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U.S. Futures Rise Modestly as Technicals Continue to Strengthen

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 higher on mixed volume.  With the gains, Asian equity markets closed above their worst levels of the year, but are levels comparable to those in early 2009.  European bourses are modestly higher, with greater strength in Germany. The dollar is mixed. U.S. equity options markets suggest a neutral short-term outlook.  Commodities prices are mixed.  U.S. Treasury yields are unchanged, with the 10-year at 1.899%.  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 +0.57 points, March SPX equity futures are at 1259.40, up +1.43 points.  The SPX opens at 1263.02, -7.38% below its April 29, 2011, multi-year 1363.61 closing high, +1.71% and +2.22% above its respective 20- and 50-day moving averages and 0.33% above its 200-day moving average.  The SPX is +0.43% above its 1257.64 year-end close.  Next resistance is at 1267.79.  Next support is at 1254.00.
Thursday.  Volumes were lower, but U.S. equity markets recaptured most of Wednesday’s lost ground. The NYSE composite rose +1.20%, followed closely by the DJI and SPX, which rose +1.12% and +1.07%, respectively. The Nasdaq rose +0.92%. Futures had indicated a more modest gain. Market breadth was positive, but trading desks reported thin volume, liquidity, and attendance. The rally appears to have been assembled around strong pending home sales and an anticipated cut of Chinese bank reserve requirements, possible this weekend. Some were encouraged by the better-than-feared Italian sovereign debt auctions, but investors remain cautious, given the prospect of credit ratings agency sovereign debt downgrades in 2012. Other factors that supported the day’s equity rally included a mid-day reversal in the euro, which rallied strongly through the afternoon. All market segments closed at least +0.78%, led by financials, industrials, and oil and gas, which closed up at least +1.20%. Laggards were telecommunications, technology, and utilities.
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 ended the year higher, on mixed volume. Volumes declined in Tokyo and Hong Kong, but rose in Shanghai.  In Tokyo, the NKY rose +0.67%. Volume fell -4.85%.  In Hong Kong, the HSI rose +0.20%  on a +30.5% decrease in volume.  In Shanghai, the SHCOMP closed +1.19% higher on a +1.72% increase in volume.  In 2011, these indexes ended down -17.3%, -20.0%, and -21.7%, respectively, to levels comparable to March 2009.  Commentary focused on the weakness of the past year’s markets, improved U.S. economic data, and speculation that Chinese monetary authorities will cut bank reserve requirements this weekend.  Japanese and Chinese markets are closed Monday.
In Japan, the NKY closed at 8,455.35, up from 8,398.89 at the prior close.  The index closed -0.62% and -1.34% below its respective 20- and 50-day moving averages.  The index gapped higher to 8,440, but traded down to a mid-morning intraday low of 8,415.56. Markets traded within a narrow range through mid-afternoon, but rallied strongly to end at the intraday high. Most market segments closed higher. Leaders were utilities, basic materials, and consumer goods, which closed up at least +0.89%. Financials gained +0.88%. Laggards were oil and gas and health care, which closed up at least +0.30%, and telecommunications, which closed off -0.02%.
In China, from the prior day’s 18,397.92 close, the Hang Seng Index gapped up to open at 18,490, trading to a mid-morning intraday high of 18,506.27. The index trended lower through the close, with greater weakness in the final half hour. The index is -0.70% and -1.84% below its respective 20- and 50-day moving averages.  Market segments closed mixed. Utilities, telecommunications, and consumer services led with gains of at least +0.55%. Financials added +0.29%. Laggards were industrials, consumer goods, and basic materials, which closed off -0.21%. In Shanghai, the SHCOMP closed at 2,199.42, up from 2,173.56 at the prior close.  The index opened slightly higher, but traded to a late-morning intraday high of 2,200.99. The afternoon trade was somewhat weaker, pulling back to 2,187 before rallying after mid-afternoon to retest resistance at the 2,200 level. Most market segments rose.  Leaders were consumer services, basic materials, and consumer goods, which gained at least +1.67%. Laggards were utilities and telecommunications, which gained at least +0.60%, and oil and gas, which shed -0.10%.
