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 -0.81% below its 200-day moving average. Overnight, Asian equity markets closed mixed, with greater strength in Japan. European exchanges are moderately higher, after another successful sovereign debt auction. The dollar is lower. U.S. equity options markets suggest a neutral to bearish short-term outlook. Commodities prices are mixed. U.S. Treasury yields are lower, with the 10-year at 1.855%, down from 1.857% 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 18th.
U.S. equity futures are much higher, but off earlier pre-market highs. After a fair value adjustment of -0.03 points, March SPX equity futures are at 1293.20, up +3.83 points. The SPX opens at 1293.67, -5.13% below its April 29, 2011, multi-year 1363.61 closing high, but +2.18% and +3.63% above its respective 20- and 50-day moving averages and +6.14% and +2.86% above its respective 100- and 200-day moving averages. Next resistance is at 1301.04. Next support is at 1288.26.
Tuesday. Equities closed higher, but well off the day’s early morning highs, as the financials 4Q2011 earnings season opened mixed, with a solid WFC report, but disappointing report from Citigroup (NYSE:C). The Nasdaq, NYSE composite, Nasdaq, DJI, and SPX rose +0.64%, +0.50%, +0.48%, and +0.36%, respectively. Most market segments closed higher, though financials closed off -0.65%. 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 positive. Volumes fell, signaling that participation remains light and many investors remain sidelined. Late in the day, volatility moved up strongly to its highest level since January 4th.
Early market strength benefited from stronger than expected 4Q2011 Chinese GDP and better than feared market reactions to last week’s S&P sovereign debt downgrades. Trading desks report that early selling pressure passed quickly, but activity levels remained relatively low, as hedge and mutual fund participation remains muted. Financials traded more poorly in the afternoon session, and volatility responded by moving higher as valuations flagged. Technically, the session was positive. From its prior day’s 1289.09 close, the SPX opened at 1296 and traded briefly through 1300 to an intraday high of 1303 in early trading. The SPX retreated back to 1298 by mid-morning, but retested resistance at 1300 several time through mid-day before trending lower through most of the afternoon, to an intraday low of 1290.22. The SPX rallied into the close, ending above the technically important 1292.66 October highs. 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 mixed, with moderate strength in Tokyo and Hong Kong, while Shanghai gave back a portion of the prior day’s exceptional gains. Volumes rose. In Japan, the NKY closed up +0.99% on a +11.8% increase in volume. In Hong Kong, the HSI rose +0.30% on a +91.1% increase in volume. In Shanghai, the SHCOMP fell -1.39% 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 Wednesday at 8,550.58, compared to 8,466.40 the prior day. The index closed +1.49% and +0.65% above its respective 20- and 50-day moving averages. The index opened at 8,460 and traded within a narrow range through the morning session, but rallied strongly just after mid-day to an intraday high of 8,595.78. The index trended lower in the final hour. Most market segments closed higher. Leaders were industrials, oil and gas, and basic materials, which closed up at least +1.72%. Financials rose +0.07%. Laggards were consumer goods, utilities, and telecommunications, which closed down at least -0.09%.
In China, the Hang Seng closed at 19,686.92, up from 19,627.75 at the prior day’s close. The index opened slightly higher at 19,650, but traded variably through the day, to an early morning intraday high of 19,726.84 and intraday low of 19,577.07 about an hour later. The index rallied back to 19,680 at mid-day, twice retested support at 19,600 in mid-afternoon, and rallied back to 19,700 minutes before the close. The index closed +5.23% and +5.01% above its respective 20- and 50-day moving averages. Market segments were mixed. Leaders were technology, oil and gas, and consumer goods, which gained at least +0.79%. Financials rose +0.55%. Laggards were consumer services, telecommunications, and utilities, which lost at least -0.95%. In Shanghai, the SHCOMP closed at 2,266.38, down from 2,298.38 the prior day. The SHCOMP traded briefly higher to an early intraday high of 2,311.38 before trending lower to a late afternoon intraday low of 2,258.02. The index closed +2.53% above and -2.14% below its respective 20- and 50-day moving averages. All market segments closed at least -1.04% lower. Leaders were industrials, financials, and oil and gas, which closed at least -1.31% lower. Laggards were consumer services, technology, and health care, which closed off at least -2.50%.
In Europe, equity indexes are moderately higher, after reasonably strong Portuguese sovereign short-term debt auctions. The Euro Stoxx 50, FTSE 100, and DAX are up +0.30%, -0.05%, and +0.31%, respectively. Compared to the prior day’s 2,396.63 close, the Euro Stoxx 50 trades at 2,410.58, compared to a 2,423.02 intraday high. The index is +3.98% and +5.83% above its respective 20- and 50-day moving averages. Most market segments are higher. Leaders are technology, financials, and consumer services, which are up at least +0.40%. Laggards are health care and basic materials, up at least +0.03%, and telecommunications, down -0.55%.
