This morning. Despite yesterday’s best one-day gain since August 11th, equity markets remain in correction, pending some adequate follow-through next week. All major indexes are again above 20-, 50-, and 100-day moving averages. Only the DJI closed above its 200-day moving average. U.S. equity futures are higher, responding to strong equity markets in Europe. Futures are largely unchanged after a mixed, but somewhat better-than-expected November U.S. payrolls report. Asian equity markets closed mixed, with greater strength in Japan, but volume declined. European markets are again very strong, appear headed toward their best advance in 3 years, and trade near their intraday highs. The dollar is much weaker, and the euro correspondingly stronger. U.S. equity options markets suggest a neutral short-term outlook. Commodities prices are mostly higher. U.S. Treasury yields are higher at the long end of the curve, with the 10-year moving above 2.10%. U.S. repo rates are unchanged. Overnight and 3-month LIBO remain elevated. Euribor-OIS spreads are near 2011 highs. After a fair value adjustment of +0.08 points, December SPX equity futures are at 1257.60, up +13.92 points. The SPX opens at 1244.58, -8.73% below its April 29 multi-year 1363.61 closing high, +1.42% above its 20-day and +3.03% above its 50-day moving averages. The SPX is -1.04% below its 1257.64 year-end close. Next resistance is at 1250.54. Next support is at 1239.18.
Thursday. After Wednesday’s strong gains, volumes slowed markedly, and equity markets closed mixed. The Nasdaq managed to hold onto a +0.22% gain, but the NYSE composite, DJI, and SPX lost -0.46%, -0.21%, and -0.19%, respectively. Market segments were mixed. Leaders were technology, consumer services, and health care, which gained at least +0.06%. Laggards were oil and gas, basic materials, and financials, which closed down -0.83%. Notably, BAC bucked the broader trend, gaining +1.65%. From its prior 1246.96 close, the SPX opened slightly lower, traded quickly to a 1251.09 intraday high at 10:00, then weakened to a midmorning intraday low of 1239.73. The index traded within a narrow range through the day’s remainder, finding support at 1140 and resistance at 1248. Market breadth was negative, and up volume lagged down volume.
Trading desks reported that non-U.S. news, mostly overnight or before the open, dominated the morning trade, followed by a slow afternoon trade. Encouraging U.S. economic news has not yet been able to overcome negative and skeptical sentiment that the Eurozone’s troubles will find resolution before its policymakers visit disaster on markets through their ineptitude and folly. Despite skepticism, investors worry that they might miss a strong rally, at least in the run-up to the “Leaders” Summit on Friday, December 9th.
In Asia, on lower volume, Asian equity markets closed mixed, with greater strength in Tokyo. In Tokyo, the NKY rose +0.54%. Volume fell -31.8%. In Hong Kong, the Hang Seng rose +0.20%, on a -35.1% decrease in volume. The Shanghai composite fell -1.10% on a -39.5% decrease in volume. Commentary focused on yesterday’s coordinated central bank actions. In China, gains came after monetary authorities lower bank reserve requirements after the prior day’s close. Also, gains came despite the day’s disappointing PMI report.
In Japan, the NKY closed at 8,643.75, up from 8,597.38 at the prior close. The NKY closed +1.76% above its 20-day moving average, but down -15.5% for the year. The index moved higher at the open and traded to 8,642 in late-morning before trading back to support at 8,600 in early afternoon. The index strengthened through the afternoon to close at its 8,643.75 intraday high. All market segments closed higher at least +0.13% higher. Leaders were health care, telecommunications, and consumer goods, which closed up at least +0.62%. Financials added +0.44%. Laggards were utilities, consumer services, and oil and gas.
