This morning, agreement on a Greek sovereign debt refinancing was announced, but details are slim. Market responded positive, but subsequently gave up most of the initial momentum. In Asia, equity markets closed mixed, with modest changes and better strength in Shanghai. China's inflation report disappointed. European exchanges are modestly higher but off the morning's highs. The dollar is slightly weaker. U.S. options markets suggest a neutral to bearish short-term outlook. Commodities prices are mixed. U.S. Treasury yields are higher at the long end of the curve, with the 10-year at 2.009%, up from down from 1.982% the prior day. U.S. repo rates are at 7 bps.
The ECB's bank lending facilities have eased interbank lending and associated liquidity 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 early August and less than half its worst level of late December.
U.S. economic reporting focuses on the latest week's initial jobless claims report. After a fair value adjustment of -0.34 points, March SPX equity futures are at 1350.00, up +3.24 points. The SPX opens at 1349.96, -1.50% below its May 2, 2011, multi-year 1370.50 intraday high, but +2.42% and +5.81% above its respective 20- and 50-day moving averages and +8.78% and +7.34% above its respective 100- and 200-day moving averages. Next resistance is at 1353.32. Next support is at 1344.27.
Wednesday. Equity markets rallied early, sold off mid-morning, then rallied to reverse moderate losses to end with modest gains. Volumes were higher than Tues, but remained well off 50-day moving averages. The Nasdaq ended up +0.41% with the day's best gain, followed by the SPX, NYSE composite, and DJI with gains of +0.22%, +0.16%, and +0.04%, respectively. Market segments were mixed. Leaders were consumer goods, basic materials, and oil and gas, with gains of at least +1.10%. Financials gained +0.75%. Laggards were technology, consumer services, and utilities, which closed down at least -0.42%. As indicated by the volume, trading desks reported a quiet session, with better participation after the mid-day dip. Sentiment remains skeptical.
From its prior close at 1344.33, the SPX opened mildly to the upside, trading quickly to an intraday high of 1351.00, before trading off to a 1341.95 late-morning intraday low. Indexes rallied and traded back to par by early afternoon, and rallied into the close. For a 11th consecutive day, all indexes closed above their respective 20-, 50-, 100-, and 200-day moving averages. Market breadth was positive. NYSE volume rose +4.99% to 0.91x the 50-day moving average. Interestingly, volatility fell with stocks in early trading, then rose as equities reversed and rallied, then trended lower after late morning through the close. The VIX ended at 18.16, up from 17.65 the prior day and down from an intraday high of 18.46. At 124.76, the CBOE put/call skew remains well above a neutral range.
Technically, the day was positive. The markets found support early, reversed, and rallied to close with gains. Important support levels include 1315.83 (-23.6% Fibonacci retrace of the rally since December 19th), 1318 (20-day moving average), 1297 (the January 12th high), 1293 (the October 27th high), and 1295 (a -38.2% Fibonacci retrace). Immediate resistance is 1350-56, then 1370.58, the May 2nd 2011 intraday high and SPX multi-year high point.
In Asia, equity markets closed mixed, with solid gains on heavy volume. In Japan, the NKY closed down -0.15% on a +13.2% increase in volume. In China, the HSI closed down -0.04% on a +27.0% increase in volume. The SHCOMP closed up +0.09% on a +12.5% increase in volume. Commentary focused on Greek debt negotiations and Asian economic growth prospects.
In Japan, the NKY closed at 9,002.24, compared to 9,015.59 the prior day. The index closed +3.01% and +4.90% above its respective 20- and 50-day moving averages. The index opened modestly lower, but lost ground through mid-morning, to an intraday low of 8,942.87 before finding support. The day's remainder saw a rally back to a breakeven intraday high of 9018.24 before finding weakness again at the close. Market segments closed mostly higher. Leaders were utilities, financials, and oil and gas, which ended up at least +0.80%. Laggards were telecommunications, industrials, and consumer services, which closed off at least -0.05%.
