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U.S. Futures Follow Asia, Europe Sharply Lower

This morning. The U.S. equity market uptrend is under pressure. 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. Most technical indicators remain positive, but recent market distributions suggest growing resistance and greater probability of a market pull-back or correction. All major indices are above their respective 20-, 50-, 100-, and 200-day moving averages. All moving averages are trending higher. Shorter-term averages are above longer term averages. The SPX is in bull market territory, closing Thursday up +31.5% above the 1074.77 October 4th intraday low. Financial stocks have outperformed, up +53.3% in the same period.

In Asia, Chinese equity were closed for holiday, but in Tokyo, equities suffered their worst loss in several months. Commentary focused on yesterday's Fed minutes, which suggest that the Fed will allow its current "operation twist" to expire at the end of June. In Europe, stock exchanges are also experiencing losses in excess of -1%, in reaction to the Fed minutes, but also to a weak Spanish note auction and disappointing February German factory orders. French elections are scheduled for April 22nd, with a May 6th run-off, as required. Also, Greek parliamentary elections are on May 6th. The dollar is mixed. U.S. options markets suggest a neutral short-term outlook. Commodities prices are lower. U.S. Treasury yields are lower, with the 10-year at 2.263%, down from 2.299% 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 have stabilized in recent weeks. The 3-month Euro basis swap is near its best level since early August and a third of its worst level of late December.

After a fair value adjustment of -0.22 points, June SPX equity futures are at 1397.80, down -10.78 points. The SPX opens at 1413.38, +1.16% and +3.40% above its respective 20- and 50-day moving averages, and +8.05% and +11.4% above its respective 100- and 200-day moving averages. Next resistance is at 1420.05. First support is at 1405.67.

Tuesday. Markets opened lower, but traded narrowly through mid-afternoon, when the release of the most recent Fed minutes spurred a sharp, but brief sell-off that quickly reversed and was largely erased by the close. Volume rose +7.05% to 1.01x the 50-day moving average. The Nasdaq closed down only -0.20%, avoiding a distribution day. The NYSE composite, DJI, and SPX closed off -0.78%, -0.56%, and -0.40%, respectively. Market breadth was negative. Most market segments closed lower. Leaders were utilities and health care, which closed up at least +0.01%, and telecommunications, which lost -0.10%. Financials lost -0.56%. Laggards were industrials, oil and gas, and basic materials, which lost at least -0.61%.

DJ transports outperformed the industrials, falling -0.20% to close at 5294.83, from 5305.50 the prior day, and -1.38% off its 5368.93 February 3rd closing high. The index closed +0.84% and +0.95% 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 -0.49% below its recent April 2nd high.

Technical indicators are generally positive. All major exchanges closed above their respective 20-, 50-, 100-, and 200-day moving averages. Volatility rose slightly, as the VIX closed at 15.66, up +0.13% from 15.64 the prior day. The CBOE put/call skew rose +0.58% to 123.84, from 123.13 the prior session, and above a 115-120 neutral range.

Trading desks reported a generally quiet day with activity skewed toward short-term traders. Selling pressure after the 2:00 release of Fed minutes lacked much follow-through. Demand for equities is middling, but there's little for sale. Conviction remains lacking. Sentiment remains skeptical ahead of the start of 1Q2012 earnings next week.

Immediate support is 1406, 1397 (the 20-day moving average), 1372 (the February high), 1370 (a -23.6% Fibonacci retracement from December 19th), 1367 (50-day moving average), 1340 (a -38.2% Fibonacci retrace), and then 1297 (the January 12th high), and 1293 (the October 27th high). Immediate resistance is 1419 (the April high), followed by 1420, 1427, and 1441.

The distribution day counts rose to 5 on the DJI and SPX, and 8 on the NYSE composite. The Nasdaq count was unchanged at 3. The BKX count rose to 6.

In Asia, equity markets were closed in Hong Kong and China. In Tokyo, the NKY sold off -2.29% on increased volume, suffering a strong distribution. The index closed below 10,000 for the first time since March 13th. Volume rose 31.5%. Commentary focused on yesterday's Fed minutes, which suggest that the Fed's quantitative easing will end this June with the expiration of QE2 "operation twist".

In Japan, the NKY closed at 9,819.99, down from 10,050.39 at the prior close. The index opened near the prior day's close and briefly traded slightly higher. Finding resistance, the NKY sold off sharply at mid-morning and the downward trend persisted through the close, which also set the intraday low. The index closed -1.89% and +3.06% below its respective 20- and 50-day moving averages. All market segments closed at least -1.13% lower. Leaders were oil and gas, telecommunications, and health care. Laggards were technology, financials, and consumer services, which closed down at least -2.40%.

