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U.S. Futures Rebound After Greek Parliament Approves Austerity

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. Technical indicators are generally positive. All major indexes are above their respective 20-, 50-, 100-, and 200-day moving averages. Notably, on January 31st, the SPX 50-day moving average crossed above the 200-day moving average. Also on January 31st, the SPX 200-day moving average recaptured an upward trend, ending a 5-month long decline. The SPX is now well into bull market territory, closing Friday up +24.9% above the October 4th intraday low.

This morning, commentary focuses on Sunday's parliamentary approval of the Greek sovereign debt refinancing package. The action will be reviewed by a meeting of Eurozone finance ministers on Wednesday. Its approval is expected, avoiding default but with significant haircuts on privately held Greek sovereign debt. In Asia, equity markets closed mixed, with better strength in Shanghai, on disappointing Chinese trade balance. European exchanges are lower on Greek debt concerns. The dollar is mixed. 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 2.016%, up from +1.986% the prior day. U.S. repo rates are at 14 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.

There are no scheduled U.S. economic reports. After a fair value adjustment of -1.16 points, March SPX equity futures are at 1350.20, up +10.76 points. The SPX opens at 1342.64, -2.03% below its May 2, 2011, multi-year 1370.50 intraday high, but +1.45% and +4.73% above its respective 20- and 50-day moving averages and +7.95% and +6.76% above its respective 100- and 200-day moving averages. Next resistance is at 1350.112. Next support is at 1336.26.

Friday. Equity markets sold off on Eurozone concerns, with most exchanges scoring their first weekly loss since the first week of January. Volumes, however, were lower, an indication that selling pressure was never particularly acute after the day's first minutes. The SPX and DJI closed down -0.69%, followed by the Nasdaq and NYSE composite, which lost -0.80% and -1.10%, respectively. Market segments closed off at least -0.69%. Leaders were utilities, health care, and consumer services, which closed down at least -0.37%. Laggards were financials, oil and gas, and basic materials. As indicated by the meager volume, trading desks reported a generally quiet session. Sentiment remains skeptical.

From its prior close at 1351.95, the SPX opened below 1340 and twice tested support at 1338 in the morning session and again late in the day. The index rallied in the final hour to narrow the day's loss to less than one percent, but for the week, the loss was just -0.17%. For a 13th consecutive day, all indexes closed above their respective 20-, 50-, 100-, and 200-day moving averages. Market breadth was negative. NYSE volume fell -1.12% to 0.90x the 50-day moving average. For a 3rd consecutive day, volatility rose, but by a torrid +11.6%. The VIX ended at 20.8, up from 18.63 the prior day, but below the 21.98 intraday high. At 129.59, the CBOE put/call skew remains well above a neutral range.

Technically, the day was negative. Important support levels include 1310 (-23.6% Fibonacci retrace of the rally since December 19th), 1323 (20-day moving average), 1297 (the January 12th high), 1293 (the October 27th high), and 1290 (a -38.2% Fibonacci retrace). Immediate resistance is 1350, then 1370.58, the May 2nd 2011 intraday high and SPX multi-year high point.


Distribution days number 4 on the BKX, 2 on the SPX, DJI, and NYSE composite, and 1 on the Nasdaq.

In Asia, equity markets closed mixed on lower volume. In Japan, the NKY closed up +0.58% on a -17.7% decrease in volume. In China, the HSI closed up +0.50% on a -24.1% decrease in volume. The SHCOMP closed down -0.01% on a -10.6% decrease in volume. Commentary focused on Greek debt developments, preliminary Japanese 4Q2012 GDP, and hints from China's premier that economic policies will be eased beginning this quarter.

In Japan, the NKY closed at 8,999.18, compared to 8,947.17 the prior day. The index closed +2.35% and +5.77% above its respective 20- and 50-day moving averages. Despite a report that showed continued -1.6% shrinkage of 4Q2011 GDP (compared to survey -1.7% and prior revised -2.1%), the index opened higher and climbed to a late-morning intraday high of 9023.50 before selling back below 9,000 through most of the afternoon session. Most market segments closed higher. Leaders were telecommunications, financials, and industrials, which rose at least +0.60%. Laggards were technology, basic materials, and utilities.

In China, the Hang Seng closed at 20,877.40, up from 20,783.86 at the prior close. The index opened lower, but trended higher through mid-session to an intraday high of 20,969.80 before giving back a portion of the day's gains in the afternoon session. The index is +3.56% and +8.80% above its respective 20- and 50-day moving averages. Market segments closed at least +0.14% higher. Leaders were telecommunications, basic materials, and consumer services, which closed up at least +0.98%. Laggards were utilities, financials, and consumer goods, which gained at least +0.14%. In Shanghai, the SHCOMP closed at 2,351.85, down from 2,351.98 at the prior close. The SHCOMP opened lower and traded immediately to an intraday low of 2,325.20, but reversed and traded to an intraday high of 2,365.23 by early afternoon. The index sold back to 2,333 late in the session, but found support and rallied to end with an insignificant loss. Market segments were mostly higher. Leaders were technology, health care, and consumer goods, which rose at least +1.22%. Laggards were basic materials, oil and gas, and financials, which closed off at least -0.06%.