In China, the Hang Seng closed at 21,010.01, down from 21,018.46 at the prior close. The index opened lower, but above 20,900, but sold off quickly to test support successfully at 20,800, where it reversed and rallied back to breakeven at mid-morning and an late afternoon intraday high of 21,053.06. The index is +5.19% and +10.1% above its respective 20- and 50-day moving averages. Market segments closed mixed. Leaders were technology, consumer services, and industrials, which closed up at least +0.42%. Financials closed down -0.07%. Laggards were consumer goods, utilities, and telecommunications, which closed down -0.23%. In Shanghai, the SHCOMP closed at 2,349.59, up from 2,347.53 at the prior close. The SHCOMP opened lower and saw an intraday low of 2333.94 in the first hour before reversing to a mid-afternoon intraday high of 2,363.32. The index sold off in the final hour, but found support at 2,345, rallied again, and closed with a small gain. Market segments closed mixed. Leaders were health care, technology, and consumer goods, which gained at least +0.58%. Financials lost -0.09%. Laggards were basic materials, utilities, and telecommunications, which closed off at least -0.11%.
In Europe, equity indexes opened higher, rallied to intra-day highs within the first hour, but have retraced gains to more modest levels. Commentary focuses on Greek debt negotiations and the ECB rate decision. The Euro Stoxx 50, FTSE 100, and DAX are up +0.33%, +0.16%, and +0.55%, respectively. Compared to the prior day's 2,514.12 close, the Euro Stoxx 50 trades at 2,521.19, compared to a 2,534.03 intraday high and 2,514.83 intraday low. The index is +3.53% and +7.12% above its respective 20- and 50-day moving averages. Most market segments are higher. Leaders are basic materials, consumer goods, and oil and gas, which are up at least +0.76%. Financials are +0.53% higher. Laggards are consumer services, technology, and utilities, down at least -0.63%.
Libor, LOIS, Currencies, Treasuries, Commodities:
- USD LIBOR is at 0.14200%, unchanged from 0.14200% the prior day, and down from the December 30th 0.15400% high. USD 3-month LIBOR is 0.51000%, down from 0.51325% the prior day and from the January 4th peak of 0.58250%.
- The US Libor-OIS (LOIS) spread fell to 39.87 from 40.32 bps the prior day, and compares to the recent January 6th high of 50.05 bps. Euribor-OIS fell to 72.80 bps from 73.20 bps the prior day and December 27th high of 98.80 bps. This is its best reading since October 12th. A fall in the LOIS indicates a decreased intra-bank lending risk premium.
- The Euro 3-month basis swap continues to improve, rising to -67.50 bps from -70.39 bps the prior day, at levels of early August and up from a trough of -147.00 bps on December 14th.
- The U.S. government overnight repo rate is unchanged at 7 bps and off from the August 2nd high of 33 bps.
- U.S. Treasury yields are mixed, with 2- and 10-year maturities yielding 0.250% and 2.002%, respectively, compared to 0.254% and 1.982% Wednesday. The yield curve steepened to +1.754%, compared to +1.728% 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, but slightly stronger compared to the Japanese yen and British pound. The dollar trades at US$78.656, compared to a US$78.781 intraday high and US$78.641 at the prior day's close, and mixed against its US$79.855 50-day, US$78.752 100-day, and US$76.871 200-day averages. The euro trades at US$1.3240, compared to an intraday high of US$1.3313, and compares to a close of US$1.3260 the prior day. The euro trades stronger than its US$1.3045 50-day but weaker than its US$1.3333 100-day average. In Japan, the dollar trades at ¥77.17, compared to ¥77.04 yesterday. The yen trades better than its 50-day moving average ¥77.28.
- Commodities prices are mixed, with higher energy, lower precious metals, mixed aluminum and copper, and mostly lower agriculture prices.
- The VIX ended at 18.16, up +2.89% from 17.65 at the prior close. The VIX is -5.10% below its 19.14 20-day moving average.
- The Euro Stoxx 50 volatility index (V2X) is up +0.34% to 25.82, compared to 25.73 at the prior day's close. The V2X index trades -0.66% below its 25.99 20-day moving average, -24.63% below the 33.37 30-day high, and +10.0% above the 23.46 30-day low.
- The Hang Seng volatility index (VHSI) closed at 22.73, up +4.17% from 21.82 the prior day. The VHSI index trades +0.46% above its 22.63 20-day moving average.
