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U.S. Equity Futures Slightly Higher, Rebounding from Distributions Yesterday

This morning.  U.S. equity markets are in a confirmed uptrend, which began on November 28th when the SPX opened at 1158.67.  The SPX 50-day moving average has trended higher since October 13th.  Wednesday’s losses pushed the Nasdaq and NYSE composite indexes below their 20-day moving averages. The Nasdaq also fell below its 50-day moving average. The SPX fell below its 200-day moving average. The DJI closed above its 20-, 50-, 100-, and 200-day moving averages.  Overnight, Asian markets closed mixed on mixed volume.  Asian equity markets trade near their worst levels of the year and comparable to early 2009.  European bourses are modestly higher, after completion of Italy’s auctions of 3- and 10-year bonds, in which rates fell, but the amounts sold were less than plan. The dollar is stronger against the euro and British pound, though slightly weaker against the Japanese yen. U.S. equity options markets suggest a neutral short-term outlook.  Commodities prices are mostly lower. U.S. Treasury yields are slightly higher, with the 10-year at 1.916%, up from 1.909% Wednesday.  U.S. repo rates are unchanged at 7 bps.  There are no indications that the ECB’s new bank lending facilities have eased interbank lending problems.  Overnight and 3-month LIBO remain elevated.  Euribor-OIS spreads are near 2011 highs.
U.S. equity futures are modestly higher.  After a fair value adjustment of -0.01 points, March SPX equity futures are at 1247.80, up +3.31 points.  The SPX opens at 1249.64, -8.36% below its April 29, 2011, multi-year 1363.61 closing high, +0.63% and +1.13% above its respective 20- and 50-day moving averages.  The SPX is -0.64% below its 1257.64 year-end close.  Next resistance is at 1260.78.  Next support is at 1243.57.
Wednesday.  Volumes were mixed, but U.S. equity markets closed off more than -1%, with distributions on the Nasdaq, SPX, and NYSE composite indexes. Futures had indicated a quiet trade, but indexes moved decisively lower at the open as dollar strength/euro weakness and prospects for the 2nd round of Italian debt refunding dictated the trade. Treasury yields fell, particularly at the longer end of the yield curve. The NSYE composite ended off -1.48%, followed by the Nasdaq, SPX, and DJI, which closed -1.34%, -1.25%, and -1.14% lower. Market breadth was negative, and all market segments closed off at least -0.58%. Leaders were utilities, telecommunications, and consumer goods. Laggards were financials, oil and gas, and basic materials, which closed down -1.54%.
Since the uptrend confirmation on December 20th, distribution days number 2 on the Nasdaq and SPX and 1 on the NYSE composite.  
In Asia, equity markets closed mixed.  Volumes rose in Hong Kong, but declined in Tokyo and Shanghai.  In Tokyo, the NKY fell -0.29%.  Volume fell -6.41%.  In Hong Kong, the HSI fell -0.65%  on a +39.7% increase in volume.  In Shanghai, the SHCOMP ended up +0.16% on a -9.85% decrease in volume.  In 2011, these indexes are down -17.9%, -20.1%, and -22.6%, respectively, to levels comparable to March 2009.  Commentary focused on the strength of the Japanese yen, which is expected to hurt Japanese exports and economic growth, and a worsening Chinese economic outlook.
In Japan, the NKY closed at 8,398.89, down from 8,423.62 at the prior close.  The index closed -1.31% and -2.10% below its respective 20- and 50-day moving averages.  The index gapped lower to open below 8,375 and fell mid-morning to an intraday low of 8,330.87, but then reversed and rose through the rest of the day to test resistance at 8,400.  Market segments closed mixed.  Leaders were oil and gas, utilities, and health care, which rose at least +0.05%.  Laggards were financials, technology, and telecommunications, which closed down at least -0.58%.
In China, from the prior day’s 18,518.67 close, the Hang Seng Index gapped down to open below 18,350 and dropped to an intraday low of 18,293.81 before finding support and trending higher through the day’s remainder to close at 18,397.92. The index is -0.85% and -0.85% below its respective 20- and 50-day moving averages.  Most market segments closed lower. Telecommunications ended with a gain of +0.48%. Other leaders were basic materials and oil and gas, which closed at least +0.21% lower. Laggards were consumer goods, financials, and technology, which closed off at least -0.83%.  In Shanghai, the SHCOMP closed at 2,173.56, up from 2,170.01 at the prior close.  The index opened lower and traded immediately to an intraday low of 8,330.87, but reversed and traded to an intraday high of 2,181.96 at mid-day. Momentum flagged through the afternoon, and the index traded back to an intraday loss at mid-afternoon before strengthening into the close.  Most market segments rose. Leaders were telecommunications, consumer goods, and technology, which rose at least +0.76%. Laggards included financials (up +0.01%) and basic materials and consumer services, which closed off at least -0.01%.