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 0.14640%, down from 0.14650% the prior day and the December 30th 0.15400% high. USD 3-month LIBOR is 0.56120%, down from 0.56230% the prior day and recent January 4th peak of 0.58250%.
- The US Libor-OIS (LOIS) spread rose to 47.73 bps from +47.35 bps the prior day, and compares to the recent January 6th high of 50.05 bps. Euribor-OIS eased to 84.5 bps, from 85.3 bps Tuesday 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 -78.125 bps, the best level since August 18th, from -82.580 bps the prior day, and up from a trough of -147.00 bps on December 14th.
- The U.S. government overnight repo rate is 22.0 bps, up from 17.0 bps Friday, 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 0.217% and 1.850%, respectively, compared to 0.217% and 1.857% Tuesday. The yield curve narrowed to +1.633%, compared to +1.640% 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$80.719, off the intraday high of US$81.121, and compares to US$81.182 at the prior day’s close, and above its US$79.573 50-day, US$78.305 100-day, and US$76.447 200-day averages. The euro trades at US$1.2810, compared to an intraday low of US$1.2734, and compares to a close of US$1.2736 Tuesday and US$1.2667 the day prior. The euro trades worse than its US$1.3153 50-day and US$1.3447 100-day averages. In Japan, the dollar trades at ¥76.81, compared to ¥76.83 Tuesday and ¥77.46 the prior day. The yen trades better than its 50-day moving average ¥77.42.
- Commodities prices are mixed, with mostly higher energy, higher precious metals, aluminum and copper, and mostly lower agriculture prices.
- The VIX ended at 22.20, up +6.17% from 20.91 at the prior close. The VIX is +0.70% above its 22.19 20-day moving average.
- The Euro Stoxx 50 volatility index (V2X) is down -3.81% to 27.07, compared to 28.15 the prior day. The V2X index trades -9.43% below its 29.89 20-day moving average, -31.7% below the 39.63 30-day high, and +1.47% above the 26.68 30-day low.
- The Hang Seng volatility index (VHSI) fell to 21.92, down -0.63% from 22.06 the prior day. The VHSI index trades -8.92% below its 24.07 20-day moving average.
- CBOE skew rose +3.04% to 125.63 from 121.92 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:
- December producer prices fell -0.1%, compared to survey +0.1% and prior +0.3%. Ex food and energy, the PPI rose 0.3%, compared to survey of 0.1% and prior 0.1%.
Overseas news: Today, press reports indicate that the IMF will seek to raise an additional $500 billion in voluntary contributions after seeing a potential 2-year horizon funding shortfall of up to $1 trillion. For 2012, Germany cut its official GDP forecast to +0.7% from +1.0%. Today, China’s central bank conducted reverse bond repurchase agreements with selected banks, injecting cash into the financial system.
Company news/ratings changes:
· GS – reports GAAP and operating EPS of $1.84, beating estimates of $1.23
· PNC – reports GAAP and operating EPS of $0.85 and $1.39, missing estimates of $1.47
· USB – reports GAAP and operating EPS of $0.69 and $0.64, beating estimates of $0.63
· BK – reports GAAP and operating EPS of $0.42 and $0.50, missing estimates of $0.53
· STT – reports operating EPS of $0.93, compared to estimates of $0.94
4Q2011 Earnings. The fourth quarter’s earnings reports have so far disappointed expectations. Of the 12 S&P500 companies that reported earnings to date, 33% (4 out of 12) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies missed EPS expectations by an average of -4.0% (versus a historical average of +2.0%). EPS is down -5.9% over the prior year. Though challenged in the current operating environment, 50% of companies reported increased revenues over the prior year and 70% 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.
With 8 of 24 BKX members reporting fourth quarter earnings, 50% beat operating EPS estimates, with aggregated results disappointing by -0.4%, while 50% beat revenue estimates, with aggregated results missing by -2.3%. EPS is down by -2.7% over the prior year while revenue has decline by -8.9%. 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 ($104.76) and 11.0x estimated 2013 earnings ($117.51), 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 -3.6%, and -0.2%, respectively. Analysts expect 2012 and 2013 earnings to exceed 2011 earnings ($94.97) by +10.3% and +23.7%, respectively.
Large-cap banks trade at a median 1.35x tangible book value, and 10.8x and 9.2x 2012and 2013 consensus earnings, respectively, compared to 1.36x tangible book value and 10.9x/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 $4.44 per share, compared to $4.30 and $2.96 in 2011 and 2010, a +3.3% and +50.0% increase, respectively.
