This morning. U.S. equity markets are in a confirmed uptrend. The uptrend began on November 28th, when the SPX opened at 1158.67, but the SPX 50-day moving average has trended higher since October 13th. The SPX, DJI, and Nasdaq closed well above their respective 20-, 50-, 100-, and 200-day moving averages. The NYSE composite indexes closed -1.06% below its 200-day moving average. Overnight, Asian equity markets closed lower, with greater weakness in Tokyo. European exchanges are up strongly, rallying after strong Italian and Spanish sovereign debt auctions. In response, the dollar is weaker and the euro comparatively stronger. U.S. equity options markets suggest a bearish short-term outlook. Commodities prices are higher. U.S. Treasury yields are higher, with the 10-year at 1.916%, up from 1.904% the prior day. U.S. repo rates are at 3 bps.
There are indications that the ECB’s new bank lending facilities have begun to ease interbank lending problems. Overnight and 3-month LIBO remain elevated, and Euribor-OIS spreads remain near 2011 highs, but appear to have begun to trend lower. Also, the 3-month Euro basis swap is now at its best levels since August 31st.
U.S. equity futures are modestly higher, and well off earlier pre-market highs. After a fair value adjustment of -0.12 points, March SPX equity futures are at 1289.90, up +1.58 points. The SPX opens at 1292.48, -5.22% below its April 29, 2011, multi-year 1363.61 closing high, but +3.23% and +4.08% above its respective 20- and 50-day moving averages and +6.59% and +2.72% above its respective 100- and 200-day moving averages. Next resistance is at 1295.72. Next support is at 1287.33.
Wednesday. After starting the day with moderate losses, U.S. equity markets closed mixed, on lower volume, just 0.87x the 50-day moving SPX average. Volatility spiked at the open to an intraday high of 21.22 on the VIX, but then steadied to trade in a narrow channel through the close. Trading desks report that early selling pressure was never intense, and that activity levels remained relatively low, as hedge and mutual fund participation remains muted. The 2:00 Beige Book release, which gave the overall economy a mild upgrade, appeared to add some late strength to the session.
The Nasdaq and SPX rose +0.31% and +0.03%, respectively, while the NYSE composite and DJI fell -0.09% and -0.10%, respectively. All indexes closed above their 20-, 50-, and 100-day moving averages, and only the NYSE composite closed below its 200-day moving average. Market breadth was slightly positive. Basic materials, financials, and telecommunications were the segment leaders, closing up at least +0.78%. Laggards were utilities, consumer goods, and oil and gas, which closed off at least -0.40%.
Technically, the day was mixed. The notable development was that U.S. equities held up despite euro weakness, with markets signaling that the weakness is understood to be evidence of policy easing as opposed to sovereign default likelihood. And while the SPX again closed above 1290, its 1293.80 intraday high never tested the October 27th intraday high of 1292.66. Sentiment is improving, but investors remain cautious. While the U.S. economy is improving, markets appear to need further assurance that ECB actions have contained Eurozone sovereign problems and that China’s economy will and softly. Hedge fund and mutual fund participation remains muted.
Distribution days number 2 on the Nasdaq, SPX, and BKX, and 1 on the DJI and NYSE composite.
In Asia, equity markets closed modestly lower with greater weakness in Japan. Volumes declined. In Japan, the NKY closed down -0.74% on a -20.2% decrease in volume. In Hong Kong, the HSI fell -0.30% on a -12.1% decrease in volume. In Shanghai, the SHCOMP declined -0.05% on a -15.2% decrease in volume. After a poor 2011, these indexes are at levels comparable to March 2009 and well below their 200-day moving averages. Commentary focused on the impact of a stronger currencies on Asian exports and their negative economic growth effects.
In Japan, the NKY closed Thursday at 8,385.59, compared to 8,447.88 the prior day. The index closed -0.78% and -1.76% below its respective 20- and 50-day moving averages. The index opened at 8,420, and trended lower through mid-afternoon to an intraday low of 8,360.33. All market segments closed at least -0.12% lower. Leaders were utilities, oil and gas, and industrials. Laggards were consumer goods, financials, and health care, which closed off at least -0.93%.
