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U.S. Futures Up Small As Activity Focuses On Bond Sell-Off

|Includes: Capital One Financial Corporation (COF), LAZ
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 positive. All major indices are above their respective 20-, 50-, 100-, and 200-day moving averages. The SPX is in bull market territory, closing Tuesday up +29.7% above the 1074.77 October 4th intraday low. Financial stocks have outperformed, up 47.8% in the same period.

In Asia, equity markets closed mixed, with greater strength in Japan, where the yen continues to weaken. Chinese markets closed mixed, with greater weakness in Shanghai, where commentary focused on speculation that Chinese authorities may take steps to curb property prices. In Europe, stock exchanges are mixed, with modest weakness in the United Kingdom. The dollar is mixed against the euro, pound, and Japanese yen. U.S. options markets suggest a neutral short-term outlook. Commodities prices are mixed. U.S. Treasury yields are higher, with the 10-year at 2.314%, up from 2.269% the prior day. U.S. repo rates are at 18 bps.

The ECB's bank LTRO 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 fell to its best level since early August and less than half its worst level of late December.

After a fair value adjustment of -0.02 points, June SPX equity futures are at 1391.10, up +2.42 points. The SPX opens at 1394.28, just off yesterday's new multi-year 1399.42 intraday high, and +2.07% and +4.42% above its respective 20- and 50-day moving averages, and +8.39% and +10.6% above its respective 100- and 200-day moving averages. Next resistance is at 1399.14. First support is at 1389.69.

Wednesday. Equity markets closed mixed, with the DJI and Nasdaq adding +0.13% and +0.03%, respectively, while the SPX and NYSE composite lost -0.12% and -0.68%, respectively. Market breadth was negative. NYSE volume fell -5.94% to 1.07x the 50-day moving average. Most market segments closed lower. The leaders were technology, which rose +0.73%, and health care and financials, which closed at least -0.02% lower. Laggards were basic materials, oil and gas, and utilities, which closed off at least -0.49%.

Technical factors are positive. All major exchanges closed above their respective 20-, 50-, 100-, and 200-day moving averages. Volatility rose +3.45%, but remains low with the VIX closing at 15.31, up from 14.80 the prior day. The CBOE put/call skew fell another -3.31% to 118.82, down from 122.89 the prior session and back within a neutral range. DJ transports fell -1.41%, underperforming the DJI, and closing at 5180.39, down from 5254.50 the prior day, and +0.33% above its 20-day moving average, but -0.58% below its 50-day moving average. The TRAN remains -3.51% below its recent peak of 5,368.93 on February 3rd and has not confirmed subsequent DJI new highs.

From its prior 1395.95 close, the SPX opened higher and rose in early trading to its 1399.42 intraday high. Unable to move through 1400, the index sold off modestly to 1394 through mid-day, then rallied after the European close at 12:30 back to 1398. Weakness returned through most of the afternoon. In the final hour, the SPX successfully tested support at 1390 and rallied to close with a modest loss.

Trading desks reported disappointment that the SPX couldn't fight through resistance at 1400 and noted the reemergence of several divergences. Small caps and transports underperformed, but mostly, activity diminished after Tuesday's late day surge. Short selling remains subdued. Focus has turned to bond markets, where the long Treasuries sold off hard, but without the expected benefit of sharply higher equity prices.

Immediate support is 1390, then 1366 (the 20-day moving average), followed by 1354 (a -23.6% Fibonacci retracement, 1335 (50-day moving average), 1327 (a -38.2% Fibonacci retrace), and then 1297 (the January 12th high), and 1293 (the October 27th high). Immediate resistance is 1399, followed by 1404 and 1413.


The distribution day count is 3 on the DJI, 4 on the SPX and Nasdaq, and 5 on the NYSE composite. The BKX count is 6.

In Asia, equity markets closed mixed, with greater strength in Japan. Volumes were also mixed. Commentary focused on the weakening yen and speculation that Chinese authorities will impose curbs on property prices. In Japan, the NKY closed up +0.72% on a +5.65% increase in volume. In China, the HSI closed up +0.21% on a -31.4% decrease in volume. The SHCOMP closed down -0.73% on a -33.4% decrease in volume.

