In Asia, equity markets closed higher on better volume. Commentary focused on U.S. economic reports, prospective easing of monetary policy and property restrictions, and improving equity index technicals, where 20- and 25-day moving averages have crossed above the 200-day moving average. In Europe, stock exchanges are higher, but off their best levels of the day. The dollar is modestly weaker against the euro and pound, but better against the yen. U.S. options markets suggest a neutral short-term outlook. Commodities prices are mixed. U.S. Treasury yields are slightly lower at the long end of the curve, with the 10-year at 1.995%, down from 1.997% 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 and Euribor-OIS spreads are trending lower. In the past two days, the 3-month Euro basis swap has risen consecutively, but remains near its best levels since early August and less than half its worst level of late December.
After a fair value adjustment of -1.34 points, March SPX equity futures are at 1365.40, up +3.84 points. The SPX opens at 1357.66, -0.51% below its May 2, 2011, multi-year 1370.50 intraday high, but +1.60% and +4.97% above its respective 20- and 50-day moving averages and +8.26% and +8.40% above its respective 100- and 200-day moving averages. Next resistance is at 1367.71. Next support is at 1355.75.
Thursday. U.S. equities reversed early losses and ended moderately higher on slightly improved volume. News flows were few, but U.S. employment developments continue to suggest improving economic growth. NYSE volumes were 0.95x the 50-day moving average. The Nasdaq rose +0.81%, followed by the NYSE composite, SPX, and DJI, which rose +0.52%, 0.43%, and +0.36%, respectively. For a 20th consecutive day, all indexes closed above their respective 20-, 50-, 100-, and 200-day moving averages. Market breadth was positive. Volatility declined markedly, with the VIX closing at 16.80, down -7.64% and at its lowest levels since early July. The CBOE put/call skew remains elevated at 127.81, well above a neutral range and at levels often coincident with market tops.
From its prior close at 1357.66, the SPX opened lower, falling within the first quarter hour to an intraday low of 1352.28 before rebounding by 11:00 back to better than 1360. The index traded sideways through most of the afternoon, but found support at 1359 and strengthened after 1:30 to a late session 1364.24 intraday high. Market segments closed mostly higher. Leaders were financials, telecommunications, and consumer services, which rose at least +0.51%. Laggards were industrials and health care, which rose at least +0.01%, and utilities, which lost -0.14%. Notably, the Dow transportation index (TRAN) reversed intraday losses and rose for the first time in four sessions, closing back above its 50-day moving average. The TRAN is -2.21% below its 20-day moving average.
Trading desks reported another subdued day, with activity levels ascribed to Monday's holiday. Some profit taking was noted, but also that selling pressures are light and many investors remain sidelined in front of next week's news heavy agenda. Corporate earnings remain reasonably strong through the 4Q2011 earnings season. Guidance is more mixed. While momentum continues to the upside, debates as to the market's "fatigue" or "exhaustion" remain active and unresolved.
Important support levels include 1326 (-23.6% Fibonacci retrace of the rally since December 19th), 1342 (20-day moving average), 1297 (the January 12th high), 1293 (the October 27th high), and 1303 (a -38.2% Fibonacci retrace). Immediate resistance is 1367, then 1370.58, the May 2nd 2011 intraday high and SPX multi-year high point. Possible macro catalysts include the follow-on LTRO on February 29th of an estimated €500 billion, Bernanke's semi-annual Congressional testimony on the same day, a scheduled EU leaders' summit on March 1-2, February U.S. economic data (PMIs on March 1st and jobs report on March 9th), the next ECB meeting on March 8th, the FOMC on March 13th, and U.S. bank stress tests by March 15th.
In Asia, equity markets closed higher on increased volume. Commentary focused on prospective further easing of monetary policy and in China, easing of property restrictions. In Japan, the NKY closed up +0.54% on a +0.06% increase in volume. In China, the HSI closed up +0.12% on a +23.1% increase in volume. The SHCOMP closed up +1.25% on a +21.3% increase in volume. The SHCOMP has closed higher for 7 consecutive sessions.
