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U.S. Futures Flat After Durable Goods Disappoint

|Includes: Bank of America Corporation (BAC)
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 Wednesday up +27.2% above the 1074.77 October 4th intraday low.

In Asia, equity markets closed higher on mixed volume. Commentary focused on movements in the yen. In Europe, stock exchanges are moderately higher after the German parliament's approval of the Greek aid package. The dollar is modestly weaker against other major currencies. U.S. options markets suggest a neutral short-term outlook. Commodities prices are mixed. U.S. Treasury yields are lower, with the 10-year at 1.919%, down from 1.926% 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 and Euribor-OIS spreads are trending lower. The 3-month Euro basis swap remains near its best levels since early August and less than half its worst level of late December.

After a fair value adjustment of -1.31 points, March SPX equity futures are at 1367.50, up +1.51 points. The SPX opens at 1367.59, -0.21% below its May 2, 2011, multi-year 1370.50 intraday high, but +1.54% and +4.85% above its respective 20- and 50-day moving averages and +8.16% and +8.71% above its respective 100- and 200-day moving averages. Next resistance is at 1374.71. Next support is at 1357.69.

Monday. U.S. equities fought off an early, sharp sell-off and closed modestly mixed on light volume. Volume was 0.92x the NYSE composite's 50-day moving average. News flows were thin, with much of the focus on the German parliamentary vote on Greece, but pending home sales beat survey and at 10:00, Dallas Fed manufacturing activity surprised positively, which may have motivated yesterday's reversal. Probably the greater factor was commodity price weakness, especially in energy, and the TRAN index rebounded from Friday's sharp sell-off, rising +0.62% on the day, moving back above its 50-day moving average. Late in the day, BAC received a favorable court ruling, which supported the financials. The SPX rose +0.14%, followed by the Nasdaq's +0.08% gain, but the DJI and NYSE composite closed off -0.01% and -0.10%, respectively. For a 22nd consecutive day, all indexes closed above their respective 20-, 50-, 100-, and 200-day moving averages. Market breadth was slightly negative. Volatility rose, with the VIX closing at 18.19, up +5.08% from 17.31 the prior day. The CBOE put/call skew remains elevated at 126.92, well above a neutral range.

From its prior close at 1365.74, the SPX gapped lower and fell immediately to the 1354.92 intraday low, where the index found support and began to strengthen. Markets steadily rebounded, and the SPX reversed to positive shortly after 11:00, then trended slightly higher to an intraday high of 1371.94, slightly above the May 2, 2011 high. Like the DJI, which traded above 13,000 through most of the afternoon to close at 12,981.51, the SPX finds resistance at these levels. Most market segments closed higher. Leaders were financials, consumer services, and technology, which rose +0.09%. Laggards were industrials, utilities, and oil and gas, which fell at least -0.046%.

Trading desks took note of the buying on weakness. Short sellers remain absent. After an active open, activity was muted. 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 1329 (-23.6% Fibonacci retrace of the rally since December 19th), 1347 (20-day moving average), 1297 (the January 12th high), 1293 (the October 27th high), and 1306 (a -38.2% Fibonacci retrace). Immediate resistance is 1370.58, the May 2nd 2011 intraday high and SPX multi-year high point, then 1375. 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.


There was no change in the distribution day count of 3 on the NYSE composite, 2 on the SPX, DJI, and Nasdaq. The BKX count is 4.

In Asia, equity markets closed higher on mixed volume, with better strength in Hong Kong. Commentary focused on moves in the Japanese yen and the past 3-month rally in Chinese equities, where short-term moving averages are breaking above long-term moving averages. In Japan, the NKY closed up +0.92% on a +4.74% increase in volume. In China, the HSI closed up +1.65% on a +0.21% increase in volume. The SHCOMP closed up +0.20% on a -25.0% decrease in volume. The SHCOMP has closed higher for 9 consecutive sessions.

In Japan, the NKY closed at 9,722.52, up from 9,633.93 the prior day. In response to a stronger yen, the index initially traded to an mid-morning intraday low of 9,528.77, but reversed by mid-afternoon and rallied to close at the intraday high. The index closed +6.00% and +10.7% above its respective 20- and 50-day moving averages and at near its best levels since last August, prior to the S&P downgrade of the U.S. credit rating. Most market segments closed higher. Leaders were telecommunications, consumer services, and financials, which closed up at least +1.40%. Laggards were technology, up +0.34%, and basic materials and oil and gas, which closed at least -0.05% lower.

In China, the Hang Seng closed at 21,568.73, up from 21,217.86 at the prior close. The index opened at 21,300, but traded sideways through mid-day, when the index rallied strongly and rose to a late session 21,583.07 intraday high. The index closed +2.50% and +9.01% above its respective 20- and 50-day moving averages. Its 20-day moving average is above its 20,298 200-day moving average. All market segments closed at least +0.85% higher. Leaders were oil and gas, consumer goods, and industrials, which closed up at least +2.22%. Laggards were basic materials, financials, and telecommunications. In Shanghai, the SHCOMP closed at 2,451.86, up from 2,447.06 at the prior close. The SHCOMP opened slightly lower and traded within a ±10 point range through late afternoon. A late rally preserved the 9-day consecutive winning streak. Most market segments closed higher. Leaders were utilities, financials, and oil and gas, which closed up at least +0.32%. Laggards were technology, consumer services and health care, which closed down -0.51%.

