In Asia, equities closed mixed, with strong gains in Tokyo and Hong Kong, but modest losses in Shanghai. The NKY has recovered its losses after last year's March 11th tsunami. In Europe, stock exchanges are mixed. The dollar is mixed. U.S. options markets suggest a neutral short-term outlook. Commodities prices are mostly higher. U.S. Treasury yields are mixed, with the 10-year at 2.243%, down from 2.248% the prior day. U.S. repo rates are at 21 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 have stabilized in recent weeks. The 3-month Euro basis swap is at its best level since early August and a third of its worst level of late December.
After a fair value adjustment of -4.24 points, June SPX equity futures are at 1412.90, up +2.04 points. The SPX opens at 1416.51, +2.38% and +4.58% above its respective 20- and 50-day moving averages, and +9.08% and +12.0% above its respective 100- and 200-day moving averages. Next resistance is at 1423.02. First support is at 1403.55.
Monday. Equity markets opened higher and rallied through the session to close at the day's highs. Commentary attributed the gains largely to Bernanke's early morning speech before the National Association of Business Economics (NABE). Eurozone talk of "firewall" expansion also was supportive. The Nasdaq and SPX closed at new yearly highs. The Nasdaq rose +1.78%, followed by the SPX, NYSE composite, and DJI, which gained +1.39%, +1.33%, and +1.23%, respectively. NYSE volume rose +1.79% to 0.93x the 50-day moving average. Market breadth was positive. Treasuries weakened modestly. All segments closed up at least +0.55%. Leaders were health care, technology, and financials, which closed up at least +1.61%. Laggards were consumer goods, utilities, and telecommunications.
DJ transports outperformed the industrials, rising +1.36% to close at 5289.02, up from 5217.82 the prior day, but -1.49% off its 5,368.93 February 3rd closing high. The index closed +1.48% and +0.94% above its respective 20- and 50-day moving averages. The TRAN has not confirmed multiple DJI new highs subsequent to February 3rd. The DJI closed -0.08% below its recent high.
Technical indicators are generally positive. All major exchanges closed above their respective 20-, 50-, 100-, and 200-day moving averages. Volatility fell -3.78%, and the VIX closed at 14.26, down from 14.82 the prior day. The CBOE put/call skew fell to 118.02, down from 122.98 the prior session, and back within a neutral range.
Bernanke's remarks began at 8:00 and set a positive tone for the day, despite middling to poor economic reports. His remarks were not so dovish as to ensure a QE3 (Philadelphia Fed Governor Plosser's subsequent interview threw cold water on that idea), only that any further deterioration in labor markets would likely cause the Fed to ease further. From its prior 1397.11 close, the SPX opened above 1405, traded to 1410 by early afternoon, and strengthened into the close. Economic reports were mostly negative, with declines in the Chicago and Dallas Fed activity indexes and also in February pending home sales. Equities rallied regardless.
Trading desks reported that the rally came as a surprise, with most expecting a flattish session moving into quarter end, but forced to cover or chase prices higher instead. Sentiment remains skeptical, more confused than bullish. Some expect clearer direction Monday, with the beginning of 2Q2012. Volumes remained short of 50-day moving averages.
Immediate support is 1404, then 1384 (the 20-day moving average), 1372 (the February high), 1366 (a -23.6% Fibonacci retracement from December 19th), 1354 (50-day moving average), 1336 (a -38.2% Fibonacci retrace), and then 1297 (the January 12th high), and 1293 (the October 27th high). Immediate resistance is 1423, followed by 1429 and 1449.
In Asia, equity indexes rose strongly in Tokyo and Hong Kong, but fell modestly in Shanghai. Volumes rose. Commentary focused on Bernanke's comments and the unexpected gain in German business confidence yesterday. In Japan, the NKY closed up +2.36% and set a new yearly high. Volume rose +27.3%. In China, the HSI closed up +1.83% on a +6.84% increase in volume. The SHCOMP closed down -0.15% on a +9.83% increase in volume. In 2012, the indexes are up +21.3%, +14.2%, and +6.72%, respectively.