In China, the Hang Seng closed at 19,0905.38, down from 19,151.94 at the prior day’s close. The index opened at 19,110, and rose mid-morning to an intraday high of 19,261.29 but trended lower through mid-day to retest support 19,075 several times prior to the close. The index closed +3.04% and +1.72% above its respective 20- and 50-day moving averages. Market segments closed mixed. Leaders were consumer services, industrials, and technology, which closed up at least +0.30%. Financials gained +0.21%. Laggards were telecommunications, consumer goods, and oil and gas, which closed off at least -1.17%. In Shanghai, the SHCOMP closed at 2,275.01, down from 2,276.05 the prior day, but traded within a narrow range. The SHCOMP closed +3.26% above and -2.72% below its respective 20- and 50-day moving averages. As in Hong Kong, the index moved higher in early trading, but found resistance at 2,295 mid-morning, and traded back by mid-day to test support at 2,267. A mid-afternoon rally pulled the index back to 2,287, but selling pressure resumed, and the index closed with a modest loss. The index closed -2.60% and +5.35% below its 20- and 50-day moving averages. Most market segments closed lower. Leaders were utilities, basic materials, and financials, which gained at least +0.09%. Laggards were technology, consumer services, and telecommunications, which closed down at least -0.85%.
In Europe, equity indexes are posting strong gains after surprisingly strong Spanish and Italian sovereign debt auctions. The Euro Stoxx 50, FTSE 100, and DAX are up +1.71%, +0.39%, and +1.50%, respectively, with even greater strength in Italian equities. Compared to the prior day’s 2,374.17 close, the Euro Stoxx 50 trades at 2,380.56, compared to a 2,384.25 intraday high. The index is +3.77% and +4.44% above its respective 20- and 50-day moving averages. Most market segments are higher. Leaders are financials, up +4.92%, basic materials and industrials, which are up at least +1.50%. Laggards are technology and consumer goods, up at least +0.17%, and oil and gas, which is off -0.57%.
Libor, LOIS, Currencies, Treasuries, Commodities:
- Recent interbank lending rates suggest that the substantial stress, evident in the latter half of 2011 and centered on the health and liquidity of Eurozone banks, has peaked and begun to ease. USD LIBOR is at 0.14700%, down from 0.14900% the prior day and the December 30th 0.15400% high. USD 3-month LIBOR is 0.57150%, down from 0.57650% the prior day and recent January 4th peak of 0.58250%.
- The US Libor-OIS (LOIS) spread rose to 49.05 bps from +49.90 bps the prior day, and compares to the recent January 6th high of 50.05 bps. Euribor-OIS eased to 89.90 bps, from 90.60 bps Wednesday and December 27th high of 28.80 bps. A rise in the LOIS indicates an increased intra-bank lending risk premium.
- The Euro 3-month basis swap continues to improve, rising to -84.125 bps from -90.305 bps the prior day, from a trough of -147.00 bps on December 14th.
- The U.S. government overnight repo rate is 4.0 bps, unchanged from 4.0 bps Tuesday, and well off from the August 2nd high of 33 bps.
- U.S. Treasury yields are slightly higher at the long end of the curve, with 2- and 10-year maturities yielding 0.229% and 1.923%, respectively, compared to 0.229% and 1.904% Wednesday. The yield curve narrowed to +1.696%, compared to +1.675% 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 weaker against the euro, British pound, and Japanese yen. The dollar trades at US$81.043, off the intraday high of US$81.364, and compares to US$81.351 at the prior day’s close, and above its US$79.248 50-day, US$78.014 100-day, and US$76.324 200-day averages. The euro trades at US$1.2764, well above the intraday low of US$1.2699, and compares to US$1.2707 Wednesday and US$1.2778 the day prior. The euro trades worse than its US$1.3233 50-day and US$1.3516 100-day averages. In Japan, the dollar trades at ¥76.86 compared to ¥76.85 Wednesday and ¥76.85 the prior day. The yen trades better than its 50-day moving average ¥77.51.
- Commodities prices are higher, with higher energy, precious metals, aluminum and copper, and agriculture prices.
- The VIX ended at 21.05, up +1.74% from 20.69 at the prior close. The VIX is -7.25% below its 22.70 20-day moving average.
- The Euro Stoxx 50 volatility index (V2X) is down -0.43% to 28.34, compared to 28.46 the prior day. The V2X index trades -7.43% below its 30.61 20-day moving average, -28.49% below the 39.63 30-day high, and +1.12% above the 28.03 30-day low.
