Notably, Moody's downgrade yesterday of six Eurozone sovereign credits has had little impact outside Asia. In Asia, equity markets closed mixed, with better strength in Japan after the BOJ unexpectedly initiated asset purchases. European exchanges are moderately higher. The dollar is mixed. U.S. options markets suggest a bearish short-term outlook. Commodities prices are mostly lower. U.S. Treasury yields are largely unchanged, with the 10-year at 1.978%, up from +1.974% 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.
After a fair value adjustment of -0.33 points, March SPX equity futures are at 1349.20, up +0.43 points. The SPX opens at 1351.77, -1.37% below its May 2, 2011, multi-year 1370.50 intraday high, but +1.90% and +5.27% above its respective 20- and 50-day moving averages and +8.56% and +7.49% above its respective 100- and 200-day moving averages. Next resistance is at 1355.73. Next support is at 1345.44.
Monday. Equity markets largely erased last Friday's sell-off, but without either enthusiasm or conviction. Volumes were the worst of the year, so the day's strength can hardly be ascribed to any improved participation, as much as the absence of any selling pressure. The Nasdaq scored the best gain, rising +0.95%, followed by the NYSE composite, SPX, and DJI, which rose +0.80%, +0.68%, and +0.57%, respectively. For a 14th consecutive day, all indexes closed above their respective 20-, 50-, 100-, and 200-day moving averages. Market breadth was positive. NYSE volume fell -9.06% to 0.84x the 50-day moving average. Volatility fell. The VIX ended at 19.04, down -8.42% from 20.79 the prior day, but below the 21.98 intraday high. At 127.89, the CBOE put/call skew remains well above a neutral range.
Most market segments rose. Industrials, financials, and telecommunications led with increases of at least +0.84%. Laggards were consumer services and basic materials, which rose at least +0.12%, and utilities, which closed off at least -0.26%. From its prior close at 1342.64, the SPX opened back above 1350 and closed just -0.18 points below Thursday's 1351.95 close. During the morning session, the index traded back to 1346, but found support and trended higher to a mid-afternoon 1353.35 intraday high.
Traders attributed the day's strength to the Greek parliament's approval of the austerity package that was in such doubt Friday. Largely, however, markets seemed to ignore the day's news, which included Obama's proposed 2013 budget, continued negotiations over the payroll tax cut, and Moody's sovereign credit actions. Traders' principal worries seem to center on whether resistance at 1350 on the SPX will prove too tough, that the market shows "fatigue" or "exhaustion" and is preparing to roll over; or, alternatively, that markets are consolidating recent gains preparatory to another major push.
Technically, the day was mixed. Important support levels include 1317 (-23.6% Fibonacci retrace of the rally since December 19th), 1327 (20-day moving average), 1297 (the January 12th high), 1293 (the October 27th high), and 1295 (a -38.2% Fibonacci retrace). Immediate resistance is 1356, then 1370.58, the May 2nd 2011 intraday high and SPX multi-year high point.
In Asia, equity markets closed mixed on mixed volume. In Japan, the NKY closed up +0.59% on an +11.8% increase in volume. In China, the HSI closed up +0.15% on a -22.5% decrease in volume. The SHCOMP closed down -0.30% on a -15.2% decrease in volume. Commentary focused on Moody's downgrades of several European sovereign credits, BOJ asset purchases, and a bullish Nomura research call on Hong Kong commercial properties.
In Japan, the NKY closed at 9,052.07, compared to 8,999.18 the prior day. The index closed +2.59% and +4.99% above its respective 20- and 50-day moving averages. The index opened slightly lower and traded within a narrow range around 8,980, with an intraday low of 8,972.74. The index spurted higher early in the afternoon on reports of unexpected BOJ asset purchases, carrying the index to an intraday high of 9,072.08, its best level since last August. Most market segments closed higher. Leaders were financials, technology, and utilities, which closed up at least +0.85%. Laggards were basic materials (+0.04%) and oil and gas and telecommunications, which fell at least -0.26%.
In China, the Hang Seng closed at 20,917.83, up from 20,877.40 at the prior close. The index opened lower, but trended higher through mid-session to an intraday high of 20,947.95 before trading back to 20,850 mid-afternoon. The index rallied in the final hour to end slightly higher. The index is +3.27% and +8.59% above its respective 20- and 50-day moving averages. Most market segments closed lower. Leaders were consumer goods and financials, which rose at least +0.43%, and telecommunications, which closed off -0.02%. Laggards were basic materials, oil and gas, and technology, which closed down at least -0.51%. In Shanghai, the SHCOMP closed at 2,344.77, down from 2,351.85 at the prior close. The SHCOMP opened lower and traded at mid-day to an intraday low of 2,332.25, before narrowing the day's losses through the afternoon. Market segments were mostly lower. Health care rose +0.22%. Other leaders were oil and gas and basic materials, which closed down at least -0.12%. Laggards were financials, technology, and telecommunications, which closed off at least -0.55%.