In Japan, the NKY closed at 10,255.15, down from 10,018.24 at the prior close. The NKY closed at its best level since last year's tsunami. The index gapped to open above 10,150, and rallied through the session to close at its highs. The index closed +3.77% and +9.75% above its respective 20- and 50-day moving averages. All market segments closed at least +1.34% higher. Leaders were financials, consumer goods, and utilities, which closed up at least +2.61%. Laggards were technology, telecommunications, and health care.
In China, the Hang Seng closed at 21,046.91, up from 20,668.86 at the prior close. The index closed -2.92% below its recent February 29th high. The index also gapped higher to open above 20,900 and strengthened through the session to end at its intraday high. Volatility declined -8.93%. The HSI closed -0.35% below its 20-day moving average, but +1.08% above its 50-day moving average. All market segments closed at least +0.18% higher. Leaders were financials, basic materials, and oil and gas, which closed up at least +1.53%. Laggards were utilities, consumer goods, and consumer services.
In Shanghai, the SHCOMP closed at 2,347.18, down from 2,350.60 at the prior close. The SHCOMP closed -5.13% below its recent March 14th high. The SHCOMP traded higher through the morning, to a mid-morning 2,363.48 intraday high, but sold off through the afternoon, finally finding support at 2,345 late in the session. The index closed -2.56% and -0.57% below its 20- and 50-day moving averages. Most market segments closed lower. Leaders were basic materials, telecommunications, and financials, which closed up at least +0.07%. Laggards were consumer services, health care, and consumer goods, which fell at least -0.43%.
In Europe, equities are off their best levels and are mixed mid-day. News flows are light. Sovereign debt yields are slightly higher after auctions in Spain and Italy. The Euro Stoxx 50, FTSE 100, and DAX are up +0.34%, -0.03%, and +0.56%, respectively. The FTSE 100 trades below both its 20- and 50-day moving averages. The DAX remains above its 20-, 50-, 100-, and 200-day moving averages. Compared to the prior day's 2,539.87 close, the Euro Stoxx 50 trades at 2,551.84, compared to the 2,543.73 intraday low. The index is +0.49% and +2.00% above its respective 20- and 50-day moving averages. Most market segments are higher. Leaders are financials, utilities, and consumer goods, which are up at least +0.81%. Laggards are technology and telecommunications, which are up at least +0.19%, and oil and gas, which is down -1.89%.
Libor, LOIS, Currencies, Treasuries, Commodities:
- USD LIBOR rose to 0.15300%, unchanged from 0.15300% the prior day, up from a low of 0.13850% on March 1st, but down from the December 30th 0.15400% high. USD 3-month LIBOR is 0.47065%, down from 0.47265% the prior day, but down from the January 4th peak of 0.58250%.
- The US Libor-OIS (LOIS) spread rose to 34.07 bps, from 34.01 bps the prior day, and compares to the recent January 6th high of 50.05 bps. Euribor-OIS fell to 43.45 bps from 43.75 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 is -50.250 bps, up from -52.000 bps the prior day, at their best levels since August 1st, and up from a trough of -147.00 bps on December 14th. A normal range is between 25 bps and 50 bps.
- The U.S. government overnight repo rate is 21 bps, compared to an August 2nd high of 33 bps.
- U.S. Treasury yields are mixed, with 2- and 10-year maturities yielding 0.344% and 2.243%, respectively, compared to 0.344% and 2.248% Monday. The yield curve narrowed to +1.899%, from +1.904% 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, slightly stronger against the Japanese yen, but weaker compared to the euro and British pound. The dollar trades at US$78.927, compared to a US$78.770 intraday low and US$78.982 the prior day, and mixed compared to its US$79.358 50-day, US$79.437 100-day, and US$77.599 200-day averages. The euro trades at US$1.3351, compared to an intraday low of US$1.3327 and compares to a close of US$1.3359 the prior day. The euro trades better than its US$1.3185 50-day and $1.3176 100-day averages. In Japan, the dollar trades at ¥82.81, compared to ¥82.82 the day prior. The yen trades worse than its 50-day moving average ¥79.76.