In Japan, the NKY closed at 9,647.38, up from 9,595.57 the prior day. The index initially traded lower, but found support at the 9,580 level, then reversed and traded to 9,635 at mid-morning, before trading back to just above breakeven at mid-day. The index strengthened through the afternoon session to end at the intraday high. The index closed +6.13% and +10.3% above its respective 20- and 50-day moving averages and at its best level since last August, prior to the S&P downgrade of the U.S. credit rating. Most market segments closed higher. Leaders were oil and gas, financials, and technology, which closed up at least +0.97%. Laggards were health care, utilities, and telecommunications, which closed at least -0.38% lower.
In China, the Hang Seng closed at 21,406.86, up from 21,380.99 at the prior close. Most of the activity was in the first hour, when the index spiked to an early session intraday high of 21,468.93, then reversed to a mid-morning intraday low of 21,292.40 before recovering to par and meandering through the session's remainder. The index closed +2.21% and 8.74% above its respective 20- and 50-day moving averages, and its 20-day moving average has now crossed above its 200-day moving average. Market segments closed mixed. Leaders were consumer goods, utilities, and industrials, which closed up at least +0.47%. Financials rose +0.12%. Laggards were consumer services, basic materials, and oil and gas, which closed down at least -0.49%. In Shanghai, the SHCOMP closed at 2,439.63, up from 2,409.55 at the prior close. The SHCOMP traded narrowly through the morning session, but strengthened through the afternoon to end at the intraday high. All market segments closed higher. Leaders were industrials, consumer services, and basic materials, which rose at least +1.36%. Laggards were utilities, technology, and telecommunications, which rose at least +0.58%.
In Europe, equity indexes are moderately higher. The DAX is notable in that the 50-day moving average crossed above its 200-day moving average this week, following the FTSE 100's early February golden cross. The Euro Stoxx 50 appears poised to follow the DAX next week. The Euro Stoxx 50, FTSE 100, and DAX are up +0.52%, +0.15%, and +0.78%, respectively. Compared to the prior day's 2,508.08 close, the Euro Stoxx 50 trades at 2,522.31, compared to an intraday high of 2,531.68 and intraday low of 2,512.26. The index is +1.17% and +5.21% above its respective 20- and 50-day moving averages. Most market segments are higher. Leaders are technology, financials, and telecommunications, which are up at least +0.79%. Laggards are basic materials, which is up +0.20%, and health care and consumer goods, which are down at least -0.05%.
Libor, LOIS, Currencies, Treasuries, Commodities:
- USD LIBOR declined to 0.13850%, down from 0.13950% the prior day, and down from the December 30th 0.15400% high. USD 3-month LIBOR is 0.49060%, unchanged from 0.49060% the prior day and down from the January 4th peak of 0.58250%.
- The US Libor-OIS (LOIS) spread fell to 37.41 from 37.26 bps the prior day, and compares to the recent January 6th high of 50.05 bps. Euribor-OIS fell to 65.85 bps from 66.40 bps the prior day and December 27th high of 98.80 bps. This is its best reading since August 17th. A fall in the LOIS indicates a decreased intra-bank lending risk premium.
- The Euro 3-month basis swap worsened to -72.00 from -71.13 bps the prior day, marking the first 2 consecutive day fall in several weeks, but still 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 7 bps, down from an August 2nd high of 33 bps.
- U.S. Treasury yields are slightly lower, with 2- and 10-year maturities yielding 0.297% and 1.995%, respectively, compared to 0.301% and 1.997% Thursday. The yield curve widened to +1.698%, from +1.696% 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 +2.83% on March 8, 2011.