In Europe, equity indexes have shrugged off yesterday's Moody's sovereign downgrades, reversing early losses and trading to moderate gains. Commentary focuses on a better than expected German business confidence report. The Euro Stoxx 50, FTSE 100, and DAX are up +0.38%, +0.13%, and +0.39%, respectively. Compared to the prior day's 2,491.54 close, the Euro Stoxx 50 trades at 2,500.75, compared to a 2,507.66 intraday high and 2,477.49 intraday low. The index is +1.76% and +5.81% above its respective 20- and 50-day moving averages. Most market segments are higher. Leaders are technology, utilities, and consumer services, which are up at least +0.62%. Laggards are industrials and financials, which are up at least +0.03%, and health care, which is down -0.04%.
Libor, LOIS, Currencies, Treasuries, Commodities:
- USD LIBOR is at 0.14400%, up from 0.14200% the prior day, and down from the December 30th 0.15400% high. USD 3-month LIBOR is 0.49760%, down from 0.50260% the prior day and from the January 4th peak of 0.58250%.
- The US Libor-OIS (LOIS) spread rose to 37.56 from 37.38 bps the prior day, and compares to the recent January 6th high of 50.05 bps. Euribor-OIS fell to 70.30 bps from 70.50 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 -68.13 bps from -68.38 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, unchanged from 14 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 0.278% and 1.978%, respectively, compared to 0.286% and 1.974% Monday. The yield curve widened to +1.700%, compared to +1.688% 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, slightly lower against the euro, but slightly stronger against the Japanese yen and British pound. The dollar trades at US$79.881, compared to a US$78.947 intraday low and US$79.870 at the prior day's close, and mixed against its US$79.811 50-day, US$78.778 100-day, and US$76.935 200-day averages. The euro trades at US$1.3200, compared to an intraday low of US$1.3128, and compares to a close of US$1.3037 the prior day. The euro trades better than its US$1.3033 50-day, but worse than its US$1.3323 100-day average. In Japan, the dollar trades at ¥78.03, compared to ¥77.57 the day prior. The yen trades worse than its 50-day moving average ¥77.28.
- Commodities prices are mixed, with mixed energy, lower precious metals, aluminum and copper, and mixed agriculture prices.
- The VIX ended at 19.04, down -8.42% from 20.79 at the prior close. The VIX is +0.05% above its 18.94 20-day moving average.
- The Euro Stoxx 50 volatility index (V2X) is down -3.67% to 25.63 compared to 26.60 at the prior day's close. The V2X index trades -0.32% below its 25.71 20-day moving average, -20.0% below the 32.04 30-day high, and +9.22% above the 23.46 30-day low.
- The Hang Seng volatility index (VHSI) closed at 23.31, down -4.50% from 22.26 the prior day. The VHSI index trades -1.72% below its 22.65 20-day moving average.
- CBOE skew fell -1.31% to 127.89 from 129.59 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:
· At 7:30. The NFIB small business optimism report disappointed at 93.9, compared to survey 95.0 and prior 93.8.
· At 8:30, the January import price index was +0.3%, in-line with survey and up from -0.1% prior.
· Advance retail sales for January rose +0.4%, below the +0.8% survey, but up from +0.1% prior. Ex-autos, retail sale rose +0.7% compared to +0.5% prior and -0.2% prior.
Overseas news: After yesterday's close, Moody's downgraded the sovereign debt ratings of Italy, Portugal, Slovakia, Slovenia, and Malta by one notch, Spain by two notches, and changed the outlook on AAA-rated Austria, U.K., and France to negative. Today, Italy sold €6 billion of 2-, 3-, and 5-year bonds, the maximum amount targeted, with yields falling by as much as -140 basis points. In February, German economic expectations improved more than estimated and recorded the first positive reading since May 2011. In the fourth quarter, Portugal's GDP contracted slightly less than expected, falling -1.3% over the prior quarter compared to -1.5% estimates. Today, the Bank of Japan announced a surprise +$129 billion expansion to its asset purchase program. In January, India's inflation eased to the lowest level in more than two years and beating expectations.
Company news/ratings changes:
· BAC - downgraded to neutral at Citi, price target increased to $8.50 from $8.
4Q2011 Earnings. The fourth quarter's earnings reports have so far exceeded expectations. Of the 333 S&P500 companies that reported earnings to date, 70% (233 out of 333) 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 13.0x estimated 2012 earnings ($104.25) and 11.5x estimated 2013 earnings ($117.94), compared to 12.8x 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 -4.1%, and +0.1%, respectively. Analysts expect 2012 and 2013 earnings to exceed 2011 earnings ($94.97) by +9.8% and +24.2%, respectively.