In Japan, the NKY closed at 10,123.28, up from 10,050.52 the prior day. The index gapped higher to test resistance at 10,150 in early trading. Profit taking took the index back to support at 10,080 in late morning. The index rallied again through mid-afternoon, to the 10,158.74 intraday high, but sold off again in the final hour. The index closed +4.70% and +11.1% above its respective 20- and 50-day moving averages. Most market segments closed higher. Leaders were technology, consumer goods, and telecommunications, which added at least 1.21%. Laggards were industrials and consumer services, which rose at least +0.32%, and financials, which closed off -0.09%.

In China, the Hang Seng closed at 21,353.53, up from 21,307.89 at the prior close. The index opened slightly higher but dropped in mid-morning trading to the 21,162.17 intraday low, then rebounded back to breakeven at mid-day, retested support at 21,200 in early afternoon, then reversed and rallied to the late session 21,368.48 intraday high. The index closed +0.28% and +4.29% above its 20- and 50-day moving averages. Market segments closed mixed. Leaders were technology, telecommunications, and industrials, which rose at least +0.46%. Financials rose +0.19%. Laggards were consumer services, utilities, which lost at least -0.31%. In Shanghai, the SHCOMP closed at 2,373.77, down from 2,391.23 at the prior close. The SHCOMP traded higher in early trading, testing resistance unsuccessfully with a 2,403.43 intraday high, then reversing back to 2375 by mid-morning. The index rallied back to breakeven at mid-day, but reversed lower to a mid-afternoon intraday low of 2,366.15. A subsequent late rally failed, and the index closed with a moderate loss. Most market segments closed lower. Leaders were health care and oil and gas, which gained at least +0.42%, and technology, which lost -0.65%. Financials closed off -0.67%. Laggards were basic materials, industrials, and telecommunications, which closed off at least -1.33%.

In Europe, equities are mixed and off their intraday highs. Commentary focuses on Fitch's action to lower the United Kingdom's sovereign debt outlook to negative, based on its structural budget deficit and indebtedness "significantly above" the AAA median. The Euro Stoxx 50 and DAX are up +0.16% and +0.30%, respectively, while the FTSE 100 is off -0.08%. All are above their respective 20-day, 50-day, 100-, and 200-day moving averages. Compared to the prior day's 2,574.79 close, the Euro Stoxx 50 trades at 2,578.94, compared to the 2,588.95 intraday high. The index is +2.33% and +4.68% above its respective 20- and 50-day moving averages. Most market segments are higher. Leaders are industrials, technology, and utilities, which are up at least +0.49%. Financials are up +0.28%. Laggards are oil and gas, consumer goods, and consumer services, which are down at least -0.15%.

Libor, LOIS, Currencies, Treasuries, Commodities:
 

  • USD LIBOR rose to 0.14670%, up from 0.14370% the prior day, but down from the December 30th 0.15400% high. USD 3-month LIBOR is 0.47365%, unchanged from 0.47375% the prior day and down from the January 4th peak of 0.58250%.
  • The US Libor-OIS (LOIS) spread fell to 33.97 bps, from 34.07 bps the prior day, and compares to the recent January 6th high of 50.05 bps. Euribor-OIS fell to 50.80 bps from 51.75 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 -59.50 bps, up from -60.125 bps the prior day, at their best levels since August 1st, and up from a trough of -147.00 bps on December 14th.
  • The U.S. government overnight repo rate is 18 bps, compared to an August 2nd high of 33 bps.
  • U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.386% and 2.281%, respectively, compared to 0.386% and 2.269% Wednesday. The yield curve widened to +1.895%, from +1.882% 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 +2.77% on April 8, 2011.
  • The U.S. dollar is mixed against the euro, British pound, and Japanese yen. The dollar trades at US$80.378, compared to a US$80.361 intraday low and US$80.565 at the prior day's close, and worse compared to its US$79.635 50-day, US$79.209 100-day, and US$77.419 200-day averages. The euro trades at US$1.3065, compared to an intraday high of US$1.3069 and compares to a close of US$1.3032 the prior day. The euro trades better than its US$1.3101 50-day, but worse than its US$1.3222 100-day averages. In Japan, the dollar trades at ¥83.30, compared to ¥83.26 the day prior. The yen trades worse than its 50-day moving average ¥78.77.
  • Commodities prices are mixed, with mixed energy, higher precious metals, lower aluminum and copper, and higher agriculture prices.

