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. Friday, the SPX, DJI, and Nasdaq closed well above their respective 20-, 50-, 100-, and 200-day moving averages. The NYSE composite indexes closed -1.35% below its 200-day moving average. Overnight, Asian equity markets closed higher, with substantial strength in China. European exchanges are moderately higher, led by financials, after another successful sovereign debt auction. The dollar is mixed, but lower against the euro. U.S. equity options markets suggest a neutral short-term outlook. Commodities prices are higher. U.S. Treasury yields are higher, with the 10-year at 1.890%, down from 1.864% the prior day. U.S. repo rates are at 17 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 are trending lower. Also, the 3-month Euro basis swap is now at its best levels since August 31st.
U.S. equity futures are much higher, but off earlier pre-market highs. After a fair value adjustment of -4.16 points, March SPX equity futures are at 1299.80, up +14.66 points. The SPX opens at 1289.09, -5.46% below its April 29, 2011, multi-year 1363.61 closing high, but +2.13% and +3.61% above its respective 20- and 50-day moving averages and +5.88% and +2.48% above its respective 100- and 200-day moving averages. Next resistance is at 1296.75. Next support is at 1279.51.
Friday. Equities closed moderately lower, but well off the day’s early morning lows, as the 4Q2011 earnings season opened weakly and news of several Eurozone sovereign downgrades hit the market. The NYSE composite, Nasdaq, SPX, and DJI fell -0.64%, -0.51%, -0.49%, and -0.39%, respectively. All market segments closed higher. 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 negative. Volumes rose, but remained below the 50-day moving average, another indication that participation remains light and many investors remain sidelined. Volatility gapped higher, but reversed early in the session, with the VIX rising to 22.43 before trending lower through the day’s remainder to close at 20.91.0
Trading desks report that early selling pressure passed quickly, but activity levels remained relatively low, as hedge and mutual fund participation remains muted. Technically, the session was positive. From its prior day’s 1295.50 close, the SPX opened at 1285 and traded lower to an intraday low of 1277.58, where it found support at the prior week’s lowest closing level. The SPX rallied back to 1285 by mid-day, and after some early afternoon weakness, rallied from 1282 to end above 1289. Support is seen at 1280-83, the prior week highs, and 1278, last week’s close, and 1258, the 200-day moving average. Resistance is 1312. 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.
In Asia, equity markets closed higher, with moderate strength in Tokyo and substantial strength in China. Volumes rose. In Japan, the NKY closed up +1.05% on a +11.8% increase in volume. In Hong Kong, the HSI rose +3.24% on a +91.1% increase in volume. In Shanghai, the SHCOMP rose +4.18% on a +91.6% increase in volume. Commentary focused on views that China will ease monetary policy at month-end and that Europe’s debt crisis is easing.
In Japan, the NKY closed Tuesday at 8,466.40, compared to 8,378.35 the prior day. The index closed +0.46% above and -0.47% below its respective 20- and 50-day moving averages. The index gapped up to open at 8,420, and tested 8,450 at mid-day, then trended higher through most of the afternoon session to an intraday high of 8,475.66 minutes before the close. Most market segments closed higher. Leaders were financials, industrials, and technology, which closed up at least +1.15%. Laggards were consumer goods and health care, which closed up at least +0.45%, and telecommunications, which closed down -0.17%.
In China, the Hang Seng closed at 19,627.75, up from 19,012.20 at the prior day’s close. The index gapped up to open just below 19,200, then rallied and traded higher through the session to end just off the 19,640.28 intraday high. The index closed +5.36% and +4.74% above its respective 20- and 50-day moving averages. All market segments gained at least +1.35%. Leaders were basic materials, oil and gas, and technology, which closed up at least +4.29%. Financials gained +3.53%. Laggards were telecommunications, consumer services, and utilities. In Shanghai, the SHCOMP closed at 2,298.38, up from 2,206.19 the prior day. The SHCOMP closed +4.15% above and -0.96% below its respective 20- and 50-day moving averages. Compared to the HSI, the index rose more modestly at the open, and after some early morning weakness, rallied strongly through mid-session and the afternoon to close at the intraday high. All market segments closed at least +2.53% higher. Leaders were basic materials, industrials, and technology, which closed up at least +5.28%. Laggards were telecommunications, financials, and oil and gas.
In Europe, equity indexes are moderately higher, led by the financials, after reasonably strong Spanish sovereign debt auctions. The Euro Stoxx 50, FTSE 100, and DAX are up +1.51%, +0.72%, and +1.77%, respectively. Compared to the prior day’s 2,361.56 close, the Euro Stoxx 50 trades at 2,396.83, compared to a 2,411.40 intraday high. The index is +3.81% and +5.32% above its respective 20- and 50-day moving averages. All market segments are at least +0.05% higher. Leaders are financials, up +2.10%, industrials and oil and gas, which are up at least +1.80%. Laggards are consumer services, telecommunications, and health care.