Large-cap banks trade at a median 1.35x tangible book value, and 10.8x and 9.6x 2012and 2013 consensus earnings, respectively, compared to 1.34x tangible book value and 10.6x/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 bearish. Composite options markets are neutral, index options markets are bearish, and equity options markets are bearish. The composite put/call ratio closed at 0.87, compared to 1.08 the prior day and in between its 5- and 10-period moving averages of 0.88 and 0.85, respectively. The index put/call ratio closed at 1.48, compared to 1.47 the prior day, and above the 5- and 10-period moving averages of 1.31 and 1.25, respectively. The equity put/call ratio closed the day at 0.53, compared to 0.77 the prior day, below its 5- and 10-period moving averages of 0.61 and 0.60, 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. 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 close lower than a week earlier could signal the reversal's initiation, which could extend as low as 1170 on the SPX. If a reversal does not occur by the end of the month, the current trend will likely persist.
NYSE Indicators. Volume was the lightest this year, falling -9.06% to 682.65 million shares, 0.84x the 50-day moving average, from 750.64 million shares Friday. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by +1,607 (compared to -1,604 the prior day), or 3.23:1. Up volume led down volume by 3.34:1.
SPX. On lower volume and the lightest of the year, the SPX rose +9.13 points, or +0.68%, to 1351.77, the 19th straight close above 1300. Volume fell -9.57% to 509.47 million shares, down from 563.38 million shares Friday and below the 631.16 million share 50-day moving average. For the 36th consecutive day, the SPX closed above its 50-day moving average (1284.07) and remained above its 200-day moving average (1257.58) for the 33rd time in the past 34 sessions. The SPX closed above its 200-week moving average (1133.51) for the 88th straight session.
From its prior close at 1342.64, the SPX gapped higher to 1352, recouping its prior day's loss. Through 11:45, the index retraced to the 1346 level, setting the intra-day low. Momentum reversed through 2:40, and the index rallied to the intra-day high of 1353.35. A small sell-off in trading's final hour left the index just shy of its Thursday's close.
The SPX closed above all major moving averages, above 1200 for the 50th straight session and above 1300 for the 19th 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 37th straight session, the SPX closed (by +1.90%) above its 20-day moving average (1326.54). The index closed (by +5.27%)above its 50-day moving average for the 37th straight session. The index closed (by +8.56%) above its 100-day moving average (1245.24) for the 51st straight session. The SPX closed +7.49% above its 200-day moving average for the 32nd time in the past 34 sessions. The 200-day moving average fell. The directional momentum indicator was positive for the 37th straight session, and the trend is strong. Relative strength rose to 70.69 from 67.42, an overbought range. Next resistance is at 1355.73; next support is at 1345.44.
BKX. On higher volume, the KBW bank index rose +0.37 points, or 0.83%, to end at 44.90, its 28th straight close above 40. Volume rose +1.74% to 66.15 million shares, up from 65.02 million shares Friday but below the 77.50 million share 50-day average. The BKX closed +4.47% above its August 30, 2010, closing low of 42.98, the trough of the 2010's correction, and -22.52% and -19.29% 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 regional banks outperformed large-cap banks. From its prior close of 44.53, the BKX gapped higher at the open to 45.05 and set the intra-day low of 45.12 at 9:31. By 10:30, the index had retraced gains to the 44.90 level when a 12:30 sell-off dropped financials to the intra-day low of 44.73 at 12:40. Through 1:40, the index rallied back to 45.00 but met resistance. The index traded mostly sideways into the close, just shy of the 45.00 level, to finish in the middle of the day's positive 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 +37.90% from the 32.56 October 4th intra-day low compared to a +25.86% rebound in the SPX. However, the BKX is still -19.3% below its 2011 high, compared to the SPX which has corrected only -0.9%. Moving averages alignment is mixed, as the 20- and 50-day moving averages (43.75 and 41.33 respectively) moved above the 100-day moving average (39.48), and each average is rising. The 200-day moving average (42.14) 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 32nd time in the past 33 sessions, the 20-day closed (by +2.42 points) above the 50-day, but the gap contracted. The 50-day moving average closed (by -0.81 points) below the 200-day moving average for the 170th straight session, but the gap continues to narrow. The 100-day moving average closed (by -2.66 points) below the 200-day moving average for the 148th straight session, but the gap is narrowing. The BKX closed (by +2.63%) above its 20-day moving average for the 11th straight session. The index closed (by +8.65%) above its 50-day moving average for the 35th straight session. The index closed (by +13.72%) above the 100-day moving average for the 36th straight session. The index closed (by +6.55%) above its 200-day moving average for the 18th time in 19 sessions. The index closed below 50.0 for the 177th straight session but above 40.0 for the 29th straight session. The directional movement indicator was positive for the 34th consecutive session, and the trend is strong. Relative strength rose to 64.04 from 61.85, the high end of a neutral range. Next resistance is 45.10; next support at 44.71.