In Europe, equity indexes are higher at mid-day, reversing earlier mid-morning losses after completion of Italy's debt auctions.  The Euro Stoxx 50, FTSE, and DAX are up +0.22%, +0.26%, and +0.41%, respectively. Commentary focuses on the Italian debt pricing, which was somewhat better than feared.  Compared to the prior day’s 2,255.03 close, the Euro Stoxx 50 trades at 2,259.82, compared to a 2,249.89 intraday low and 2,270.15 intraday high.  The index is +0.74%  and +0.87% above its respective 20- and 50-day moving averages.  Most market segments are higher.  Leaders are basic materials, technology, and oil and gas, which are up at least +0.87%.  Laggards are consumer goods, telecommunications, which are up at least 0.24%, and financials, which are off -0.71%.
Libor, LOIS, Currencies, Treasuries, Commodities:
  • Interbank lending rates continue to reflect substantial stress, centered on the health and liquidity of Eurozone banks in the current economic environment.   USD LIBOR eased to 0.14950% from 0.15000% the prior day, and below the 0.25188% year-end 2010 level.  USD 3-month LIBOR rose to 0.58100%, the highest of the year, up from 0.57925% the prior day and 0.30281% at year-end 2010.
  • The US Libor-OIS (LOIS) spread eased to 49.30 bps, from 49.32 bps the prior day, and compares to 12.0 bps at the end of 2010.  Euribor-OIS eased to 97.5 bps, from 98.7 bps Wednesday, 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 is 7.0 bps, unchanged from 7.0 bps Wednesday, and well off from the August 2nd high of 33 bps.
  • U.S. Treasury yields are slightly higher at the longer end of the curve, with 2- and 10-year maturities yielding 0.267% and 1.916%, respectively, compared to 0.267% and 1.909% Wednesday.  The yield curve widened to +1.642%, compared to +1.649% the prior day.  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 is stronger against the euro and British pound, but weaker compared to the Japanese yen.  The dollar trades at US$80.833, compared to an intraday low of $80.435 and US$80.497 at the prior day’s close, and above its US$78.360 50-day, US$77.357 100-day, and US$76.089 200-day averages.  The euro trades at US$1.2861, compared an intraday high of US$1.2944 and US$1.2941 Wednesday and US$1.3071 the day prior.  The euro trades worse than its US$1.3445 50-day and US$1.3669 100-day averages.  In Japan, the dollar trades at ¥77.83, compared to ¥77.94 Wednesday and ¥77.88 the prior day.  The yen trades worse than its 50-day moving average ¥77.52.
  • Commodities prices are mixed, with mixed energy, lower precious metals, aluminum, and copper, and mostly lower agriculture prices.
Volatility, Skew:
  • The VIX ended at 23.52, up +7.35% from 221.91 at the prior close.  The VIX is -7.36% below its 20-day moving average 25.39.
  • The Euro Stoxx 50 volatility index (V2X) is up +3.60% to 32.96 from 31.82 the prior day.  The V2X index trades -11.9% below its 37.42 20-day moving average, -22.9% below the 42.74 30-day high, and +16.3% above the 28.35 30-day low.
  • The Hang Seng volatility index (VHSI) is at 24.97, up +0.97% from 24.73 the prior day.  The VHSI index trades -10.0% below its 27.76 20-day moving average.
  • CBOE skew fell -0.18% to 116.32, from 116.53 at the prior day’s close and near the bottom of 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.  Scheduled economic reports include the latest week’s initial and continuing jobless claims (survey 375K and 3,600K, respectively) at 8:30, followed at 9:45 by the December Chicago Purchasing Manager report (survey 61.0), and at 10:00, with November pending home sales. Initial jobless claims were 381K, up from a revised 366K. Continuing claims were 3,601K, up from revised 3,567K the prior week.
Overseas news: Italy sold €7.02 billion in 3- and 10-year bonds, scaled back from the €8.5 billion planned auctions. Yields on the 3-year bond fell to 5.62%, down from 7.89% in the previous sale on November 29. The 10-year bond priced at 6.98%, compared to 7.56% in November. 
Company news/ratings changes:
·         None.
 
3Q2011 Earnings.  The third quarter’s earnings reports surprised expectations.  Of the 492 S&P500 companies that reported earnings to date, 73% (356 out of 498) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies beat EPS expectations by an average of +4.3% (versus a historical average of +2%).  EPS is up +14.7% 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 12.7x estimated 2011 earnings ($98.89) and 11.5x estimated 2012 earnings ($108.70), 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 +4.5%, and +1.3%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +16.6% and +28.2%, respectively. 
Large-cap banks trade at a median 1.26x tangible book value, and 11.6x and 10.1x 2011 and 2012 consensus earnings, respectively, compared to 1.24x tangible book value and 11.5x/9.8x 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 +29.5% and +53.8%, respectively.