- The U.S. dollar is mixed, slightly weaker against the euro and British pound, but stronger compared to the Japanese yen. The dollar trades at US$78.482, compared to a US$78.476 intraday low and US$78.819 at the prior day's close, and mixed against its US$79.818 50-day, US$78.819 100-day, and US$77.088 200-day averages. The euro trades at US$1.3420, compared to an intraday high of US$1.3425, and compares to a close of US$1.3373 the prior day. The euro trades worse than its US$1.3041 50-day and US$1.3309 100-day averages. In Japan, the dollar trades at ¥80.54, compared to ¥80.00 the day prior. The yen trades worse than its 50-day moving average ¥77.58.
- Commodities prices are mixed, with mixed energy, mixed precious metals, lower aluminum and copper, and lower agriculture prices.
- The VIX ended at 16.80, down -7.64% from 18.19 at the prior close. The VIX is -9.79% below its 18.62 20-day moving average.
- The Euro Stoxx 50 volatility index (V2X) is down -4.75% to 22.71, compared to 23.84 at the prior day's close. The V2X index trades -10.4% below its 25.34 20-day moving average, -23.8% below the 29.79 30-day high, and +0.50% above the 22.60 30-day low.
- The Hang Seng volatility index (VHSI) closed at 21.52, down -5.99% from 23.84 the prior day. The VHSI index trades -5.87% below its 22.86 20-day moving average.
- CBOE skew rose +0.09% to 127.81 from 127.70 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:
- The Kansas City Fed manufacturing activity index rose to 13 in February, compared to survey 9 and 7 prior.
- At 9:55, the final February University of Michigan confidence report is expected to rise to 73.0 from prior 72.5.
- At 10:00, new home sales for January are expected to be 315K, up from 307K prior.
Overseas news: Today, Italy sold €3 billion of 2-year debt with yields falling -70 basis points compared to January's auction while demand increased. In February, Italy's retail sales fell more than estimates, declining -1.1% over January compared to -0.5% expectations. In February, French consumer confidence came in-line with consensus, rising to 82 from 81 in January. In January, China's Leading Economic Indicator index gained +1.6% over December's level.
Company news/ratings changes:
· European Banks - cut to underweight at Barclays
· European Banks - raised to overweight at BofA/ML
4Q2011 Earnings. The fourth quarter's earnings reports have so far exceeded expectations. Of the 435 S&P500 companies that reported earnings to date, 68% (296 out of 435) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat EPS expectations by an average of +2.5% (versus a historical average of +2%). EPS is up +5.3% 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 13.1x estimated 2012 earnings ($104.40) and 11.6x estimated 2013 earnings ($117.94), compared to 13.0x and 11.5 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 -4.2%, and +0.1%, respectively. Analysts expect 2012 and 2013 earnings to exceed 2011 earnings ($94.97) by +9.7% and +24.2%, respectively.
Large-cap banks trade at a median 1.34x tangible book value, and 10.7x and 9.6x 2012and 2013 consensus earnings, respectively, compared to 1.35x tangible book value and 10.6x/9.5x 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 +45.5% increase, respectively.
Options. Options markets are neutral. Composite options markets are neutral, index options markets are neutral, and equity options markets are neutral. The composite put/call ratio closed at 0.98, compared to 0.89 the prior day and above its 5- and 10-period moving averages of 0.87 and 0.92 respectively. The index put/call ratio closed at 1.36, compared to 1.20 the prior day, and above the 5- and 10-period moving averages of 1.27 and 1.33, respectively. The equity put/call ratio closed the day at 0.67, compared to 0.63 the prior day, above its 5- and 10-period moving averages of 0.61 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, and again on February 9th and 21st. 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 and February with the most recent indicator coming on February 17th. A close below the lowest close in the previous four day period combined with a new four-day, intra-session low could signal the reversal's initiation. A reversal might 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 rose +4.67% to 763.09 million shares, 0.95x the 50-day moving average, from 729.05 million shares, Wednesday. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by ++1,314 (compared to -652 the prior day), or 2.55:1. Up volume led down volume by 2.36:1.