- Commodities prices are mixed, with mixed energy, higher precious metals, aluminum and copper, and higher agriculture prices.
- The VIX ended at 14.26, down -3.78% from 14.82 at the prior close. The VIX is -13.6% below its 16.50 20-day moving average.
- The Euro Stoxx 50 volatility index (V2X) is up +0.60% to 21.47, compared to 21.34 at the prior day's close. The V2X index trades -4.12% below its 22.39 20-day moving average, -26.2% below the 29.07 30-day high, and +24.4% above the 17.26 30-day low.
- The Hang Seng volatility index (VHSI) closed at 18.72, down -8.93% from 21.02 the prior day. The VHSI index trades -11.8% below its 21.40 20-day moving average.
- CBOE skew fell -4.03% to 118.02 from 122.98 at the prior day's close, well above a neutral (115-120) range. Spikes in excess of 130 (as on March 12, 15, and 16) correlate well with short-term market tops. 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:
· At 9:00, the January CaseShiller home price index is expect to fall -0.30% after a -0.50% fall in December.
· At 10:00, March consumer confidence is expected at 70.1, down from 70.8 the prior month.
· The Richmond Fed manufacturing index is expected to fall to 18, from 20 in February.
Overseas News. Today, Spain sold €2.6 billion of 3- and 6-month bills, with yields rising on the 6-months bills to +0.84% from +0.76% at last month's auction. Today, Italy sold €2.8 billion of 2-year bonds at +2.35%, down from 3.01% a month ago but under lighter demand. In March, German consumer confidence fell slightly to 5.9, down from 6.0 in February and below estimates for no change. In March, French consumer confidence rose to 87, up from 82 in February and above estimates for no change. In the January-February period, Chinese industrial company profits fell -5.2% over the prior year's period, the first such year-over-year contraction since 2009.
· BAC - downgraded to neutral at RW Baird, $10 price target
· USB - downgraded to neutral at ISI Group
4Q2011 Earnings. The fourth quarter's earnings reports have so far exceeded expectations. Of the 489 S&P500 companies that reported earnings to date, 67% (330 out of 489) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat EPS expectations by an average of +3.3% (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 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 13.6x estimated 2012 earnings ($104.34) and 12.0x 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 1.44x tangible book value, and 11.9x and 10.1x 2012and 2013 consensus earnings, respectively, compared to 1.43x tangible book value and 11.7x/10.0x 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 +0.6% and +46.1% 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 1.01, compared to 1.04 the prior day and above its 5- and 10-period moving averages of 1.00 and 0.89 respectively. The index put/call ratio closed at 1.41, compared to 1.55 the prior day, in between the 5- and 10-period moving averages of 1.47 and 1.31, respectively. The equity put/call ratio closed the day at 0.65, compared to 0.62 the prior day, above its 5- and 10-period moving averages of 0.61 and 0.58, 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 on both indices. March 26st on the SPX and March 16th and 21st on the BKX. 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 indicators coming on March 26th, 15th and 14th.
NYSE Indicators. Volume rose +1.79% to 754.89 million shares, 0.93x the 50-day moving average, from 741.64 million Friday. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by +1,565 (compared to +1,262 the prior day), or 3.12:1. Up volume led down volume by 5.71:1.