- The Hang Seng volatility index (VHSI) fell to 22.41, down -1.58% from 22.77 the prior day. The VHSI index trades -11.1% below its 25.22 20-day moving average.
- CBOE skew rose +1.02% to 120.20 from 118.99 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:
- December advance retail sales were +0.1%, versus survey +0.3% and prior +0.2%.
- Latest week’s initial and continuing jobless claims were 399K and 3628K, respectively, versus survey 375K and 3595K, and prior 372K and 3595K, respectively.
- At 10:00, November business inventories , versus survey of +0.4% and prior +0.8%.
Overseas news: Today, both the European Central Bank and the Bank of England left their benchmark interest rates unchanged at 1.0% and 0.5%, respectively. Today, both Italy and Spain had stronger than expected debt auctions, with Spain selling twice its €5 billion target allotment under falling yields while Italian one-year yields were cut in half to +2.74% from +5.95% in the December auction. Today, Fitch said it was concerned Spain’s 2011 budget deficit will be worse than expected and downgraded the region of Valencia further into junk territory. In December, China’s consumer price index rose slightly more than expected at +4.1% over the prior year compared to +4.0% estimates.
Company news/ratings changes:
· RF – sells Morgan Keegan to Raymond James for $1.18 billion and pre-announced 4Q11 earnings in the $0.07 to $0.09 range.
· XL – announced preliminary net losses of $135 - $185 million from Thailand’s floods and an additional $35 million in losses from 2011’s first three quarters.
· BLK – initiated at buy at UBS, $218 price target
3Q2011 Earnings. Fourth quarter earnings reports began Monday night with Alcoa reporting -$0.03 earnings per share, matching analysts’ estimates. In the fourth quarter of 2011, analysts estimate the SPX will earn $24.34 per share, compared to $25.19 and $22.25 per share in 3Q11 and 4Q10, a -3.4% and +9.4% change, respectively.
BKX members begin fourth quarter reports on Friday with JPMorgan’s expected $0.93 earnings per share. In the fourth quarter, analysts estimate the BKX will earn $0.96 per share, compared to $1.24 and $0.91 per share in 3Q11 and 4Q10, a -22.6% and +5.5% change, respectively.
Valuation. The SPX trades at 12.3x estimated 2012 earnings ($105.04) and 11.0x estimated 2013 earnings ($117.78), compared to 12.3x and 11.0 respective 2011-12 earnings yesterday. The 10-year average median Price/Earnings multiple is 20.0x. Since the beginning of 2012, analysts changed 2012 and 2013 earnings estimates by -3.4%, and +0.0%, respectively. Analysts expect 2012 and 2013 earnings to exceed 2011 earnings ($94.97) by +10.6% and +24.0%, respectively.
Large-cap banks trade at a median 1.35x tangible book value, and 10.7x and 9.3x 2012and 2013 consensus earnings, respectively, compared to 1.35x tangible book value and 10.6x/9.3x 2012/2013 earnings yesterday. These compare to the 10-year average median multiples of 3.08x tangible book value and 15.9x earnings. In 2012, analysts expect the BKX to earn $4.47 per share, compared to $4.30 and $2.96 in 2011 and 2010, a +3.8% and +50.9% increase, respectively.
Options. Options markets are bearish. Composite options markets are neutral, index options markets are bearish, and equity options markets are bearish. The composite put/call ratio closed at 0.79, compared to 0.80 the prior day and below its 5- and 10-period moving averages of 0.85 and 0.89, respectively. The index put/call ratio closed at 1.30, compared to 1.10 the prior day, and above the 5- and 10-period moving averages of 1.25 and 1.25, respectively. The equity put/call ratio closed the day at 0.56, compared to 0.58 the prior day and below its 5- and 10-period moving averages of 0.61 and 0.64, respectively.
Price Exhaustion/Trend Reversal. On a daily timeframe, technical price exhaustion metrics show the SPX reached a potential upward price exhaustion level yesterday, the first such signal since April. Intra-day timeframes of 120- and 60-minute intervals show the SPX and BKX reached levels of upward price exhaustion on Tuesday with the SPX showing another price exhaustion signal yesterday.
NYSE Indicators. Volume fell -9.72% to 759.12 million shares, 0.87x the 50-day moving average, from 840.83 million shares Tuesday. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by +259 (compared to +1,633 the prior day), or 1.19:1. Up volume led down volume by 1.62:1.
