84, above the 5- and 10-period moving averages of 1.58 and 1.48, respectively.  The equity put/call ratio closed the day at 0.89, in between its 5- and 10-period moving averages of 0.93 and 0.83, respectively.
Tuesday’s equity markets.  On lower volume, but still elevated volume, equity markets gained.  The Nasdaq, NYSE, SPX, and DJI all recovered some of the previous day’s losses and ended up +5.29%, +5.25%, +4.74% and +3.98%, respectively.  After Monday’s losses, the market began the day with an upward bias.  Most investors were still assessing the damage from Monday’s selloff and with an eye to the FOMC, anticipated some recovery in the markets.  SPX futures gained throughout the night and were indicated substantially higher at Tuesday’s opening.  Prior to the opening, 2Q2011 non-farm productivity was reported lower, but better than expectations.  The markets opened higher and gained through the morning.  The early afternoon saw a small decline in front of the FOMC decision. Market reaction was initially somewhat positive, then strongly negative, then positive as interest rates across the curve fell significantly. Markets reversed and soared to new highs as investors snapped up bargain-priced equities.  Markets ended impressively at their intraday highs, with the best gains since March 29, 2009.  The intra-day moves covered more than 638 DJI points and 71 SPX points.
In the morning, trading desks were busy as investors moved back into names that had sold off Monday.  Most desks were quiet in the hour just before the rate decision.  Desks were again active after the Fed decision and during the market bounce, but primarily in ETFs versus single stock purchases/sales.  Financials were bought as value-investors sought the extreme values that Monday’s selloff had created.  Larger accounts sold some of their 2nd tier stocks, event story stocks, as well as “broken” names that were crushed during earnings season.  Hedge funds were much busier than larger accounts, as those accounts seem willing to miss the first 5% of any rally than try to try to time the market bottom.  The Bloomberg NYSE new net highs were -604 versus the previous day’s reading of -953.  The relative strength indicator bounced from Monday’s severely oversold level of 15.56 to finish the day at a still oversold 31.28.
All market segments were positive. Financials, basic materials, and consumer services were the leaders, while health care, utilities, and consumer goods were the laggards.
Financials recovered some of Monday’s severe losses. The XLF, BKX and KRX all posted significant gains finishing the day higher by +7.76%, +7.00%, and +6.36%.  Financials led markets higher after lagging this past week.  The BKX finished with all 24 names higher.  The leaders were BAC, C, and COF, each higher by at least +8.48%.  Laggards were BK, STT, and CMA, which were higher by at least +2.00%.  The KRX finished the day with all 50 names higher.  The leaders were PRK, FFIN, and PRSP, each higher by at least +10.96%.  The laggards were VLY, CYN, and WTFC.  Among broader financials, banks were clearly the leaders as investors sought the values presented by the oversold group.  Investors also were buyers of insurance companies like HIG and GNW, as well as some REITS, like HCP and SPG.  Only one name in the S&P financials index finished lower. FII was down -0.91%.  Financial trading desks indicated that hedge funds were actively buying money center banks, possibly a mixture of covering shorts and adding to positions.  Value-oriented accounts were active in some of the higher quality names early in the day, but seem to disappear near the FOMC decision.  Hedge funds took over the afternoon trading, as the BKX first swung to a loss and then rapidly reversed to the highs of the day.  The BKX, KRX, and XLF all finished below their 50-, 100-, and 200-day and 200-week moving averages.  While the broader indexes have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -31.70% below its April 2010 high and -52.05% below its best level of 82.55 in September 2008.
NYSE Indicators.  Volume fell -5.28% to 2.410 billion shares, from 2.544 billion shares Monday, 2.20x the 1.060 billion share 50-day moving average.  By large margins, market breadth was positive, and up volume led down volume.  Advancing stocks led decliners by +2651 (compared to -3068 the prior day), or 11.6:1.  Up volume led down volume by 34.6:1.
SPX. On lower, but comparatively large volume, the SPX rose +53.07 points, or +4.74%, to 1172.53.  Volume fell -3.97% to 1,861 million shares, down from the Monday’s 2011 high volume mark of 1,938 million shares but still more than 2.2x the 832.97 million share 50-day moving average.  For the 201st consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1293.24 vs. 1286.10 respectively), but a cross to the downside may occur later this week.  The SPX closed back above its 200-week moving average (1155.86).