In Europe, equity indexes gapped higher, but have sold off their best intraday levels. Commentary focuses on Sunday's Greek parliamentary action. The Euro Stoxx 50, FTSE 100, and DAX are up 0.78%, +1.11%, and +0.87%, respectively. Compared to the prior day's 2,480.76 close, the Euro Stoxx 50 trades at 2,500.95, compared to a 2,510.72 intraday high and 2,490.13 intraday low. The index is +1.86% and +5.77% above its respective 20- and 50-day moving averages. Most market segments are higher. Leaders are oil and gas, utilities, and consumer goods, which are up at least +1.07%. Financials are +0.98% higher. Laggards are consumer services, technology, and telecommunications.

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 0.50260%, down from 0.50600% the prior day and from the January 4th peak of 0.58250%.
  • The US Libor-OIS (LOIS) spread fell to 36.96 from 37.60 bps the prior day, and compares to the recent January 6th high of 50.05 bps. Euribor-OIS fell to 70.70 bps from 71.70 bps the prior day and December 27th high of 98.80 bps. This is its best reading since September 26th. A fall in the LOIS indicates a decreased intra-bank lending risk premium.
  • The Euro 3-month basis swap continues to improve, rising to -70.00 bps from -72.65 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 14 bps, up from 7 bps the prior day, but off from the August 2nd high of 33 bps.
  • U.S. Treasury yields are mixed, with 2- and 10-year maturities yielding 0.270% and 2.012%, respectively, compared to 0.274% and 1.986% Friday. The yield curve widened to +1.746%, compared to +1.712% 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, lower against the euro, but slightly stronger against the Japanese yen and British pound. The dollar trades at US$78.773, compared to a US$78.608 intraday low and US$79.114 at the prior day's close, and mixed against its US$79.866 50-day, US$78.761 100-day, and US$76.912 200-day averages. The euro trades at US$1.3257, compared to an intraday low of US$1.3185, and compares to a close of US$1.3197 the prior day. The euro trades better than its US$1.3039 50-day but worse than its US$1.3328 100-day average. In Japan, the dollar trades at ¥77.27, compared to ¥77.61 the day prior. The yen trades worse than its 50-day moving average ¥77.27.
  • Commodities prices are mixed, with higher energy and precious metals, lower aluminum and copper, and higher agriculture prices.

Volatility, Skew:
  • The VIX ended at 20.79, up +11.6% from 18.63 at the prior close. The VIX is +9.25% above its 19.01 20-day moving average.
  • The Euro Stoxx 50 volatility index (V2X) is down -2.65% to 26.66 compared to 27.38 at the prior day's close. The V2X index trades +3.40% above its 25.787 20-day moving average, -16.8% below the 32.04 30-day high, and +13.6% above the 23.46 30-day low.
  • The Hang Seng volatility index (VHSI) closed at 23.31, down -1.06% from 23.56 the prior day. The VHSI index trades +2.88% above its 22.66 20-day moving average.
  • CBOE skew rose +2.46% to 129.59 from 126.48 at the prior day's close, and well 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:

· There are no scheduled economic reports.

Overseas news: Last night, the Greek parliament approved the latest austerity package demanded by the European Union, the European Central Bank, and the IMF as a precondition for new bailout funding. In the fourth quarter, Japan's GDP contracted -2.3% over the prior quarter, widely missing estimates of only a -1.3% decline. The Arab League called for a joint UN-Arab peacekeeping mission in Syria, saying the Assad regime's violence has violated international law.

Company news/ratings changes:

· None.

4Q2011 Earnings. The fourth quarter's earnings reports have so far exceeded expectations. Of the 331 S&P500 companies that reported earnings to date, 70% (232 out of 331) 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 12.8x estimated 2012 earnings ($104.52) and 11.4x estimated 2013 earnings ($117.94), compared to 12.9x and 11.4 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 -3.8%, and +0.1%, respectively. Analysts expect 2012 and 2013 earnings to exceed 2011 earnings ($94.97) by +10.1% and +24.2%, respectively.