In China, the Hang Seng Index closed at 19,040.39, up from 19,002.26 at the prior close. The index opened lower and traded to a mid-day intraday low of 18,878.30, but reversed in the afternoon and rallied strongly to an intraday high of 19,151.70 before fading in the final minutes. Volatility fell -3.48% . The index ended +1.36% and +0.21% above its respective 20-day and 50-day moving averages. Among market segments, only financials closed higher, up +1.04%. Other leaders were telecommunications and industrials, down at least -0.24%. Laggards were consumer goods, consumer services, and technology, which closed -1.61% lower.
In Shanghai, the SHCOMP closed at 2,360.66, down from 2,386.86 at the prior close. The index opened at 2,374.90, and trended lower to an early afternoon intraday low of 2,344.85 before finding support and strengthening mildly through the close. The SHCOMP closed -3.55% and -2.88% below its respective 20-day and 50-day moving averages. All market segments closed down at least -0.17%. Leaders were oil and gas, telecommunications, and financials, which closed down at least -0.53%. Basic materials, technology, and utilities lagged with losses of at least -1.93%.
In Europe, equities are higher and trading near their intraday highs. Financials are leading the advance. Commentary focuses on possible ECB actions to ease the Eurozone sovereign debt crisis. Such optimism reflects in improving Italian and French debt yields and tighter sovereign CDS. The Euro Stoxx 50, FTSE, and DAX are up +2.15%, 1.78%, and 1.89%, respectively. Compared to the prior day’s 2,313.84 close, the Euro Stoxx 50 trades at 2,365.53, the intraday high. The index is +5.88% and +4.68% above its respective 20- and 50-day moving averages. All market segments are higher. Financials are up +5.13%. Other leaders are basic materials and industrials, up at least +2.48%. Telecommunications, consumer services, and health care lag, but are at least +0.58% higher.
Libor, LOIS, Currencies, Treasuries, Commodities:
- Interbank lending rates continue to reflect substantial stress, centered on the health of Eurozone banks in the current economic environment. USD LIBOR is 0.14611%, up from 0.14556% Thursday, but below the 0.25188% year-end level. USD 3-month LIBOR rose to 0.52883%, down from 0.52722% the prior day and compared to 0.30281% at year-end 2010.
- The US Libor-OIS (LOIS) spread rose to 0.432%, the year’s high, up from d to 42.6 bps the prior day, and compares to 12.0 bps at the end of 2010. Euribor-OIS eased to 0.996 bps from 100.6 bps Thursday, and 40.6 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 was 10.0 bps Thursday, unchanged from 10.0 bps Wednesday, but well off from the August 2nd high of 33 bps.
- U.S. Treasury yields are higher at the longer end of the curve, with 2- and 10-year maturities yielding 0.258% and 2.119%, respectively, compared to 0.254% and 2.087% Thursday. The yield curve widened to +1.861%, compared to +1.833% Thursday. In the past year, the 2- and 10-year spread varied from a low of +1.520% on September 22, 2011, to a high of +2.910% on February 4, 2011.
- The U.S. dollar reversed earlier gains and (from an intraday high of US$78.382) presently trades near its intraday lows compared to the euro, yen, and pound. The dollar trades at US$78.231, compared to US$78.328 the prior day, and above its US$77.644 50-day, US$76.350 100-day, and US$75.766 200-day averages. The euro trades at US$1.3490, compared to US$1.3461 Thursday and US$1.3446 the day prior. The euro trades worse than its US$1.3621 50-day and US$1.3890 100-day averages. In Japan, the dollar trades at ¥77.99, compared to ¥77.70 Thursday and ¥77.62 the prior day. The yen trades worse than its 50-day moving average ¥77.108.
- Commodities prices are mostly higher, with higher energy and precious metals, higher aluminum, but lower copper, and higher agriculture prices.
- The VIX ended at 27.41, down -1.40% from 27.80 at the prior close. The VIX is -13.1% below its 20-day moving average 31.53.
- The Euro Stoxx 50 volatility index (V2X) is down -4.26% to 34.98 from 36.54 the prior day. The V2X index trades -12.3% below its 39.88 20-day moving average, -21.8% below the 44.69 30-day high, and +23.6% above the 28.29 30-day low.