In Europe, equity indexes are moderately higher. The Euro Stoxx 50 appears poised tomorrow to make a "golden cross" of its 50-day moving average above its 200-day moving average. The Euro Stoxx 50, FTSE 100, and DAX are up +0.45%, +0.19%, and +0.52%, respectively. Compared to the prior day's 2,513.06 close, the Euro Stoxx 50 trades at 2,523.70, compared to an intraday high of 2,531.32. The index is +0.76% below and +4.67% above its respective 20- and 50-day moving averages. Most market segments are higher. Leaders are utilities, consumer services and industrials, which are up at least +0.77%. Financials are up +0.40%. Laggards are oil and gas and telecommunications, which are up at least +0.01%, and health care, which is down -0.18%.

Libor, LOIS, Currencies, Treasuries, Commodities:

  • USD LIBOR is 0.13900%, unchanged from 0.13900% the prior day, but down from the December 30th 0.15400% high. USD 3-month LIBOR is 0.48750%, down from 0.48910% the prior day and down from the January 4th peak of 0.58250%.
  • The US Libor-OIS (LOIS) spread fell to 36.87 from 37.01 bps the prior day, and compares to the recent January 6th high of 50.05 bps. Euribor-OIS fell to 63.85 bps from 64.75 bps the prior day and the December 27th high of 98.80 bps. This is its best reading since August 31st. A fall in the LOIS indicates a decreased intra-bank lending risk premium.
  • The Euro 3-month basis swap improved to -67.000 from 68.125 the prior day, back at levels of early August 2011 and up from a trough of -147.00 bps on December 14th.
  • The U.S. government overnight repo rate is 14 bps, down from an August 2nd high of 33 bps.
  • U.S. Treasury yields are lower, with 2- and 10-year maturities yielding 0.281% and 1.919%, respectively, compared to 0.285% and 1.926% Monday. The yield curve narrowed to +1.637%, from +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 +2.83% on March 8, 2011.
  • The U.S. dollar is slightly weaker against the euro, British pound, and Japanese yen. The dollar trades at US$78.344, compared to a US$78.287 intraday low and US$78.568 at the prior day's close, and mixed against its US$79.751 50-day, US$78.836 100-day, and US$77.112 200-day averages. The euro trades at US$1.3448, compared to an intraday low of US$1.3391, and compares to a close of US$1.3398 the prior day. The euro trades worse than its US$1.3057 50-day and US$1.3305 100-day averages. In Japan, the dollar trades at ¥80.45, compared to ¥80.60 the day prior. The yen trades worse than its 50-day moving average ¥77.69.
  • Commodities prices are mixed, with lower energy, higher precious metals, aluminum and copper, and higher agriculture prices.

Volatility, Skew:
  • The VIX ended at 18.19, up +5.08% from 17.31 at the prior close. The VIX is -1.90% below its 18.54 20-day moving average.
  • The Euro Stoxx 50 volatility index (V2X) is down -2.16% to 23.70, compared to 24.22 at the prior day's close. The V2X index trades -5.64% below its 25.12 20-day moving average, -17.9% below the 28.85 30-day high, and +5.22% above the 22.52 30-day low.
  • The Hang Seng volatility index (VHSI) closed at 22.03, down -4.59% from 23.09 the prior day. The VHSI index trades -3.15% below its 22.75 20-day moving average.
  • CBOE skew fell -1.35% to 126.98 from 128.72 at the prior day's close, but 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 8:30, January durable goods orders fell -4.0%, compared to survey -1.0% and prior +3.0%. Ex-transportation, durables fell -3.2%, compared to survey 0.0% and +2.1% prior.
  • At 10:00, February consumer confidence, with survey at 63.0 compared to 61.1 prior.
  • Richmond Fed manufacturing index for February, with survey at 14 compared to 12 prior.
Overseas news: Last evening, Standard & Poor's downgraded Greece to CC, or "Selective Default." As a result of S&P's downgrade, the European Central Bank said Greek bonds could no longer be used as collateral for liquidity tenders. Today, Italy sold €6.25 billion of 7- and 10-year bonds with rates falling -80 and -60 basis points over the January auctions and with the 10-year yield reaching 5.5%, the lowest since September. In February, Eurozone business confidence rose more than expected and increased for the second straight month.

Company news/ratings changes:

· None.