SPX. On lower volume, the SPX rose +0.40 points, or +0.03%, to 1292.48. Volume fell -13.07% to 568.84 million shares, down from 654.35 million shares Tuesday and below the 670.48 million share 50-day moving average. For the 13th consecutive day, the SPX closed above its 50-day moving average (1,241.93) and remained above its 200-day moving average (1,258.20) for the 10th time in the past 12 sessions. For the 105th straight session, the SPX’s 50-day moving average closed below its 200-day moving average, but the 50-day average’s positive trend has narrowed the range considerably. The SPX closed above its 200-week moving average (1133.85) for the 66th straight session.
From its prior close at 1292.08, the SPX gapped lower at the open to 1287 and fell to the intra-day low of 1285.41 at 10:00. Through the end of the day, the index staged a staggered rally. At 1:40, the index reached break-even, then retraced. At 3:30, the SPX crossed above break-even and set the intra-day high of 1293.80 at 3:40. After retracing to break-even just before the bell, the index closed with a marginal gain. The index closed at the top end of the day’s mostly negative range.
The SPX closed above all major moving averages, above 1200 for the 28th straight session, at the highest level since August 1st, but below 1300 for the 113th 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 the 15th straight session, the SPX closed (by +3.00%) above its 20-day moving average (1254.84). The index closed (by +4.07%)above its 50-day moving average for the 15th straight session. The index closed (by +6.45%) above its 100-day moving average (1214.11) for the 29th straight session. The SPX closed +2.72% above its 200-day moving average for the 10th time in the past 12 sessions. The 20-, 50-, and 100-day moving averages rose. The directional momentum indicator was positive for the 14th straight session, but the trend is moderate. Relative strength rose to 63.81 from 63.71, in the high end of a neutral range. Next resistance is at 1295.72; next support is at 1287.33.
BKX. On lower volume, the KBW bank index rose +0.52 points, or +1.21%, to end at 43.38, its seventh straight close above 40 and its first close above the 2010 low of 42.98 in 110 sessions. Volume fell -13.86% to 73.50 million shares, down from 85.32 million shares Tuesday and below the 81.74 million share 50-day average. The BKX closed +0.93% above its August 30, 2010, closing low of 42.98, the trough of the 2010’s correction, and -25.14% and -22.02% below its April 23, 2010 (the post-2008 high point), and February 14, 2011 (the most recent high point) respective closes.
Financials continued their market leadership, and large-cap banks’ gains outperformed regional banks’ small losses. From its prior close of 42.86, the BKX opened lower to 42.63 and fell to the intra-day low of 42.42 at 9:32. The BKX set a higher low at 10:00 when the broader market was bottoming and turned positive at 10:40. The index rallied through 3:30, reaching the intra-day high of 43.41 at 3:42. The index finished just below its intra-day high.
Technical indicators are mixed, but improving. On a percentage basis, bank stocks have outperformed the broader market’s rebound from the October lows, rising +31.63% from the 32.56 October 4th intra-day low compared to a +21.41% rebound in the SPX. However, the BKX is still -22.0% below its 2011 high, compared to the SPX which has corrected only -5.2%. Moving averages alignment is mixed, as the 20- and 50-day moving averages (39.70 and 38.82, respectively) moved above the 100-day moving average (38.15), and each average is rising. The 100-day moving average appears to have troughed, though the 200-day moving average (43.01) 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 10th time in the past 11 days, the 20-day closed (by +0.88 points) above the 50-day, and the gap is expanding. The 50-day moving average closed (by -4.19 points) below the 200-day moving average for the 148th straight session, but the gap continues to narrow. The 100-day moving average closed (by -4.85 points) below the 200-day moving average for the 126th straight session, but the gap is narrowing. The BKX closed (by +9.28%) above its 20-day moving average for the 17th time in the last 18 sessions. The index closed (by +11.76%) above its 50-day moving average for the 13th straight session. The index closed (by +13.70%) above the 100-day moving average for the 14th straight session. The index closed (by +0.87%) above its 200-day moving average for the first time in 155 sessions. The index closed below 50.0 for the 155th straight session but above 40.0 for the seventh straight session. The directional movement indicator was positive for the 12th consecutive session, and the trend is moderate. Relative strength rose to 70.07 from 68.29, in an overbought range for the first time since January 5, 2011. Next resistance is 43.72; next support at 42.73.