Large-cap banks trade at a median 1.34x tangible book value, and 10.6x and 9.6x 2012and 2013 consensus earnings, respectively, compared to 1.36x tangible book value and 10.8x/9.7x 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 $4.32 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 to bearish, and equity options markets are neutral. The composite put/call ratio closed at 1.08, compared to 0.87 the prior day and above its 5- and 10-period moving averages of 0.87 and 0.86, respectively. The index put/call ratio closed at 1.41, compared to 1.35 the prior day, and above the 5- and 10-period moving averages of 1.25 and 1.23, respectively. The equity put/call ratio closed the day at 0.77, compared to 0.59 the prior day, above its 5- and 10-period moving averages of 0.62 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 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 on February 8th, 7th, and 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 in January with the most recent indicator coming on February 8th. A reversal in the SPX from these levels could extend as low as 1170.

NYSE Indicators. Despite the sell-off, volume fell -1.12% to 750.64 million shares, 0.901x the 50-day moving average, from 759.18 million shares Thursday. Market breadth was negative, and up volume lagged down volume. Advancing stocks lagged decliners by -1,604, (Compared to +36 the prior day), or 0.31:1. Up volume lagged down volume by 0.24:1.

SPX. On lower volume, the SPX fell-9.31 points, or -0.69%, to 1342.64, the 18th straight close above 1300. Volume fell -7.37% to 563.38 million shares, down from 608.23 million shares Thursday and below the 644.47 million share 50-day moving average. For the 35th consecutive day, the SPX closed above its 50-day moving average (1281.98) and remained above its 200-day moving average (1257.62) for the 32nd time in the past 33 sessions. The SPX closed above its 200-week moving average (1133.60) for the 87th straight session.

From its prior close at 1351.95, the SPX gapped lower at the open to 1342 and fell to the intra-day low of 1337.35 at 10:15. The market traded in that 1338-1342 range through the close, setting the intra-day high at 1343.20 at 1:00, retraced to 1338 by 3:10, and rallying back to 1342 at in the last 45 minutes.

The SPX closed above all major moving averages, above 1200 for the 49th straight session and above 1300 for the 18th 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. 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 36th straight session, the SPX closed (by +1.45%) above its 20-day moving average (1323.40). The index closed (by +4.73%)above its 50-day moving average for the 36th straight session. The index closed (by +7.95%) above its 100-day moving average (1243.74) for the 50th straight session. The SPX closed +6.76% above its 200-day moving average for the 31st time in the past 33 sessions. The 200-day moving average fell. The directional momentum indicator was positive for the 36th straight session, and the trend is strong. Relative strength fell to 67.42 from 75.39, an overbought range and the highest level since January 18, 2011. Next resistance is at 1350.12; next support is at 1336.26.

BKX. On lower volume, the KBW bank index fell -0.58 points, or -1.29%, to end at 44.53, its 27th straight close above 40. Volume fell -22.55% to 65.02 million shares, down from 83.95 million shares Thursday and below the 79.11 million share 50-day average. The BKX closed +3.61% above its August 30, 2010, closing low of 42.98, the trough of the 2010's correction, and -23.16% and -19.95% below its April 23, 2010 (the post-2008 high point), and February 14, 2011 (the most recent high point) respective closes.

Financials underperformed the market, and regional banks underperformed large-cap banks. From its prior close of 45.11, the BKX gapped lower at the open to 44.65 and immediately fell to 44.40. Through 11:15, the index fluctuated between 44.35 and 44.70, setting the intra-day high of 44.71 at 11:10. Through 3:05, the index lost ground and fell to the intra-day low of 44.31. A rally into the bell lifted the index to close in the middle 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 +36.76% from the 32.56 October 4th intra-day low compared to a +25.01% rebound in the SPX. However, the BKX is still -20.0% below its 2011 high, compared to the SPX which has corrected only -1.5%. Moving averages alignment is mixed, as the 20- and 50-day moving averages (43.68 and 41.19 respectively) moved above the 100-day moving average (39.41), and each average is rising. The 200-day moving average (42.17) 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 31st time in the past 32 sessions, the 20-day closed (by +2.48 points) above the 50-day, but the gap contracted. The 50-day moving average closed (by -0.98 points) below the 200-day moving average for the 169th straight session, but the gap continues to narrow. The 100-day moving average closed (by -2.77 points) below the 200-day moving average for the 147th straight session, but the gap is narrowing. The BKX closed (by +1.96%) above its 20-day moving average for the 10th straight session. The index closed (by +8.10%) above its 50-day moving average for the 34th straight session. The index closed (by +13.00%) above the 100-day moving average for the 35th straight session. The index closed (by +5.59%) above its 200-day moving average for the 17th time in 18 sessions. The index closed below 50.0 for the 176th straight session but above 40.0 for the 28th straight session. The directional movement indicator was positive for the 33rd consecutive session, and the trend is strong. Relative strength fell to 61.85 from 67.86, the high end of a neutral range. Next resistance is 44.80; next support at 44.29.