SPX. On lower volume, the SPX rose +19.40 points, or +1.39%, to 1416.51, the 48th straight close above 1300, but the sixth close above 1400 in the last eight sessions and the highest level since May 19, 2008. Volume fell -2.31% to 557.10 million shares, down from 570.28 million shares Friday and below the 628.70 million share 50-day moving average. For the 65th consecutive day, the SPX closed above its 50-day moving average (1354.42) and remained above its 200-day moving average (1264.41) for the 61st time in the past 62 sessions. The SPX closed above its 200-week moving average (1133.15) for the 116th straight session.
From its prior close at 1397.11, the SPX opened higher to 1405, immediately setting the intra-day low, and rose to the 1411 level by 10:15. The index traded sideways through 1:30 when a rally took hold that lasted through the close. The index set the intra-day high one minute prior to the bell.
Technical indicators are positive. The SPX closed above 1200 for the 80th straight session, above 1300 for the 48th session, and above 1400 for the sixth time in the past eight sessions. The 50-day moving average crossed above the 100-day moving average on December 6th, having been below that average since July 11th, and climbed above the 200-day moving average on January 31st, having been below that average since August 11th. The 100-day moving average crossed above the 200-day moving average February 23rd, having been below that average since September 7, 2011. All moving averages are increasing. For the 13th straight session, the SPX closed (by +2.38%) above its 20-day moving average (1383.57). The index closed (by +4.58%)above its 50-day moving average for the 66th straight session. The index closed (by +9.08%) above its 100-day moving average (1298.59) for the 80th straight session. The SPX closed +12.03% above its 200-day moving average for the 61st time in the past 62 sessions. The directional momentum indicator is positive for the 13th straight session, and the trend is strong and stable. Relative strength rose to 69.42 from 62.52, a neutral range. Next resistance is at 1423.02; next support is at 1403.55.
BKX. On lower volume, the KBW bank index rose +0.73 points, or +1.47%, to 50.26, its 54th straight close above 40, its second close above 50 in the last five sessions, and the highest level since May 19, 2011. Volume fell -16.79% to 69.11 million shares, down from 83.06 million shares Friday and below the 83.19 million share 50-day average. The BKX closed +16.94% above its August 30, 2010, closing low of 42.98, the trough of the 2010's correction, but -13.27% and -9.65% 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 49.53, the BKX opened higher to 49.70 before falling to the break-even line at 9:45 and setting the intra-day low of 49.51. By 10:10, the index rebounded back to 49.90 and traded sideways at 49.80 through 2:30. A sharp five minute rally at 2:45 took the index to 50.10 by 2:50, and the index rallied further into the bell to finish at the intra-day high.
Technical indicators are positive. On a percentage basis, bank stocks have outperformed the broader market's rebound from the October lows, rising +54.36% from the 32.56 October 4th intra-day low compared to a +31.89% rebound in the SPX. However, the BKX is still -9.7% below its 2011 high, compared to the SPX which is +3.9% above its 2011 peak. Moving average alignment is fully bullish, as shorter term moving averages are above longer term moving averages and are increasing more rapidly. On February 22nd, the 50-day moving average crossed above the 200-day moving average for the first time since June 15th. On March 20th, the 100-day moving average crossed above the 200-day moving average for the first time since July 18th, 2011. For the 61st time in the past 62 sessions, the 20-day closed (by +1.92 points) above the 50-day, and the gap expanded. The 50-day moving average closed (by +3.66 points) above the 200-day moving average for the 24th straight session, and the gap widened. The 100-day moving average closed (by +0.42 points) above the 200-day moving average for the sixth straight session, and the gap widened. The BKX closed +6.28% above its 20-day moving average for the 13th straight session. The index closed (by +10.77%) above its 50-day moving average for the 64th straight session. The index closed (by +19.30%) above the 100-day moving average for the 65th straight session. The index closed (by +20.50%) above its 200-day moving average for the 47th time in 48 sessions. The index closed above 40.0 for the 58th straight session. The directional movement indicator is positive for the 12th straight session, and the trend is moderate and stable. Relative strength rose to 70.22 from 67.30, the high end of a neutral range. Next resistance is 50.51; next support at 49.76.