Options. Options markets are neutral to bearish. 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 0.83, compared to 0.72 the prior day and in between its 5- and 10-period moving averages of 0.79 and 0.84, respectively. The index put/call ratio closed at 1.21, compared to 0.84 the prior day, and below the 5- and 10-period moving averages of 1.14 and 1.19, respectively. The equity put/call ratio closed the day at 0.59, compared to 0.62 the prior day and below its 5- and 10-period moving averages of 0.59 and 0.62, 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 close above the January 12th level of 1295.50. 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 fell -2.09% to 810.58 million shares, 0.95x the 50-day moving average, from 827.88 million shares Friday. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by +682 (compared to -922 the prior day), or 1.59:1. Up volume led down volume by 1.32:1.
In January, we expect dividend accruals of $77.6 thousand.
SPX. On lower volume, the SPX rose +4.58 points, or +0.36%, to 1293.37. Volume fell -20.5% to 643.31 million shares, down from 656.79 million shares Friday and below the 655.80 million share 50-day moving average. For the 17th consecutive day, the SPX closed above its 50-day moving average (1,245.30) and remained above its 200-day moving average (1,257.72) for the 13th time in the past 15 sessions. For the 108th 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 (1133.66) for the 69th straight session.
From its prior close at 1289.09, the SPX gapped higher at the open to 1299 and rose to the intra-day high of 1303.00 at 9:50, the first time the index has traded above 1300 since July 27th. At 10:00, the index crossed back below 1300 to 1298 and fluctuated at the 1300 level through 12:30. At 12:30, the index recrossed 1300 to the downside, and would remain below that level though the close. From 12:30 through 2:30, the index traded at 1298. An hour-long sell-off through 3:25 set the intra-day low of 1291.01. The index rebounded slightly into the close to finish with a modest gain but at the low end of the day’s positive range.
The SPX closed above all major moving averages, above 1200 for the 31st straight session, but below 1300 for the 116th 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 18th straight session, the SPX closed (by +2.18%) above its 20-day moving average (1266.09). The index closed (by +3.88%)above its 50-day moving average for the 18th straight session. The index closed (by +6.14%) above its 100-day moving average (1218.80) for the 32nd straight session. The SPX closed +2.86% above its 200-day moving average for the 13th time in the past 15 sessions. The 20-, 50-, and 100-day moving averages rose. The directional momentum indicator was positive for the 17th straight session, and the trend is moderate. Relative strength rose to 62.84 from 61.41, a neutral range. Next resistance is at 1301.04; next support is at 1288.26.
BKX. On lower volume, the KBW bank index fell -0.61 points, or -1.40%, to end at 42.83, its 10th straight close above 40 but re-crossing below the 2010 low of 42.98 for the first time in four sessions. Volume fell -5.07% to 94.34 million shares, down from 99.38 million shares Friday but above the 80.66 million share 50-day average. The BKX closed -0.35% below its August 30, 2010, closing low of 42.98, the trough of the 2010’s correction, and -26.09% and -23.01% 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 for the second straight session, and large-cap banks underperformed regional banks. From its prior close of 43.44, the BKX opened flat and rose to its intra-day high of 43.78 at 9:50. Through 11:00, the index retraced back to 43.20, in negative territory, and traded sideways at 42.30 through 2:30. From 2:30 through 3:20, the index sold off, crossed below the 200-day moving average of 42.87 and set the intra-day low of 42.70. A small rebound into the close could not retake the index’s 200-day moving average, and the index closed at the bottom end of the day’s mostly 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 +31.54% from the 32.56 October 4th intra-day low compared to a +20.45% rebound in the SPX. However, the BKX is still -23.0% below its 2011 high, compared to the SPX which has corrected only -5.1%. Moving averages alignment is mixed, as the 20- and 50-day moving averages (40.57 and 39.06, respectively) moved above the 100-day moving average (38.38), and each average is rising. The 100-day moving average appears to have troughed, though the 200-day moving average (42.87) 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 13th time in the past 14 days, the 20-day closed (by +1.51 points) above the 50-day, and the gap is expanding. The 50-day moving average closed (by -3.81 points) below the 200-day moving average for the 151st straight session, but the gap continues to narrow. The 100-day moving average closed (by -4.49 points) below the 200-day moving average for the 129th straight session, but the gap is narrowing. The BKX closed (by +5.57%) above its 20-day moving average for the 20th time in the last 21 sessions. The index closed (by +9.65%) above its 50-day moving average for the 16th straight session. The index closed (by +11.59%) above the 100-day moving average for the 17th straight session. The index closed (by -0.09%) below its 200-day moving average for the first time in four sessions. The index closed below 50.0 for the 158th straight session but above 40.0 for the 10th straight session. The directional movement indicator was positive for the 15th consecutive session, and the trend is moderate. Relative strength fell to 64.36 from 69.41, a neutral range. Next resistance is 43.51; next support at 42.43.