Options.  Options markets are neutral.  Composite options markets are neutral, index options markets are neutral, and equity options markets are neutral.  The composite put/call ratio closed at 0.95, compared to 1.01 the prior day and above its 5- and 10-period moving averages of 0.98 and 1.01, respectively.  The index put/call ratio closed at 1.20, compared to 1.42 the prior day, and below the 5- and 10-period moving averages of 1.30 and 1.30, respectively.  The equity put/call ratio closed the day at 0.70, compared to 0.71 the prior day and within its 5- and 10-period moving averages of 0.69 and 0.73, respectively.
NYSE Indicators.  Volume rose +9.51% to 542.49 million shares, from 495.40 million shares Tuesday.  Market breadth was negative, and up volume lagged down volume.  Advancing stocks lagged decliners by -1,899 (compared to -60 the prior day), or 0.23:1.  Up volume lagged down volume by 0.05:1.
SPX. On increased volume, the SPX fell -15.79 points, or -1.25%, to end at 1249.64.  Volume rose +11.9% to 388.41 million shares, down from 347.12 million shares Tuesday and below the 738.63 million share 50-day moving average.  For a 3rd consecutive day, the SPX closed above its 50-day moving average.  For the 95th straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1235.62 vs. 1258.87, respectively).  The SPX closed above its 200-week moving average (1133.88) for the 57th straight session. 
From its prior close at 1265.43, the SPX moved lower on a strong dollar and comparably weaker euro. By mid-day, the SPX was testing support at 1250. A mid-afternoon rally attempt raised the SPX back to 1254, but the index weakened in the final two hours and fell to an intraday low of 1248.64 at 3:30, before improving slightly into the close.
Technical indicators worsened. Yesterday’s distribution, the index’s 2nd since the current uptrend was confirmed on December 20th, brought the index back below the 200-day moving average. The SPX closed below 1300 for the 104th straight session, but above 1200 for the 19th straight session.  The 50-day moving average crossed above the 100-day moving average on December 6th, having been below that average since July 11th.  The 100-day moving average crossed below the 200-day average on September 7th, and the spread is still widening.  The SPX closed (by +0.63%) above its 20-day moving average (1241.81) for the 6th straight session.  The index closed (by +1.13%)above its 50-day moving average for the 6th straight session.  The index closed (by +3.78%) above its 100-day moving average (1204.08) for the 20th straight session.  The SPX closed -0.73% below its 200-day moving average, the 34th such close in the past 36 sessions.  The 20-, 50-, and 100-day moving averages rose.  The directional momentum indicator was positive for the 5th straight session, but the trend weakened.  Relative strength fell to 53.94 from 58.95, in the middle of a neutral range.  Next resistance is at 1260.78; next support is at 1243.57.
BKX.  On lower volume, the KBW bank index fell -0.71 points, or -1.79%, to end at 38.88.  The index recorded its 101st straight close below its 2010 low and finished below the 40-level for the 36th time in the past 37 sessions.  Volume fell -22.1% to 41.80 million shares, from 53.68 million shares Tuesday, but below the 92.90 million share 50-day average.  The BKX closed -9.54% below its August 30, 2010, closing low of 42.98, the trough of the last year’s correction, and -32.9% and -28.8% below its April 23, 2010, and February 14, 2011 respective closes.
Financials were the day’s 8th worst performing sector, though large cap names outperformed regional banks.  The BKX opened lower, falling to a mid-day intraday low of 38.81. A mid-afternoon rally pulled the index back to 39.15, but renewed selling pressured the index through the close. 
Technical indicators are mostly negativeBank stocks have lagged the market’s overall rebound from the October lows.  Moving averages align bearishly, as most shorter duration averages are below the longer duration averages and most moving averages are falling.  On December 16th, the 50-day average (38.52) crossed above the 100-day moving average (37.85) for the first time since April 25th.  The 50-day remains below the 200-day moving average (43.47), as it has since June 16th.  The 20-day closed (by -0.03 points) below the 50-day for the 18th straight session, but the gap narrowed.  The 50-day moving average closed (by -4.99 points) below the 200-day moving average for the 139th straight session, but the gap narrowed.  The 100-day moving average closed (by -5.66 points) below the 200-day moving average for the 117th straight session, but the gap narrowed.  The BKX closed (by +0.94%) above its 20-day moving average for the 8th time in the last nine sessions.  The index closed (by +1.02%) above its 50-day moving average for the 4th straight session.  The index closed (by +2.72%) above the 100-day moving average for the 5th straight session.  The index closed (by -10.6%) below its 200-day moving average for the 145th consecutive session.  The index closed below 50.0 for the 146th straight session and below the 40.0 level for the 36th time in 37 sessions.  The directional movement indicator was positive for the 3rd consecutive session, and the trend narrowed to a negligible advantage. Relative strength declined to 52.77 from 56.69, in the middle of a neutral range.  Next resistance is 39.40; next support at 38.59.