In Asia, equity markets closed mixed on lower volume. Commentary focused on details of the ECB's latest round of LTRO, which lent €529.5 billion to Eurozone banks. In Europe, stock exchanges are mixed, though the Euro Stock 50 enjoyed a "golden cross" of its 50-day moving average above its 200-day moving average. 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 1.934%, down from 1.943% the prior day. U.S. repo rates are at 12 bps.
The ECB's bank lending facilities are credited with easing 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 -0.62 points, March SPX equity futures are at 1372.80 up +2.02 points. The SPX opens at 1372.18,+0.12% above its May 2, 2011, multi-year 1370.50 intraday high, and +1.66% and +4.94% above its respective 20- and 50-day moving averages and +8.31% and +9.07% above its respective 100- and 200-day moving averages. Next resistance is at 1374.86. Next support is at 1367.74.
Tuesday. U.S. equities opened lower on disappointing durables goods reports, but rallied on strong consumer confidence and Richmond Fed manufacturing reports, leading the DJI to its first close above 13,000 since early May 2008 and the SPX at new multi-year highs. Volume remained muted at 0.96x the NYSE composite's 50-day moving average. Outside the economic reports, news flows remained thin, with focus on this morning's release of LTRO details. The Nasdaq rose +0.69%, followed by gains of +0.34% on the SPX and NYSE composite, and a +0.18% gain on the DJI. For a 23rd consecutive day, all indexes closed above their respective 20-, 50-, 100-, and 200-day moving averages. Market breadth was slightly positive. Volatility fell, with the VIX closing at 17.96, down -1.26% from 18.19 the prior day. The CBOE put/call skew remains elevated at 125.65, well above a neutral range.
Though equities closed higher, a mid-afternoon reversal threatened to pare or eliminate the morning's better performance. Once again, the TRAN seemed to blame as early gains were reversed and the Transports diverged markedly from the Industrial's better trade. From the prior day's 5,171.08 close, the TRAN traded to an mid-morning intraday high of 5,188.50, but traded mid-afternoon at a low of 5,142.08, before rallying modestly in the final two hours. The TRAN index closed at 5,165.19, down -0.11% on the day and -0.10% below its 50-day moving average.
From its prior close at 1367.59, the SPX moved down to a 1365.97 intraday low, but rallied through the 2 May 2011 1370.50 high to 1373 at mid-morning. Through early afternoon, the index found support at 1372, but as Transports weakened in early afternoon, profit taking pushed the index back to 1368-69 before a final hour rally pulled the SPX back to a modest gain. Most market segments closed higher. Leaders were technology, consumer services, and health care, which closed up at least +0.51%. Financials rose +0.23%. Laggards were industrials, oil and gas, and utilities, which fell at least -0.08%.
Trading desks reported another quiet session outside of a few specific stories. Buyers are accumulating shares. Short sellers remain absent. 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 1371 (the May 2nd 2011 intraday high), 1350 (20-day moving average), 1333 (-23.6% Fibonacci retrace of the rally since December 19th), 1308 (a -38.2% Fibonacci retrace), 1297 (the January 12th high), and 1293 (the October 27th high). Immediate resistance is 1375, then 1378, and 1385. Possible macro catalysts include the follow-on LTRO on February 29th of a €530 billion, today's Bernanke's semi-annual Congressional testimony, 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 mixed higher on lower volume, with better strength in Hong Kong. Commentary focused on improved U.S. and European business and consumer confidence and overnight LTRO developments in Europe. In Japan, the NKY closed up +0.01% on a -3.42% decrease in volume. In China, the HSI closed up +0.52% on a -3.53% decrease in volume. The SHCOMP closed down -0.20% on a -19.2% decrease in volume. The SHCOMP has closed higher for 9 consecutive sessions.
In Japan, the NKY closed at 9,723.24, up from 9,722.52 the prior day. The index rose at the open, and traded to an mid-session intraday high of 9,866.41 before weakening late in the session to erase most of the day's gains. The index closed +5.48% and +10.4% above its respective 20- and 50-day moving averages and at its best levels since last August, prior to the S&P downgrade of the U.S. credit rating. Market segments closed mixed. Leaders were utilities, consumer services, and technology, which closed up at least +0.40%. Financials lost -0.18%. Laggards were telecommunications, basic materials, and consumer goods, which closed at least -0.44% lower.