- CBOE skew fell -0.49% to 123.02 from 123.63 at the prior day's close, and above a neutral (115-120) range. The index tracks market tail risks, the cost of buying out-of-the-money, long-dated options, i.e., options not affected by expirations. A rise suggests that investors are buying more puts than calls, a bearish signal. A spike to 130, as on January 18th close, correlates well with short-term market peaks.
U.S. news and economic reporting:
· Initial jobless claims for the week ending February 4th were 358K, compared to 370K survey and revised 373K the prior week.
· Continuing claims were 3515K, compared to 3500K survey and 3451K the prior week.
Overseas news: This morning, news wires report that Greece has agreed to an austerity plan, a prerequisite of the European Union, European Central Bank (ECB), and IMF for further bailout funding. Today, the Bank of England announced a £50 billion liquidity program but held benchmark interest rates steady, in line with expectations. Today, the ECB also maintain interest rates at their current levels. In January, China's consumer price index rose +4.5% over last year's level, above estimates for a decline to a +4.0% rate from December's +4.1% reading. In January, China auto sales fell the most in more than seven years, declining -24% from a year earlier, more than the -18% estimated decline.
Company news/ratings changes:
· Foreclosure Settlement - news services report a foreclosure settlement could be announced as soon as today, which may require $5 billion in cash penalties and $20 billion in "other aid," probably including principal reduction activities.
4Q2011 Earnings. The fourth quarter's earnings reports have so far exceeded expectations. Of the 314 S&P500 companies that reported earnings to date, 69% (218 out of 314) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat EPS expectations by an average of +3.2% (versus a historical average of +2%). EPS is up +3.9% over the prior year. Though challenged in the current operating environment, 73% of companies reported increased revenues over the prior year and 57% 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 all 24 BKX members reporting fourth quarter earnings, 42% beat operating EPS estimates, with aggregated results disappointing by -16.7%, while 46% beat revenue estimates, with aggregated results missing by -0.9%. EPS is down by -20.4% over the prior year while revenue has decline by -3.8%. In the fourth quarter, the BKX earned $1.25 per share, compared to $1.24 and $0.91 per share in 3Q11 and 4Q10, a +0.8% and +37.4% change, respectively.
Valuation. The SPX trades at 12.9x estimated 2012 earnings ($104.57) and 11.4x estimated 2013 earnings ($117.94), compared to 12.9x and 11.4 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 -3.7%, and +0.1%, respectively. Analysts expect 2012 and 2013 earnings to exceed 2011 earnings ($94.97) by +10.2% and +24.2%, respectively.
Large-cap banks trade at a median 1.36x tangible book value, and 10.8x and 9.7x 2012and 2013 consensus earnings, respectively, compared to 1.37x tangible book value and 10.7x/9.6x 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 $4.32 per share, compared to $4.30 and $2.96 in 2011 and 2010, a +0.2% and +45.9% increase, respectively.
Options. Options markets are neutral to bearish. Composite options markets are neutral, index options markets are neutral, and equity options markets are bearish. The composite put/call ratio closed at 0.81, compared to 0.75 the prior day and in between its 5- and 10-period moving averages of 0.80 and 0.85, respectively. The index put/call ratio closed at 1.25, compared to 0.89 the prior day, and above the 5- and 10-period moving averages of 1.14 and 1.22, respectively. The equity put/call ratio closed the day at 0.54, compared to 0.61 the prior day, below its 5- and 10-period moving averages of 0.57 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 18th and 11th, the first such signals since April, while S&P futures reached full upward price exhaustion on January 23rd. Alternative calculations that adjust for the current uptrend's strength shows S&P futures reached upward potential price exhaustion yesterday, on February 7th, and on February 3rd. If a reversal does not occur within the next two weeks, the current trend may continue. Intra-day timeframes of 120- and 60-minute intervals show the SPX and BKX reached multiple levels of potential price exhaustion most recently as January 25th and 12th, respectively. A reversal in the SPX from these levels could extend as low as 1170.
NYSE Indicators. Volume rose +4.99% to 765.35 million shares, +0.91x the 50-day moving average, from 728.98 million shares Tuesday. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by +480 (compared to +389 the prior day), or 1.38:1. Up volume led down volume by 1.44:1.