4Q2011 Earnings. The fourth quarter's earnings reports have so far exceeded expectations. Of the 451 S&P500 companies that reported earnings to date, 67% (304 out of 451) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat EPS expectations by an average of +3.1% (versus a historical average of +2%). EPS is up +5.1% 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 ($104.15) and 11.6x estimated 2013 earnings ($117.94), compared to 13.1x and 11.6 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 10.8x and 9.6x 2012and 2013 consensus earnings, respectively, compared to 1.34x tangible book value and 10.7x/9.5x 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 +45.5% 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 0.89, compared to 1.09 the prior day and below its 5- and 10-period moving averages of 0.94 and 0.92 respectively. The index put/call ratio closed at 1.30, compared to 1.63 the prior day, and below the 5- and 10-period moving averages of 1.31 and 1.37, respectively. The equity put/call ratio closed the day at 0.63, compared to 0.70 the prior day, in between its 5- and 10-period moving averages of 0.65 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 14.3% to 732.41 million shares, +0.92x the 50-day moving average, from 640.97 million shares Friday. Market breadth was modestly negative, though up volume led down volume. Advancing stocks lagged decliners by -26 (compared to +272 the prior day), or 0.98:1. Up volume led down volume by 1.21:1.

SPX. On higher volume, the SPX rose +1.85 points, or +0.14%, to 1367.59, the 28th straight close above 1300 and the highest close since the June 5, 2008. Volume rose +21.29% to 572.60 million shares, up from 472.09 million shares Friday but below the 621.46 million share 50-day moving average. For the 45th consecutive day, the SPX closed above its 50-day moving average (1304.32) and remained above its 200-day moving average (1257.98) for the 42nd time in the past 43 sessions. The SPX closed above its 200-week moving average (1133.35) for the 97th straight session.

From its prior close at 1365.74, the SPX gapped lower at the open to 1360 and quickly fell to the intra-day low of 1354.92 at 9:45. Finding support, the index began a rally at 9:45 that retook the break-even line by 11:15 and reached 1371 by 12:50. The index traded around the 1370 level through the close and set the intra-day high of 1371.94 at 3:05. A small sell-off at the bell closed the index shy of 1370 but still at the high end of the day's negatively skewed range and with a small gain.

The SPX closed above all major moving averages, above 1200 for the 59th straight session, above 1300 for the 28th session, and at the highest level since June 2008. 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 46th straight session, the SPX closed (by +1.54%) above its 20-day moving average (1346.87). The index closed (by +4.85%)above its 50-day moving average for the 46th straight session. The index closed (by +8.16%) above its 100-day moving average (1264.40) for the 60th straight session. The SPX closed +8.71% above its 200-day moving average for the 41st time in the past 42 sessions. All moving averages rose. The directional momentum indicator was positive for the 46th straight session, and the trend is strong. Relative strength rose to 70.87 from 70.15, an oversold range. Next resistance is at 1374.71; next support is at 1357.69.

BKX. On higher volume, the KBW bank index rose +0.60 points, or +1.34%, to end at 45.30, its 37th straight close above 40. Volume rose +97.61% to 86.01 million shares, up from 44.70 million shares Friday and above the 77.23 million share 50-day average. The BKX closed +5.40% above its August 30, 2010, closing low of 42.98, the trough of the 2010's correction, and -21.83% and -18.57% 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 large-cap banks outperformed regional banks. From its prior close of 44.70, the BKX gapped lower to 44.40 and set the intra-day low of 44.24 at 9:40. Like the broader market and perhaps leading it, the BKX rallied through 12:50, retaking its break-even line earlier than the SPX at 10:45, and reaching 45.25 at 12:50. The index traded mostly sideways through 3:00 but took a small step higher into the close. The index set the intra-day high of 45.40 at 3:50 and closed at the top end of the day's mixed range.

Technical indicators are turning positive. On a percentage basis, bank stocks have outperformed the broader market's rebound from the October lows, rising +39.13% from the 32.56 October 4th intra-day low compared to a +27.34% rebound in the SPX. However, the BKX is still -18.6% below its 2011 high, compared to the SPX which reclaimed its 2011 peak on February 24th. 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 the 100-day moving average (40.33) is still below the 200-day moving average (41.87), though the 20-day (44.53) is above all moving averages and the 50-day (42.46) is above the 100- and 200-day moving averages. For the 41st time in the past 42 sessions, the 20-day closed (by +2.07 points) above the 50-day, but the gap contracted. The 50-day moving average closed (by +0.59 points) above the 200-day moving average for the fifth straight session. The 100-day moving average closed (by -1.54 points) below the 200-day moving average for the 157th straight session, but the gap is narrowing. The BKX closed +1.73% above its 20-day moving average for the 20th straight session. The index closed (by +6.69%) above its 50-day moving average for the 44th straight session. The index closed (by +12.33%) above the 100-day moving average for the 45th straight session. The index closed (by +8.20%) above its 200-day moving average for the 27th time in 28 sessions. The index closed below 50.0 for the 186th straight session but above 40.0 for the 38th straight session. The directional movement indicator was positive for the 43rd consecutive session, and the trend is moderate. Relative strength rose to 59.71 from 55.81, a neutral range. Next resistance is 45.72; next support at 44.56.