- The Hang Seng volatility index (VHSI) fell -3.48% to 27.74 from 28.74 the prior day. The VHSI index trades -18.3% below its 33.95 20-day moving average.
- CBOE skew rose +0.29% to 116.90 from 116.56 at the prior day’s close, and in a neutral (115-120) range. The index tracks the cost of buying out-of-the-money, long-dated options. A fall suggests that investors are buying more calls than puts, a bullish signal.
U.S. news and economic reporting. Today’s economic reports focus is November non-farm payrolls and unemployment rate. Survey expects gains of +125K, with +150K private payrolls, and no change in the 9.0% unemployment rate. Recall that Wednesday’s ADP report showed gains of +206K, much better than survey +130K. The unemployment rate fell to 8.6%, principally due to a large reduction in the workforce. Non-farm payrolls rose +120K, and private payrolls rose +140K, with positive revisions to September and October.
Overseas news: In November, the Eurozone producer price index rose +5.5% over the prior year, less than the 5.6% estimated. In November, China’s four largest banks issued less credit than expected.
Company news/ratings changes:
3Q2011 Earnings. The third quarter’s earnings reports surprised expectations. Of the 468 S&P500 companies that reported earnings to date, 73% (342 out of 468) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat EPS expectations by an average of +4.7% (versus a historical average of +2%). EPS is up +15.9% over the prior year. Though challenged in the current operating environment, 80% of companies reported increased revenues over the prior year and 58% beat revenue estimates. In the third quarter of 2011, analysts estimate the SPX will earn $24.98 per share, compared to $24.84 and $21.49 per share in 2Q11 and 3Q10, a +0.6% and +16.2% increase, respectively.
With all of the 24 BKX members reporting, 75% beat operating estimates with aggregated results surprising by +14.3% and 63% have beat revenue estimates with aggregated surprising by +4.2%. EPS is up +21.2% over the prior year, while revenue is up +1.5%. In the third quarter of 2011, the BKX earned $1.24 per share, beating analysts’ estimate of $1.15 per share, and compared to $1.12 and $0.71 in 2Q11 and 3Q10, (an +11% and +48% increase, respectively). In the second quarter, 88% (21 of 24) beat earnings estimates on an operating basis. Revenues also exceeded expectations, with 79% of BKX members beating estimates.
Valuation. The SPX trades at 12.6x estimated 2011 earnings ($98.95) and 11.4x estimated 2012 earnings ($108.92), compared to 12.6x and 11.4 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 +4.6%, and +1.5%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +16.8% and +28.5%, respectively.
Large-cap banks trade at a median 1.17x tangible book value, and 10.8x and 9.5x 2011 and 2012 consensus earnings, respectively, compared to 1.19x tangible book value and 10.9x/9.6x 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 +29.9% and +53.8%, respectively.
Options. Options markets are mixed. Composite options markets are neutral, index options markets are neutral to bullish, and equity options markets are neutral. The composite put/call ratio closed at 0.95, compared to 0.89 the prior day and below its 5- and 10-period moving averages of 1.00 and 1.05, respectively. The index put/call ratio closed at 1.18, compared to 1.22 the prior day and below the 5- and 10-period moving averages of 1.34 and 1.41, respectively. The equity put/call ratio closed the day at 0.66, compared to 0.56 the prior day and in between its 5- and 10-period moving averages of 0.65 and 0.71, respectively.
NYSE Indicators. Volume dropped -48.7% to 855.83 million shares, from 1.667 billion shares Wednesday, 0.82x the 1.042 billion share 50-day moving average. Market breadth was negative, and up volume lagged down volume. Advancing stocks lagged decliners by -610 (compared to +2,306 the prior day), or 0.66:1. Up volume lagged down volume by 0.71:1.