Volatility, Skew:
  • The VIX ended at 15.31, up +3.45% from 14.80 at the prior close. The VIX is -14.1% below its 17.83 20-day moving average.
  • The Euro Stoxx 50 volatility index (V2X) is down -5.71% to 19.92, compared to 21.12 at the prior day's close. The V2X index trades -17.3% below its 24.07 20-day moving average, -31.5% below the 29.07 30-day high, and +3.39% above the 19.26 30-day low.
  • The Hang Seng volatility index (VHSI) closed at 20.27, down -4.48% from 21.22 the prior day. The VHSI index trades -8.88% below its 22.25 20-day moving average.
  • CBOE skew fell -3.31% to 118.82 from 122.89 at the prior day's close, and 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.

U.S. news and economic reporting:

· March empire manufacturing was 20.2, compared to 17.50 survey and 19.53 prior.

· Producer prices rose 0.4%, compared to 0.5% survey and +0.1% prior.

· Initial jobless claims were 351K in the latest week, compared to 357K survey and 362K prior.

· Continuing claims were 3343K, compared to 3405K survey and 3424K revised prior.

· At 10:00 the March Philadelphia Fed report, with survey at 12.0 and prior at 10.2.

Overseas News. Today, Fitch downgraded the U.K's long term outlook to negative citing the country's structural deficit size and indebtedness relative to other AAA-rated sovereigns. In the fourth quarter of 2011, Spain's home prices fell -4.2% over the prior quarter, indicating the property market has yet to bottom. Today, Spain sold €3 billion of 4- and 7-year bonds with yields declining -38 and -64 basis points, respectively, from the prior auctions. In February, foreign direct investment into China fell -0.9% over the prior month, the fourth straight monthly decline.

Company News.

· COF - pursuant to the terms of its prior HSBC card portfolio acquisition, COF announced a $1.25 billion secondary today likely to be priced in the high $51 range.

· LAZ - downgraded to sell at BofA/ML, $26 price target

4Q2011 Earnings. The fourth quarter's earnings reports have so far exceeded expectations. Of the 473 S&P500 companies that reported earnings to date, 68% (319 out of 473) 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 +4.9% over the prior year. Though challenged in the current operating environment, 73% of companies reported increased revenues over the prior year and 56% 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 13.4x estimated 2012 earnings ($104.29) and 11.8x estimated 2013 earnings ($117.94), compared to 13.4x and 11.8 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 -4.0%, and +0.1%, respectively. Analysts expect 2012 and 2013 earnings to exceed 2011 earnings ($94.97) by +9.9% and +24.2%, respectively.

Large-cap banks trade at a median 1.38x tangible book value, and 11.6x and 9.7x 2012and 2013 consensus earnings, respectively, compared to 1.40x tangible book value and 11.4x/9.7x 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 $4.30 per share, compared to $4.30 and $2.96 in 2011 and 2010, a +0.1% and +45.4% 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 0.82, compared to 0.85 the prior day and below its 5- and 10-period moving averages of 0.91 and 0.94 respectively. The index put/call ratio closed at 1.09, compared to 1.12 the prior day, and below the 5- and 10-period moving averages of 1.24 and 1.29, respectively. The equity put/call ratio closed the day at 0.59, compared to 0.61 the prior day, below its 5- and 10-period moving averages of 0.63 and 0.66, respectively.

Price Exhaustion/Trend Reversal. On a daily timeframe, technical price exhaustion metrics show the SPX and S&P futures began reaching potential upward price exhaustion levels as early as January 18th, the first such signals since April, and repeatedly through February with the most recent reading on February 21st. 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 March 14th. March 5th's close was below the lowest close in the previous four days and recorded a new four-day, intra-session low, a pattern which may have signaled a reversal's initiation. A reversal could extend as low as 1170 on the SPX but more likely would be confined to a -11% decline.