In China, the Hang Seng closed at 21,680.08, up from 21,568.73 at the prior close. The index opened at 21,640, but reversed immediately to an intraday low of 21,526 before reversing the reversal up to a mid-morning intraday high of 21,716.76. However, by mid-afternoon, the index sold back to breakeven, found support and rallied into the close. The index closed +2.74% and +9.25% above its respective 20- and 50-day moving averages. Its 20-day moving average is above its 20,290 200-day moving average. Most market segments closed higher. Leaders were utilities, consumer services, and telecommunications, which closed up at least +0.95%. Financials rose +0.51%. Laggards were basic materials, which closed up +0.05%, and consumer goods and industrials, which closed at least -0.19% lower. In Shanghai, the SHCOMP closed at 2,428.49, down from 2,451.86 at the prior close and the first decline in the prior 10 sessions. The SHCOMP opened lower and traded to a 2,430 at the end of the first hour. The index rallied back to breakeven late in the morning, but fell back on profit taking and closed just above the 2,426.62 intraday low. All market segments closed lower. Leaders were consumer goods, basic materials, and health care, which closed down at least -0.45%. Financials fell -1.06%. Laggards were industrials, technology, and telecommunications, which lost at least -1.52%.
In Europe, equity indexes are mixed. The Euro Stoxx 50 made its "golden cross" of its 50-day moving average (2,421.23) above its 200-day moving average (2,415.19). The Euro Stoxx 50 and DAX are up +0.49% and +0.53%, respectively, while the FTSE 100 is -0.03% lower. Compared to the prior day's 2,519.72 close, the Euro Stoxx 50 trades at 2,532.99, compared to an intraday high of 2,548.61. The index is +0.99% below and +4.85% above its respective 20- and 50-day moving averages. Most market segments are higher. Leaders are industrials, financials, and utilities, which are up at least +0.80%. Laggards are consumer services, technology, and telecommunications, which are down at least -0.08%.
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 0.4842550%, down from 0.48750% the prior day and down from the January 4th peak of 0.58250%.
- The US Libor-OIS (LOIS) spread rose to 37.43 from 37.15 bps the prior day, and compares to the recent January 6th high of 50.05 bps. Euribor-OIS rose to 63.80 bps from 63.55 bps the prior day and the December 27th high of 98.80 bps. A fall in the LOIS indicates a decreased intra-bank lending risk premium.
- The Euro 3-month basis swap improved to -67.000 from 69.1400 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 12 bps, down from an August 2nd high of 33 bps.
- U.S. Treasury yields are lower, with 2- and 10-year maturities yielding 0.285% and 1.934%, respectively, compared to 0.289% and 1.943% Tuesday. The yield curve narrowed to +1.649%, from +1.654% 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$78.210, compared to a US$78.095 intraday low and US$78.273 at the prior day's close, and mixed against its US$79.714 50-day, US$78.847 100-day, and US$77.123 200-day averages. The euro trades at US$1.3447, compared to an intraday high of US$1.3486, and compares to a close of US$1.3458 the prior day. The euro trades worse than its US$1.3065 50-day and US$1.3302 100-day averages. In Japan, the dollar trades at ¥80.43, compared to ¥80.46 the day prior. The yen trades worse than its 50-day moving average ¥77.74.
- Commodities prices are mixed, with higher energy, higher precious metals, mixed aluminum and copper, and mixed agriculture prices.
- The VIX ended at 17.96, down -1.26% from 18.19 at the prior close. The VIX is -2.77% below its 18.47 20-day moving average.
- The Euro Stoxx 50 volatility index (V2X) is down -3.73% to 22.83, compared to 23.72 at the prior day's close. The V2X index trades -8.62% below its 24.99 20-day moving average, -20.6% below the 28.76 30-day high, and +51.38% above the 22.52 30-day low.
- The Hang Seng volatility index (VHSI) closed at 21.21, down -3.72% from 22.03 the prior day. The VHSI index trades -6.43% below its 22.67 20-day moving average.
- CBOE skew fell -1.05% to 125.65 from 126.98 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:
- The latest week mortgage applications declined -0.3% compared to prior -4.5%.
- Revised 4Q2011 GDP was 3.0%, compared to 2.8% survey and prior.
- At 9:45, the Chicago February PMI is expected to be 61.0 compared to 60.2 prior.
- At 10:00 the NAPM-Milwaukee is expected to be 58.8 compared to 58.4 prior.
Overseas news: This morning, the European Central Bank allocated €529.5 billion at its second "Long Term Refinancing Operation" to 800 banks, up from the €489 billion borrowed by 523 banks at the first operation in December. In January, French consumer spending unexpectedly declined over the prior month, falling -0.4% compared to estimates for a +0.2% increase. In January, Japan industrial production increased more than expected, rising +2.0% over the prior month compared to +1.5% estimates. In the fourth quarter, India's GDP slowed to a +6.1% rate, below expectations for +6.3% and the slowest rate in more than 2 years.
Company news/ratings changes:
· GS, WFC - disclosed receiving Wells notices from the SEC over MBS sales disclosures.