In Europe, equities are struggling for a 2nd consecutive day. Equities gapped lower, but appear to have found support at mid-session after declines in excess of -1.0%. Commentary focuses on the fiscal situation in Spain, where today's debt sale was poorly received. Also, in Germany, factory orders disappointed, increasing, but less than forecast. The Euro Stoxx 50, FTSE 100, and DAX are down -1.16%, -1.17%, and -1.75%, respectively. All trade below their respective 20-day moving averages. The Euro Stoxx 50 and FTSE 100 also trade below their 50-day moving averages. Compared to the prior day's 2,458.98 close, the Euro Stoxx 50 trades at 2,430.69, compared to the 2,423.34 intraday low. The index is -1.15% and -3.93% below its respective 20- and 50-day moving averages. All market segments are at least -0.26% lower. Leaders are telecommunications, health care, and oil and gas. Financials are down -1.21%. Laggards are consumer goods, basic materials, and industrials, which are down at least -1.60%.

Libor, LOIS, Currencies, Treasuries, Commodities:
 

  • USD LIBOR is 0.15100%, unchanged from 0.15100% 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 0.46915%, unchanged from 0.46915% the prior day, and down from the January 4th peak of 0.58250%.
  • The US Libor-OIS (LOIS) spread is 32.92 bps, up from 32.87 bps the prior day, but compares to the recent January 6th high of 50.05 bps. Euribor-OIS is 41.00 bps, unchanged from 41.00 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 -50.375 bps, down from -50.000 bps the prior day, near its best levels since August 1st, and up from a trough of -147.00 bps on December 14th. A normal range is between -10 bps and -40 bps.
  • The U.S. government overnight repo rate is 18 bps, compared to an August 2nd high of 33 bps.
  • U.S. Treasury yields are mixed, with 2- and 10-year maturities yielding 0.345% and 2.234%, respectively, compared to 0.368% and 2.299% Tuesday. The yield curve narrowed to +1.889%, from +1.930% 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, better compared to the euro and British pound, but worse compared to the Japanese yen. The dollar trades at US$79.657, compared to a US$79.673 intraday high and US$79.483 the prior day, and mixed compared to its US$79.260 50-day, US$79.531 100-day, and US$77.721 200-day averages. The euro trades at US$1.3145, compared to an intraday low of US$1.3145 and a close of US$1.3233 the prior day. The euro trades worse than its US$1.3219 50-day and $1.3157 100-day averages. In Japan, the dollar trades at ¥82.29, compared to ¥82.81 the day prior. The yen trades worse than its 50-day moving average ¥80.41.
  • Commodities prices are lower, with lower energy, precious metals, aluminum and copper, and agriculture prices.


Volatility, Skew:
 

  • The VIX ended at 15.66, up +0.13% from 15.64 at the prior close. The VIX is -0.10% below its 15.68 20-day moving average. The Euro Stoxx 50 volatility index (V2X) is up +9.54% to 24.40, compared to 22.27 at the prior day's close. The V2X index trades +11.1% above its 21.96 20-day moving average, -16.1% below the 29.07 30-day high, and +41.3% above the 17.26 30-day low.
  • The Hang Seng volatility index (VHSI) closed at 18.53, down -7.86% from 20.11 the prior day. The VHSI index trades -10.3% below its 20.66 20-day moving average.
  • CBOE skew rose +0.58% to 123.84 from 123.13 at the prior day's close, 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:

· Total March vehicle sales were 14.32 million, compared to survey 14.6 million and prior 15.0 million.

· MBA mortgage applications for the week ending March 30 rose +4.8%, compared to -2.7% the prior day.

· At 8:15, March ADP employment change for March was +209K, compared to survey of +206K and +230K revised prior.

· At 10:00, the March ISM non-manufacturing composite, with survey of 56.8 and prior of 57.3.

Overseas News. Today, Spain sold only €2.5 billion of 3-, 5-, and 8-year notes, less than the €3.5 billion targeted and at higher yields than prior auctions. In March, the Eurozone services purchasing managers index rose more than expected but remained under 50. In February, German factor orders increased less than expected, rising only +0.3% from the prior month compared to +1.5% estimates. Today, Chinese Premier Wen said the country's big banks' monopoly may need to be broken.

Company News:

· None.

4Q2011 Earnings. The fourth quarter's earnings reports exceeded expectations. Of the 496 S&P500 companies that reported earnings to date, 68% (336 out of 496) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat EPS expectations by an average of +3.4% (versus a historical average of +2%). EPS is up +4.8% 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, the SPX earned $24.68 per share, compared to $25.19 and $22.25 per share in 3Q11 and 4Q10, a -3.4% and +9.4% change, respectively. In the first quarter, analysts estimate the SPX will earn $23.88 per share, compared to $24.68 and $23.03 per share in 4Q11 and 1Q11, a -3.2% and +3.7% 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. In the first quarter, analysts estimate the BKX will earn $0.97 per share, compared to $1.20 and $0.96 per share in 4Q11 and 1Q11, a -19.2% and +1.0% change, respectively.