NYSE Indicators. Volume fell -5.94% to 853.21 million shares, 1.07x the 50-day moving average, from 907.12 million shares Tuesday. Market breadth was negative, and up volume lagged down volume. Advancing stocks lagged decliners by -1,436 (compared to +1,813 the prior day), or 0.36:1. Up volume lagged down volume by 0.60:1.

SPX. On higher volume, the SPX fell -1.67 points, or -0.12%, to 1394.28, the 40th straight close above 1300. Volume rose +0.89% to 678.61 million shares, up from 672.61 million shares Tuesday and above the 619.65 million share 50-day moving average. For the 57th consecutive day, the SPX closed above its 50-day moving average (1335.27) and remained above its 200-day moving average (1260.31) for the 53rd time in the past 54 sessions. The SPX closed above its 200-week moving average (1132.93) for the 108th straight session.

From its prior close at 1395.95, the SPX opened flat and rallied to an intra-day high of 1399.42 by 10:20. The index retraced back into the red by 11:00 and found support at 1394. A rally at 12:30 lifted the index back to positive territory and to the 1398 level by 1:30, but momentum reversed and the index fell to the intra-day low of 1389.97 at 3:20. A closing bell rebound left the index in the middle of the day's mixed range and with a small loss.

The SPX closed above 1200 for the 72nd straight session and above 1300 for the 40th 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 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 fifth straight session, the SPX closed (by +2.07%) above its 20-day moving average. The index closed (by +4.42%)above its 50-day moving average for the 58th straight session. The index closed (by +8.39%) above its 100-day moving average (1286.30) for the 72nd straight session. The SPX closed +10.63% above its 200-day moving average for the 53rd time in the past 54 sessions. All moving averages increased. The directional momentum indicator is positive for the fifth straight session, and the trend is strong but declining. Relative strength fell to 68.63 from 69.73, the high end of a neutral range. Next resistance is at 1399.14; next support is at 1389.69.

BKX. On higher volume, the KBW bank index rose +0.62 points, or +1.31%, to 48.11, its 49th straight close above 40 and its highest close since July 25, 2011. Volume rose +22.47% to 142.27 million shares, up from 116.17 million shares Tuesday, above the 78.78 million share 50-day average, and the highest volume since November 30, 2011. The BKX closed +11.94% above its August 30, 2010, closing low of 42.98, the trough of the 2010's correction, but -16.98% and -13.52% 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 large-cap banks' gains outperformed regional banks' losses. From its prior close of 47.49, the BKX opened higher to 47.70, retraced to break-even by 9:35, and rallied to 48.20 by 10:20. Momentum reversed, and the index retraced into negative territory, setting the intra-day low of 47.30 at 11:20. Through 1:25, the index rallied to the intra-day high of 48.30. A sell-off to 47.70 through 2:20 was bought, and the index closed near the top end of the day's mostly positive range.

Technical indicators are positive. On a percentage basis, bank stocks have outperformed the broader market's rebound from the October lows, rising +47.76% from the 32.56 October 4th intra-day low compared to a +29.82% rebound in the SPX. However, the BKX is still -13.5% below its 2011 high, compared to the SPX which is +2.3% 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 (41.34) is still below the 200-day moving average (41.62), though a bullish cross should occur next week. The 20-day (45.39) is above all moving averages and the 50-day (44.15) is above the 100- and 200-day moving averages. For the 53rd time in the past 54 sessions, the 20-day closed (by +1.25 points) above the 50-day, and the gap expanded. The 50-day moving average closed (by +2.52 points) above the 200-day moving average for the 17th straight session, and the gap widened. The 100-day moving average closed (by -0.28 points) below the 200-day moving average for the 169th straight session, but the gap is narrowing. The BKX closed +5.98% above its 20-day moving average for the fifth straight session. The index closed (by +8.98%) above its 50-day moving average for the 56th straight session. The index closed (by +16.37%) above the 100-day moving average for the 57th straight session. The index closed (by +15.58%) above its 200-day moving average for the 39th time in 40 sessions. The index closed below 50.0 for the 198th straight session but above 40.0 for the 50th straight session. The directional movement indicator is positive for the fourth straight session, and the trend is moderate. Relative strength rose to 68.59 from 66.19, the high end of a neutral range. Next resistance is 48.51; next support at 47.51.