4Q2011 Earnings. The fourth quarter's earnings reports have exceeded expectations. Of the 463 S&P500 companies that reported earnings to date, 67% (312 out of 463) 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 13.2x 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 10.9x and 9.6x 2012and 2013 consensus earnings, respectively, compared to 1.34x tangible book value and 10.8x/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 +45.5% 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 0.78, compared to 0.89 the prior day and below its 5- and 10-period moving averages of 0.93 and 0.91 respectively. The index put/call ratio closed at 1.11, compared to 1.30 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 0.56, compared to 0.63 the prior day, below its 5- and 10-period moving averages of 0.64 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 a reversal's initiation. A reversal might extend as low as 1170 on the SPX.
NYSE Indicators. Volume rose 3.04% to 754.69 million shares +0.96x the 50-day moving average, from 732.41 million shares Monday. Market breadth was modestly positive, and up volume led down volume. Advancing stocks led decliners by +36 (compared to -26 the prior day), or 1.02:1. Up volume led down volume by 1.19:1.
SPX. On higher volume, the SPX rose +4.59 points, or +0.34%, to 1372.18, the 29th straight close above 1300 and the highest close since the June 5, 2008. Volume rose +2.56% to 587.26 million shares, up from 572.60 million shares Monday but below the 619.23 million share 50-day moving average. For the 46th consecutive day, the SPX closed above its 50-day moving average (1307.53) and remained above its 200-day moving average (1258.10) for the 43rd time in the past 44 sessions. The SPX closed above its 200-week moving average (1133.31) for the 98th straight session.
From its prior close at 1367.59, the SPX opened flat, dropped to the intra-day low of 1365.97 at 9:45, then rallied through 11:30 to reach 1373. Through 1:30, the index traded sideways at 1372 when a sell-off dropped the SPX back close to the break-even level by 2:30. Through the close, the index rallied back to 1373, set the intra-day high of 1373.09 at 3:55, and closed at the high end of the day's mostly positive range.
The SPX closed above all major moving averages, above 1200 for the 60th straight session, above 1300 for the 29th 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 has 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 47th straight session, the SPX closed (by +1.66%) above its 20-day moving average (1349.82). The index closed (by +4.94%)above its 50-day moving average for the 47th straight session. The index closed (by +8.31%) above its 100-day moving average (1266.88) for the 61st straight session. The SPX closed +9.07% above its 200-day moving average for the 42nd time in the past 43 sessions. All moving averages rose. The directional momentum indicator was positive for the 47th straight session, and the trend is strong. Relative strength rose to 72.64 from 70.87, an oversold range. Next resistance is at 1374.86; next support is at 1367.74.
BKX. On lower volume, the KBW bank index rose +0.26 points, or +0.57%, to end at 45.56, its 38th straight close above 40. Volume fell -28.08% to 61.86 million shares, down from 86.01 million shares Monday and below the 76.83 million share 50-day average. The BKX closed +6.00% above its August 30, 2010, closing low of 42.98, the trough of the 2010's correction, and -21.38% and -18.10% 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 large-cap banks' gains outperformed regional banks' losses. From its prior close of 45.30, the BKX opened flat, but fell to the intra-day low of 45.10 at 9:45. Momentum reversed sharply, and the BKX rallied through 12:00, reaching the intra-day high of 45.67. The index traded mostly sideways through the close and finished at the high end of the day's range.
Technical indicators are turning positive. On a percentage basis, bank stocks have outperformed the broader market's rebound from the October lows, rising +39.93% from the 32.56 October 4th intra-day low compared to a +27.76% rebound in the SPX. However, the BKX is still -18.1% below its 2011 high, compared to the SPX which is now +0.63% above 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 the 100-day moving average (40.43) is still below the 200-day moving average (41.84), though the 20-day (44.69) is above all moving averages and the 50-day (42.62) is above the 100- and 200-day moving averages. For the 42nd time in the past 43 sessions, the 20-day closed (by +2.07 points) above the 50-day, but the gap contracted. The 50-day moving average closed (by +0.78 points) above the 200-day moving average for the sixth straight session. The 100-day moving average closed (by -1.41 points) below the 200-day moving average for the 158th straight session, but the gap is narrowing. The BKX closed +1.95% above its 20-day moving average for the 21st straight session. The index closed (by +6.90%) above its 50-day moving average for the 45th straight session. The index closed (by +12.68%) above the 100-day moving average for the 46th straight session. The index closed (by +8.89%) above its 200-day moving average for the 28th time in 29 sessions. The index closed below 50.0 for the 187th straight session but above 40.0 for the 39th straight session. The directional movement indicator was positive for the 44th consecutive session, and the trend is moderate. Relative strength rose to 61.31 from 59.71, a neutral range. Next resistance is 45.79; next support at 45.22.