SPX. On higher volume, the SPX rose +2.91 points, or +0.22%, to 1349.96, the 16th straight close above 1300 and the highest close since July 7, 2011. Volume rose +11.98% to 599.30 million shares, up from 535.18 million shares Tuesday but below the 648.78 million share 50-day moving average. For the 33rd consecutive day, the SPX closed above its 50-day moving average (12753.84) and remained above its 200-day moving average (1257.66) for the 30th time in the past 31 sessions. The SPX closed above its 200-week moving average (1133.38) for the 85th straight session.
From its prior close at 1349.96, the SPX opened flat but rallied to the intra-day high of 1351.00 at 10:05. Through 11:45, the index sold off, turning negative at 11:05 and hitting the intra-day low of 1341.95 at 11:45. Momentum reversed, and through 2:45, the index rallied, retaking the break-even line at 1:30 and reaching the 1350 level at 2:45. The SPX traded sideways into the close to finish near the intra-day high.
The SPX closed above all major moving averages, above 1200 for the 47th straight session and above 1300 for the 16th 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. The 200-day moving average appears to have troughed and is increasing. The 50-day moving average climbed above the 200-day moving average on January 31st, having been below that average since August 11th. For the 34th straight session, the SPX closed (by +2.42%) above its 20-day moving average (1318.07). The index closed (by +5.81%)above its 50-day moving average for the 34th straight session. The index closed (by +8.78%) above its 100-day moving average (1241.00) for the 48th straight session. The SPX closed +7.34% above its 200-day moving average for the 29th time in the past 31 sessions. All moving averages rose. The directional momentum indicator was positive for the 34th straight session, and the trend is strong. Relative strength rose to 74.80 from 73.95, an overbought range and the highest level since January 18, 2011. Next resistance is at 1353.32; next support is at 1344.27.
BKX. On higher volume, the KBW bank index rose +0.53 points, or +1.19%, to end at 45.23, its 25th straight close above 40 and the highest close since August 1st. Volume rose +21.78% to 75.22 million shares, up from 61.77 million shares Tuesday but below the 80.45 million share 50-day average. The BKX closed +5.23% above its August 30, 2010, closing low of 42.98, the trough of the 2010's correction, and -21.95% and -18.69% below its April 23, 2010 (the post-2008 high point), and February 14, 2011 (the most recent high point) respective closes.
Financials outperformed the market, and large-cap banks outperformed regional banks. From its prior close of 44.70, the BKX opened higher to 44.80 and rose to 45.20 at 10:30. Momentum reversed, and the index sold off through 11:45, reaching 44.73, the intra-day low but still in positive territory. Through 2:50, a rally took the index to the intra-day high of 45.28, where the BKX traded through the close to finish near the day's 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 +38.91% from the 32.56 October 4th intra-day low compared to a +25.69% rebound in the SPX. However, the BKX is still -18.7% below its 2011 high, compared to the SPX which has corrected only -1.0%. Moving averages alignment is mixed, as the 20- and 50-day moving averages (43.54 and 40.83 respectively) moved above the 100-day moving average (39.27), and each average is rising. The 200-day moving average (42.24) 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 29th time in the past 28 sessions, the 20-day closed (by +2.71 points) above the 50-day, but the gap contracted. The 50-day moving average closed (by -1.41 points) below the 200-day moving average for the 167th straight session, but the gap continues to narrow. The 100-day moving average closed (by -2.96 points) below the 200-day moving average for the 145th straight session, but the gap is narrowing. The BKX closed (by +3.87%) above its 20-day moving average for the eighth straight session. The index closed (by +10.78%) above its 50-day moving average for the 32nd straight session. The index closed (by +15.17%) above the 100-day moving average for the 33rd straight session. The index closed (by +7.08%) above its 200-day moving average for the 15th time in 16 sessions. The index closed below 50.0 for the 174th straight session but above 40.0 for the 26th straight session. The directional movement indicator was positive for the 31st consecutive session, and the trend is strong. Relative strength rose to 69.16 from 66.54, the high end of a neutral range. Next resistance is 45.44; next support at 44.86.