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 0.14650%, up from 0.14600% the prior day and the December 30th 0.15400% high. USD 3-month LIBOR is 0.56230%, down from 0.56490% the prior day and recent January 4th peak of 0.58250%.
- The US Libor-OIS (LOIS) spread fell to 48.03 bps from +48.19 bps the prior day, and compares to the recent January 6th high of 50.05 bps. Euribor-OIS eased to 85.30 bps, from 87.20 bps Monday 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, to -80.1250 bps, the best level since August 31st, from -85.5000 750 bps the prior day, and up from a trough of -147.00 bps on December 14th.
- The U.S. government overnight repo rate is 17.0 bps, unchanged from 17.0 bps Monday, 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 0.223% and 1.8900%, respectively, compared to 0.221% and 1.864% Friday. The yield curve narrowed to +1.667%, compared to +1.643% 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, weaker against the euro and British pound, but slightly stronger compared to the Japanese yen. The dollar trades at US$80.911, off the intraday high of US$81.485, and compares to US$81.515 at the prior day’s close, and above its US$79.511 50-day, US$78.236 100-day, and US$76.417 200-day averages. The euro trades at US$1.2774, compared to an intraday low of US$1.2649, and compares to a close of US$1.2667 Monday and US$1.2680 the day prior. The euro trades worse than its US$1.3168 50-day and US$1.3463 100-day averages. In Japan, the dollar trades at ¥76.81, compared to ¥76.78 Monday and ¥76.97 the prior day. The yen trades better than its 50-day moving average ¥77.44.
- Commodities prices are higher, with higher energy, precious metals, aluminum and copper, and agriculture prices.
- The VIX ended at 20.91, up +2.15% from 20.47 at the prior close. The VIX is -5.77% below its 22.19 20-day moving average.
- The Euro Stoxx 50 volatility index (V2X) is down -3.17% to 28.00, compared to 28.92 the prior day. The V2X index trades -6.78% below its 30.03 20-day moving average, -32.4% below the 39.63 30-day high, and +3.69% above the 27.00 30-day low.
- The Hang Seng volatility index (VHSI) fell to 22.97,up +6.16% from 21.59 the prior day. The VHSI index trades -5.61% below its 24.28 20-day moving average.
- CBOE skew rose +0.94% to 121.92 from 120.78 at the prior day’s close and above 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:
- January empire manufacturing revisions, rising to 13.48 compared to survey of 11.00 and prior 9.53.
Overseas news: After Friday’s close, Standard & Poors downgraded multiple Eurozone countries, with France losing its AAA rating and falling by one notch. Today, Spain sold €4.88 billion in 12- and 18-month debt at yields of 2.05% and 2.40%, down from 4.05% and 4.23% in December’s auction. In January, the German ZEW investor sentiment index rose to -21.6 from -53.8 in December, beating estimates for an increase to only -50.0. In the fourth quarter, China’s GDP rose +8.9%, beating estimates for a +8.7% increase. Also in the fourth quarter, China’s industrial production rose +12.8% over last year’s level, above estimates or a +12.3% gain.
Company news/ratings changes:
· C – reports GAAP and operating EPS of $0.38 and $0.68, respectively, compared to estimates of $0.52.
· WFC – reports GAAP and operating EPS of $0.73, compared to estimates of $0.72.
4Q2011 Earnings. The fourth quarter’s earnings reports have so far disappointed expectations. Of the 4 S&P500 companies that reported earnings to date, 0% (0 out of 4) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies missed EPS expectations by an average of -0.2% (versus a historical average of +2%). EPS is down -26.35% over the prior year. Though challenged in the current operating environment, 50% of companies reported increased revenues over the prior year and 50% beat revenue 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 began fourth quarter reports on January 13th with JPMorgan Chase and continued today with Wells Fargo (NYSE:WFC) and Citigroup (NYSE:C). JPM reported in-line earnings per share, while WFC beat consensus and C reported mixed results. 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 ($104.93) and 11.0x estimated 2013 earnings ($117.51), compared to 12.3x and 11.0 respective 2011-12 earnings Friday. The 10-year average median Price/Earnings multiple is 20.0x. Since the beginning of 2012, analysts changed 2012 and 2013 earnings estimates by -3.5%, and -0.2%, respectively. Analysts expect 2012 and 2013 earnings to exceed 2011 earnings ($94.97) by +10.5% and +23.7%, respectively.
Large-cap banks trade at a median 1.36x tangible book value, and 10.9x and 9.3x 2012and 2013 consensus earnings, respectively, compared to 1.36x tangible book value and 10.8x/9.4x 2012/2013 earnings Friday. 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 neutral. Composite options markets are neutral, index options markets are neutral, and equity options markets are neutral to bearish. The composite put/call ratio closed at 0.72, compared to 0.83 the prior day and below its 5- and 10-period moving averages of 0.81 and 0.84, respectively. The index put/call ratio closed at 0.84, compared to 1.25 the prior day, and below the 5- and 10-period moving averages of 1.18 and 1.19, respectively. The equity put/call ratio closed the day at 0.62, compared to 0.58 the prior day and above its 5- and 10-period moving averages of 0.60 and 0.61, respectively.