SPX. On lower volume, the SPX fell -2.38 points, or -0.19%, to end at 1244.58. Volume fell -47.51% to 616.33 million shares, down from 1.174 billion shares Wednesday and below the 802.30 million share 50-day moving average. For the 77th straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1207.96 vs. 1265.43, respectively). The SPX closed above its 200-week moving average (1135.75) for the 39th straight session.
On Thursday, the SPX traded in a relatively narrow 10 point range. From its prior close at 1246.96, the SPX opened lower to the 1244 level but rallied into positive territory by 9:45 and set the intra-day high of 1251.09 at 10:05. Through 11:30, the index reversed, turning negative and set the intra-day low of 1239.73. At 1:00, a rally took the index back to its break-even line by 2:00, but the move lost momentum and the index faded slightly into the close. The SPX finished with a modest loss and in the middle of the day’s range.
Technical indicators are negative. The market returned to a correction following mid-November’s reversal. The SPX closed below 1300 for the 87th straight session but above 1200 for the second straight session. The index closed above its April 2010 highs for the second straight session. The 50-day moving average has been below the 100-day moving average since July 11th. The 100-day moving average crossed the 200-day average to the downside on September 7th. The SPX closed (by +1.42%) above its 20-day moving average (1227.16) for the second straight session. The index closed (by +3.03%) below its 50-day moving average for the second straight session. The index closed (by +2.50%) above its 100-day moving average (1214.21) for the second straight session. The SPX closed -1.65% below its 200-day moving average, closing below that average for the 22nd time in 23 sessions. The 20- and 50-day moving averages rose. The directional momentum indicator is positive for the second straight session, and the trend is weak and stable. Relative strength fell to 55.49 from 56.02, a neutral range. Next resistance is at 1250.54; next support is at 1239.18.
BKX. On lower volume, the KBW bank index fell -0.32 points, or -0.84%, to end at 37.88. The index recorded its 83rd straight close below the prior 52-week low of 42.70 from August 25, 2010 and finished below the 40-level for the 18th time in the last 19 sessions. Volume fell -52.74% to 69.21 million shares, down from 146.43 million shares Wednesday and below the 101.53 million share 50-day average. The BKX closed -11.87% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -34.63% and -31.91% below its April 23, 2010, and February 14, 2011 respective closes.
Financials were the market’s worst performing sector, and regional banks underperformed large-cap banks. From its prior close at 38.20, the BKX gapped lower to 38.00 and stayed in negative territory through the day. Through 11:30, the index sold-off to reach the intra-day low of 37.31, down -2.3%. Through 2:00, the index rallied, retaking the 38.00 level and setting the intra-day high of 38.06. Numerous attempts to sustainably breach 38.00 were sold, and the BKX sold off slightly from that level into the close. The index finished at the top end of the day’s range.
Technical indicators are mostly negative. Bank stocks are leading the market’s direction, which returned to correction following mid-November’s reversal. Moving averages align bearishly, as most shorter duration averages are below the longer duration averages and some moving averages are falling. The 50-day average (37.69) crossed below the 100- and 200-day moving averages (39.18 and 44.74, respectively) on April 25th and June 16th. The 20-day closed (by +0.15 points) above the 50-day for the 27th straight session, and the gap narrowed. The 50-day moving average closed (by -7.06 points) below the 200-day moving average for the 121st straight session, but the gap narrowed. The 100-day moving average closed (by -5.57 points) below the 200-day moving average for the 99th straight session, and the gap expanded. The BKX closed (by +0.12%) above its 20-day moving average for the second straight session. The index closed (by +0.52%) above its 50-day moving average for the second straight session. The index closed (by -3.31%) below the 100-day moving average for the 23rd straight session and (by -15.34%) below its 200-day moving averages for the 128th consecutive session. The index closed below 50.0 for the 128th straight session and below the 40.0 level for the 18th time in 19 sessions. The directional movement indicator is positive for the second straight session, and the trend is weak and decreasing. Relative strength fell to 51.166 from 52.48, a neutral range. Next resistance is 38.19; next support at 37.44.