In Europe, equity indexes are modestly higher at mid-day, off their early intraday highs, but off mid-morning lows. The Euro Stoxx 50, FTSE, and DAX are up +0.45%, +0.10%, and +0.85%, respectively.  Commentary focuses on end of year analyses, with the Euro Stoxx 50 down -17.8% on the year. Compared to the prior day’s 2,292.28 close, the Euro Stoxx 50 trades at 2,300.31, compared to a 2,292.28 intraday low and 2,307.99 intraday high.  The index is +0.67%  and +0.85% above its respective 20- and 50-day moving averages.  Most market segments are higher.  Leaders are health care, industrials, and oil and gas, which are up at least +0.73%.  Financials are up +0.25%. Laggards are technology, consumer services, and utilities.
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 rose to 0.15400%, the highest since April, from 0.14950% the prior day, but below the 0.25188% year-end 2010 level.  USD 3-month LIBOR is 0.58100%, the highest of the year, but unchanged from 0.58100% the prior day and 0.30281% at year-end 2010.
  • The US Libor-OIS (LOIS) spread rose to a new 2011 high at 49.65 bps, up from 49.55 bps the prior day, and compares to 12.0 bps at the end of 2010.  Euribor-OIS eased to 96.7 bps, from 97.8 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 is 7.0 bps, unchanged from 7.0 bps Thursday, and well off from the August 2nd high of 33 bps.
  • U.S. Treasury yields are slightly lower at the longer end of the curve, with 2- and 10-year maturities yielding 0.267% and 1.894%, respectively, compared to 0.267% and 1.8899% Wednesday.  The yield curve narrowed to +1.627%, compared to +1.632% 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 mixed, slightly stronger against the euro, and slightly weaker in comparison to the Japanese yen and British pound. The dollar trades at US$80.450, compared to an intraday low of $80.323 and US$80.486 at the prior day’s close, and above its US$78.434 50-day, US$77.412 100-day, and US$76.108 200-day averages.  The euro trades at US$1.2941 compared an intraday high of US$1.2964 and US$1.2961 Thursday and US$1.2941 the day prior.  The euro trades worse than its US$1.3428 50-day and US$1.3657 100-day averages.  In Japan, the dollar trades at ¥77.35, compared to ¥77.64 Thursday and ¥77.94 the prior day.  The yen trades better than its 50-day moving average ¥77.54.
  • Commodities prices are mixed, with mixed energy, higher precious metals, lower aluminum and copper, and mixed agriculture prices.
Volatility, Skew:
  • The VIX ended at 22.65, down -3.70% from 23.52 at the prior close.  The VIX is -10.8% below its 20-day moving average 25.39.
  • The Euro Stoxx 50 volatility index (V2X) is up +1.83% to 32.78 from 32.19 the prior day.  The V2X index trades -12.4% below its 37.42 20-day moving average, -23.3% below the 42.74 30-day high, and +15.6% above the 28.35 30-day low.
  • The Hang Seng volatility index (VHSI) is at 24.62, down -1.42% from 24.97 the prior day.  The VHSI index trades -10.3% below its 27.45 20-day moving average.
  • CBOE skew rose +0.21% to 116.57, from 116.32 at the prior day’s close and within 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.  The year’s final scheduled economic reports include December Kansas City Fed manufacturing activity (disappointing at -4 compared to survey 6 and prior 4) and the NAPM-Milwaukee, at 10:00.
Overseas news: News flows are pre-holiday light. Germany’s Merkel and France’s Sarkozy will meet in Berlin on January 7th. Eurozone finance ministers will meet on January 23rd, followed by a EU leaders meeting on January 30th. Italian 5-year CDS are at 485.96, down from 575.50 on December 14th.  
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 1.10, compared to 0.95 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 1.51, compared to 1.20 the prior day, and below the 5- and 10-period moving averages of 1.31 and 1.32, respectively.  The equity put/call ratio closed the day at 0.71, compared to 0.70 the prior day and within its 5- and 10-period moving averages of 0.69 and 0.72, respectively.
NYSE Indicators.  Volume fell -1.99% to 531.68 million shares, from 542.49 million shares Wednesday.  Market breadth was positive, and up volume led down volume.  Advancing stocks led decliners by +1,739 (compared to -1,899 the prior day), or 3.72:1.  Up volume led down volume by 11.1:1.