Price Exhaustion/Trend Reversal. On a daily timeframe, technical price exhaustion metrics show the SPX reached a potential upward price exhaustion level on January 11th, the first such signal since April, with another potential indication coming on the index’s next higher close. Intra-day timeframes of 120- and 60-minute intervals show the SPX reached levels of price exhaustion on January 10th and 13th, while the BKX recorded similar indications on the 11th and 12th.
NYSE Indicators. Volume rose +7.51% to 827.88 million shares, 0.97x the 50-day moving average, from 770.06 million shares Thursday. Market breadth was negative, and up volume lagged down volume. Advancing stocks lagged decliners by -922 (compared to +669 the prior day), or 0.53:1. Up volume lagged down volume by 0.34:1.
SPX. On higher volume, the SPX fell -6.41 points, or -0.49%, to 1289.09. Volume rose +13.17% to 656.79 million shares, up from 580.34 million shares Thursday but below the 657.99 million share 50-day moving average. For the 16th consecutive day, the SPX closed above its 50-day moving average (1,244.19) and remained above its 200-day moving average (1,257.89) for the 12th time in the past 14 sessions. For the 107th 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 (1133.75) for the 68th straight session.
From its prior close at 1295.50, the SPX opened lower to 1288 and fell to the intra-day low of 1277.58 at 10:20. After a rebound through noon back to 1285, the index retraced until 1:15 to the 1281 level. From 1:50 through the close, the index rallied moderately, ultimately reaching 1289 at the bell to finish at the high end of the day’s negative range.
The SPX closed above all major moving averages, above 1200 for the 30th straight session but below 1300 for the 115th 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 17th straight session, the SPX closed (by +2.13%) above its 20-day moving average (1262.19). The index closed (by +3.61%)above its 50-day moving average for the 17th straight session. The index closed (by +5.88%) above its 100-day moving average (1217.49) for the 31st straight session. The SPX closed +2.48% above its 200-day moving average for the 12th time in the past 14 sessions. The 20-, 50-, and 100-day moving averages rose. The directional momentum indicator was positive for the 16th straight session, and the trend is moderate. Relative strength fell to 61.41 from 64.66, a neutral range. Next resistance is at 1296.75; next support is at 1279.51.
BKX. On higher volume, the KBW bank index fell -0.17 points, or -0.39%, to end at 43.44, its ninth straight close above 40 and its third straight close above the 2010 low of 42.98. Volume rose +23.56% to 99.38 million shares, up from 80.43 million shares and above the 80.53 million share 50-day average. The BKX closed +1.07% above its August 30, 2010, closing low of 42.98, the trough of the 2010’s correction, and -25.04% and -21.91% below its April 23, 2010 (the post-2008 high point), and February 14, 2011 (the most recent high point) respective closes.
Financials were the market’s worst performing sector, and regionals banks underperformed large-cap banks. From its prior close of 43.61, the BKX opened lower to 42.95, and reached the intra-day low of 42.50 at 10:20. Through noon, the index rallied to the 43.30 level before retracing through 1:15 back to 42.90. From 1:30 through the close, the index rallied again, setting the intra-day high of 43.47 at 3:20. The index close at the top end of the day’s negative range.
Technical indicators are mixed, but improving. On a percentage basis, bank stocks have outperformed the broader market’s rebound from the October lows, rising +33.42% from the 32.56 October 4th intra-day low compared to a +20.03% rebound in the SPX. However, the BKX is still -21.9% below its 2011 high, compared to the SPX which has corrected only -5.5%. Moving averages alignment is mixed, as the 20- and 50-day moving averages (40.30 and 38.99, respectively) moved above the 100-day moving average (38.32), and each average is rising. The 100-day moving average appears to have troughed, though the 200-day moving average (42.92) 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 12th time in the past 13 days, the 20-day closed (by +1.31 points) above the 50-day, and the gap is expanding. The 50-day moving average closed (by -3.93 points) below the 200-day moving average for the 150th straight session, but the gap continues to narrow. The 100-day moving average closed (by -4.61 points) below the 200-day moving average for the 128th straight session, but the gap is narrowing. The BKX closed (by +7.79%) above its 20-day moving average for the 19th time in the last 20 sessions. The index closed (by +11.41%) above its 50-day moving average for the 15th straight session. The index closed (by +13.37%) above the 100-day moving average for the 16th straight session. The index closed (by +1.21%) above its 200-day moving average for the third straight session, having been below that level since June 1, 2011. The index closed below 50.0 for the 157th straight session but above 40.0 for the ninth straight session. The directional movement indicator was positive for the 14th consecutive session, and the trend is moderate. Relative strength fell to 69.41 from 70.85, the high end of a neutral range. Next resistance is 43.77; next support at 42.80.