Valuation. The SPX trades at 13.6x estimated 2012 earnings ($104.28) and 12.0x estimated 2013 earnings ($117.94), compared to 13.6x and 12.0 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 1.46x tangible book value, and 11.8x and 10.1x 2012and 2013 consensus earnings, respectively, compared to 1.46x tangible book value and 11.8x/10.1x 2012/2013 earnings yesterday. These compare to the 10-year average median multiples of 2.90x tangible book value and 15.9x earnings. In 2012, analysts expect the BKX to earn $4.31 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 to bearish. Composite options markets are neutral, index options markets are neutral, and equity options markets are neutral. The composite put/call ratio closed at 0.94, compared to 0.83 the prior day and below its 5- and 10-period moving averages of 0.96 and 0.99 respectively. The index put/call ratio closed at 1.54, compared to 1.24 the prior day, above the 5- and 10-period moving averages of 1.41 and 1.47, respectively. The equity put/call ratio closed the day at 0.53, compared to 0.59 the prior day, below its 5- and 10-period moving averages of 0.62 and 0.61, 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 21st and 16th 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 April 2nd and March 26th.

NYSE Indicators. Volume rose +7.05% to 817.21 million shares, +1.01x the 50-day moving average, from 763.39 million shares, 0.95x the 50-day moving average, Monday. Market breadth was negative, and up volume lagged down volume. Advancing stocks lagged decliners by -889 (compared to +1,516 the prior day), or 0.54:1. Up volume lagged down volume by 0.41:1.

SPX. On higher volume, the SPX fell -5.66 points, or -0.40%, to 1413.38, the 54th straight close above 1300 and the 12th close above 1400 in the last 14 sessions. Volume rose +10.37% to 638.65 million shares, up from 578.64 million shares Monday and above the 621.99 million share 50-day moving average. For the 71st consecutive day, the SPX closed above its 50-day moving average (1366.93) and remained above its 200-day moving average (1268.54) for the 67th time in the past 68 sessions. The SPX closed above its 200-week moving average (1133.46) for the 122nd straight session.

From its prior close at 1419.04, the SPX opened lower to 1418, fell to 1414 by 10:20, but rallied to the intra-day high to 14.18.85 at 10:50. Through 12:15, the index sold off, reaching 1410. The index rallied back to 1414 by 2:00, but the Federal Reserve's minutes disappointed expectations. The index fell to the intra-day low of 1404.62 at 2:40 before rebounding into the close and nearly retaking the pre-2:00 level. The index finished in the middle of the day's negative range.

Technical indicators are positive. The SPX closed above 1200 for the 86th straight session, above 1300 for the 54th session, and above 1400 for the 12th time in the past 14 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 increased. For the 19th straight session, the SPX closed (by +1.16%) above its 20-day moving average (1397.21). The index closed (by +3.40%)above its 50-day moving average for the 72nd straight session. The index closed (by +8.05%) above its 100-day moving average (1308.14) for the 86th straight session. The SPX closed +11.42% above its 200-day moving average for the 67th time in the past 68 sessions. The directional momentum indicator is positive for the 19th straight session, and the trend is moderate and declining. Relative strength fell to 62.92 from 66.80, a neutral range. Next resistance is at 1420.05; next support is at 1405.67.

BKX. On higher volume, the KBW bank index fell -0.13 points, or -0.26%, to 49.90, its 60th straight close above 40 but its fourth close below 50 in the past seven sessions. Volume rose +18.35% to 69.92 million shares, up from 59.08 million shares Monday but below the 80.80 million share 50-day average. The BKX closed +16.10% above its August 30, 2010, closing low of 42.98, the trough of the 2010's correction, but -13.89% and -10.30% 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 underperformed regional banks. From its prior close of 50.03, the BKX opened lower to 49.90 and rose to the intra-day high of 49.97 at 9:40. Through 12:15, the index fell to the 49.50 level. The index rose in anticipation of the Fed's minutes at 2:00, but fell following the release and reached the intra-day low of 49.32 at 2:40. A strong rally took hold at 3:00 and lasted through the bell, and the index rallied nearly back to the intra-day's high to close at the upper end of the day's negative range.

Technical indicators are positive. On a percentage basis, bank stocks have outperformed the broader market's rebound from the October lows, rising +53.65% from the 32.56 October 4th intra-day low compared to a +32.13% rebound in the SPX. However, the BKX is still -10.1% below its 2011 high, compared to the SPX which is +4.1% 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 67th time in the past 68 sessions, the 20-day closed (by +2.53 points) above the 50-day, and the gap expanded. The 50-day moving average closed (by +4.36 points) above the 200-day moving average for the 30th straight session, and the gap widened. The 100-day moving average closed (by +0.95 points) above the 200-day moving average for the 12th straight session, and the gap widened. The BKX closed +2.50% above its 20-day moving average for the 19th straight session. The index closed (by +8.11%) above its 50-day moving average for the 70th straight session. The index closed (by +16.75%) above the 100-day moving average for the 71st straight session. The index closed (by +19.40%) above its 200-day moving average for the 53rd time in 54 sessions. The directional movement indicator is positive for the 18th straight session, and the trend is strong and increasing. Relative strength fell to 63.44 from 64.63, a neutral range. Next resistance is 50.15; next support at 49.49.