SPX. On lower volume, the SPX rose +13.38 points, or +1.07%, to end at 1263.02.  Volume fell -3.42% to 375.2 million shares, from 388.41 million shares Wednesday and below the 738.63 million share 50-day moving average.  For a 5th consecutive day, the SPX closed above its 50-day moving average (1,236.37) and above its 200-day moving average (1,258.90) for the 3rd day in the past 4 days.  For the 97th straight session, the SPX’s 50-day moving average closed below its 200-day moving average.  The SPX closed above its 200-week moving average (1133.94) for the 58th straight session. 
From its prior close at 1249.64, the SPX opened slightly better, but gained strength through the session to close just short of the 1263.54 intraday high. Technical indicators improved, as the SPX recaptured its 200-day moving average and most of the prior day’s losses. The SPX closed below 1300 for the 105th straight session, but above 1200 for the 20th 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.  After peaking on June 6th at 1317.97, the 100-day moving average crossed below the 200-day average on September 7th. On December 22nd, the 100-day set a low at 1202.28, and began an upward trend. For a 7th straight session, the SPX closed (by +1.64%) above its 20-day moving average (1242.61).  The index closed (by +2.16%)above its 50-day moving average for the 7th straight session.  The index closed (by +4.77%) above its 100-day moving average (1205.52) for the 21st straight session.  The SPX closed +0.33% above its 200-day moving average, the 35th such close in the past 37 sessions.  The 20-, 50-, 100-, and 200-day moving averages rose.  The directional momentum indicator was positive for the 6th straight session, but the trend is weak.  Relative strength rose to 57.26 from 53.94, in the middle of a neutral range.  Next resistance is at 1267.79; next support is at 1254.00.
BKX.  On lower volume, the KBW bank index rose +0.82 points, or +2.11%, to end at 39.70.  The index recorded its 102nd straight close below its 2010 low and finished below the 40-level for the 37th time in the past 38 sessions.  Volume rose +11.3% to 46.54 million shares, from 41.80 million shares Wednesday, but below the 92.90 million share 50-day average.  The BKX closed -7.63% below its August 30, 2010, closing low of 42.98, the trough of the last year’s correction, and -31.5% and -28.6% below its April 23, 2010 (the post-2008 high point), and February 14, 2011 (the most recent high point) respective closes.
Financials were the day’s best performer, and large cap names performed regional banks.  The BKX opened higher and rallied through mid-morning, then traded sideways through late afternoon before strengthening into the close. The index closed just short of its 39.71 intraday high. 
Technical indicators are mixed, but improving. Bank stocks have lagged the market’s overall rebound from the October lows.  Moving averages alignment is mixed, as the 20- and 50-day moving averages (38.59 and 38.51, respectively) have crossed above the 100-day moving average (37.88). The 20- and 50-day moving averages are trending higher. The 100-day moving average appears to have troughed, through the 200-day moving average (43.41) continues to trend lower. On December 16th, the 50-day average crossed above the 100-day moving average for the first time since April 25th.  The 50-day remains below the 200-day moving average, as it has since June 16th.  For the 2nd time in the past 3 days, the 20-day closed (by +0.07 points) above the 50-day. The 50-day moving average closed (by -4.91 points) below the 200-day moving average for the 140th straight session, but the gap continues to narrow.  The 100-day moving average closed (by -5.53 points) below the 200-day moving average for the 118th straight session, but the gap is narrowing. The BKX closed (by +2.87%) above its 20-day moving average for the 9th time in the last nine sessions.  The index closed (by +3.10%) above its 50-day moving average for the 5th straight session.  The index closed (by +4.81%) above the 100-day moving average for the 6th straight session.  The index closed (by -8.55%) below its 200-day moving average for the 146th consecutive session.  The index closed below 50.0 for the 147th straight session and below the 40.0 level for the 37th time in the past 38 sessions.  The directional movement indicator was positive for the 4th consecutive session, but the trend is weak and has narrowed to a negligible advantage.  Relative strength declined to 56.51 from 52.77, in the middle of a neutral range.  Next resistance is 39.95; next support at 39.20.