SPX. On slightly higher volume, the SPX rose +5.80 points, or +0.43%, to 1363.46, the 26th straight close above 1300 and the highest close since the 2011 high from April 29th. Volume rose +0.80% to 568.61 million shares, up from 564.10 million shares Wednesday but below the 627.50 million share 50-day moving average. For the 43rd consecutive day, the SPX closed above its 50-day moving average (1298.90) and remained above its 200-day moving average (1257.81) for the 40th time in the past 41 sessions. The SPX closed above its 200-week moving average (1133.43) for the 95th straight session.
From its prior close at 1357.66, the SPX opened flat at 1357 and traded down to 1352.28 by 9:45, setting the intra-day low. Through 11:15, the index reversed and rallied back to positive territory and reached 1362. The index traded in a narrow 1360 to 1364 range through the close, and set the intra-day high of 1364.24 at 3:56. The SPX closed at the high end of the day's mixed range and just shy of the 2011 closing high of 1363.61.
The SPX closed above all major moving averages, above 1200 for the 57th straight session and above 1300 for the 26th 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 44th straight session, the SPX closed (by +1.60%) above its 20-day moving average (1341.94). The index closed (by +4.97%)above its 50-day moving average for the 44th straight session. The index closed (by +8.26%) above its 100-day moving average (1259.38) for the 58th straight session. The SPX closed +8.40% above its 200-day moving average for the 39th time in the past 40 sessions. All moving averages rose. The directional momentum indicator was positive for the 44th straight session, and the trend is strong. Relative strength rose to 69.29 from 67.0, the highest end of a neutral range. Next resistance is at 1367.71; next support is at 1355.75.
BKX. On lower volume, the KBW bank index rose +0.49 points, or +1.10%, to end at 45.10, its 35th straight close above 40. Volume fell -10.49% to 57.22 million shares, down from 63.92 million shares Wednesday and below the 77.64 million share 50-day average. The BKX closed +4.93% above its August 30, 2010, closing low of 42.98, the trough of the 2010's correction, and -22.17% and -18.93% 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 best performing sector, and regional banks outperformed large-cap banks. From its prior close of 44.61, the BKX opened flat at 44.60 and fell to the intra-day low of 44.41 at 9:45. Through 12:35, the index rallied, crossing into positive territory at 10:05 and reaching the intra-day high of 45.166 at 12:35. The index traded mostly flat into the close, finishing at the high end of the day's mostly positive range but failing to make a new 2012 high.
Technical indicators are turning positive. On a percentage basis, bank stocks have outperformed the broader market's rebound from the October lows, rising +38.51% from the 32.56 October 4th intra-day low compared to a +26.95% rebound in the SPX. However, the BKX is still -18.9% below its 2011 high, compared to the SPX which is nearly back at its 2011 peak. ON February 22nd, the 50-day moving average crossed above the 200-day moving average for the first time in 176 sessions, or since June 15th. Moving average alignment remains mixed, as 100-day moving average (40.12) is still below the 200-day moving average (41.92), though the 20-day (44.30) is above all moving averages and the 50-day (42.17) is above the 100- and 200-day moving averages. In a bullish sign, all moving averages are rising. For the 39th time in the past 40 sessions, the 20-day closed (by +2.13 points) above the 50-day, but the gap contracted. The 50-day moving average closed (by +0.25 points) above the 200-day moving average for the second straight session. The 100-day moving average closed (by -1.80 points) below the 200-day moving average for the 155th straight session, but the gap is narrowing. The BKX closed +1.80% above its 20-day moving average for the 18th straight session. The index closed (by +6.94%) above its 50-day moving average for the 42nd straight session. The index closed (by +12.42%) above the 100-day moving average for the 43rd straight session. The index closed (by +7.58%) above its 200-day moving average for the 25th time in 26 sessions. The index closed below 50.0 for the 184th straight session but above 40.0 for the 36th straight session. The directional movement indicator was positive for the 41st consecutive session, and the trend is strong. Relative strength rose to 59.37 from 56.19, a neutral range. Next resistance is 45.37; next support at 44.62.