The SPX had its largest percentage gain since March 23rd, 2009 a day after posting its worst loss since November 20, 2008.  The SPX opened slightly above the prior day’s close to the 1123 level and rallied to 1136 by 9:40.  By 9:45, a quick sell-off retraced gains back to 1121, but the index remained positive.  Through 10:05, the index rallied to the 1145 level and by 10:35, the index reached 1150.  Through 12:40, the index tested the 1150 level multiple times and consistently failed to break above it.  At 12:40, a sell-off began that took the index to 1135 just prior to the 2:15pm release of the Federal Reserve’s rate decision and policy statement.  The release was met with significant volatility.  The index traded in a 28 point range, from 1145 to 1117, in the 5 minutes following the release, and momentum was negative.  By 2:45, the index had traded down sharply, turning negative on the day and reaching the intra-day low of 1101.54 at 2:43.  Reversing just as sharply, by 2:55, the index retook 1125.  At 3:00, a closing bell rally began which took the index up 30 points in 15 minutes to 1142 by 3:15.  The index traded sideways until 3:35 when a second rally squeezed shorts and surged the index up another 32 points in trading’s final 20 minutes.  The index closed at the intra-day high. 
Technical indicators are negative.  Recent sovereign debt issues, foreign and domestic, returned markets to a correction on July 27thThe SPX closed below 1300 for the eighth straight session and below 1200 for the third straight time.  The index closed below its April 2010 highs for the fourth straight session.  The 50-day moving average has been below the 100-day moving average since July 11thThe SPX closed (by -8.57%) below its 20-day moving average (1282.48) for the 10th straight session.  The index closed (by -9.33%) below its 50-day moving average for the 10th straight session.  The index closed (by -10.58%) below its 100-day moving average (1311.28) for the ninth straight session.  The SPX closed -8.83% below its 200-day moving average, closing below that average for the fifth straight session.  All moving averages fell.  The directional momentum indicator is negative for the ninth straight session, and the trend is strong and increasing.  Relative strength rose to 31.68 from 16.46, the low point of a neutral range.  Next resistance is at 1196.43; next support is at 1125.09.
BKX.  On lower volume, the KBW bank index rose +2.59 points, or +7.00%, to 39.58, its fourth close below the prior 52-week low of 42.70 from August 25, 2010, its second straight sub-40 close.  Volume fell -20.05% to 212.85 million shares, down from 266.25 million shares Monday but still 2.3x the 92.21 million share 50-day average.  The BKX closed -7.91% below its August 30 closing low of 42.98, the trough of the recent prior correction, -31.70% and -28.85% below its April 23, 2010, and February 14, 2011 closing highs, respectively.
Financials were the market’s best performing segment, large-cap banks outperformed regional banks.  The BKX’s trading pattern mirror the broader markets, but with larger percentage rallies.  The BKX gapped higher at the open to the 37.70 level, and by 9:35, reached 38.30.  By 9:45, gains had retraced back to 37.50 when a rally began and took the index to 38.50 by 10:05.  The index met resistance at 38.50 through the morning and into the afternoon.  At 12:40, financials weakened and retraced back to 38.00 by the 2:15 Fed policy statement release.  Following the release, financials fell sharply to 37.50.  A small rebound to 37.90 at 2:25 was crushed, and the index dropped sharply into negative territory and its intra-day low of 36.57 at 2:45.  A whiplash rebound shot the BKX up by +1.0 point within five minutes, back into positive territory and 37.50.  A small sell-off retraced to the break-even line at 37.00 by 3:00 when the closing bell rally surged the index +1.25 points in 15 minutes to 38.25 by 3:15.  The index consolidated through 3:35 when the final short squeeze rally lifted financials by +1.5 points into the close.  The index finished at its intra-day high after rallying +8.26% in trading’s final hour and 15 minutes.     
Technical indicators are negativeBank stocks significantly underperformed the broader market during the May-June correction.  Foreign and domestic sovereign debt fears returned markets to a correction on July 27th and banks have reassumed their loss leadership.  Since the BKX crossed below its 50-day moving average on February 23rd, the 50-day average has provided meaningful resistance to any positive momentum.  Moving averages align bearishly.  The shortest duration averages are below the longer duration averages, the gaps are widening, and all major averages are falling.  The 50-day average (46.59) crossed below the 100- and 200-day moving averages (48.82 and 49.91, respectively) on April 25th and June 16th.  The 20-day closed (by -1.43 points) below the 50-day for the 103rd straight day, and the gap expanded.  The 50-day moving average closed (by -3.32 points) below the 200-day moving average for the 39th straight session, and the gap expanded.  The 100-day moving average closed (by -1.09 points) below the 200-day moving average for the 17th straight session, and the gap expanded.  The index closed below the 20-day moving average for the 20th time in 21 sessions.  The index closed below its 50-, 100-, and 200-day moving average for the 23rd, 83rd, and 49th consecutive sessions, respectively.  The index closed below the 50.00 level for the 48th straight session and below 40 for the second straight session.  The directional movement indicator is negative for the 11th straight session, and the trend is strong and increasing.  Relative strength rose to 30.07 from 15.13, the lowest end of a neutral range.  Next resistance is 40.59; next support at 37.57.