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Volcker Rule Delay Salvages Yesterday's Trade, U.S. Futures Advance Moderately

|Includes: Capital One Financial Corporation (COF)

This morning. U.S. equity markets remain in correction, with each of the major indexes below their respective 20- and 50-day moving averages. The SPX closed -2.97% below its recent April 2nd high of 1419.04. All major indices are above their respective 100- and 200-day moving averages. Most moving averages are trending higher, though the SPX 20-day moving average fell for a 8th consecutive day. Shorter-term averages remain above longer term averages. The SPX is in bull market territory, closing up +28.1% above the 1074.77 October 4th intraday low. Financial stocks have outperformed, with the BKX up +46.9% in the same period.

In Asia, Tokyo and Hong Kong equity markets closed mixed, with better strength in Shanghai, where the SHCOMP has recaptured both its 20- and 50-day moving averages, and closed at its best level since March 19th. In Europe, equity markets are moderately higher after a better than expected German business confidence report. Commentary focuses on earnings, the likelihood of Chinese policy easing, and Eurozone sovereign debt developments. The IMF meets in Washington this weekend. 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 mostly higher. U.S. Treasury yields are higher, with the 10-year at 1.981%, up from 1.967% the prior day. U.S. repo rates are at 7 bps.

After a fair value adjustment of +0.17 points, June SPX equity futures are at 1379.3, up +6.63 points. The SPX opens at 1376.92, -1.14% below and -0.15% below its respective 20- and 50-day moving averages, and +3.88% and +8.16% above its respective 100- and 200-day moving averages. Next resistance is at 1388.15. First support is at 1367.99.

Thursday. On better than expected 1Q2011 earnings reports, equity markets opened higher, but after mixed U.S. economic news, were unable to hold early gains, reversed to moderate losses by mid-afternoon, but narrowed their losses late in the session. The Nasdaq lost -0.79%, followed by the SPX, DJI, and NYSE composite, which closed off -0.59%, -0.53%, and -0.43%, respectively. From its prior 1385.14 close, the SPX opened without conviction and managed a modest advance to test resistance at 1390, but turned lower at mid-day and traded through the 50-day moving average by mid-afternoon on its way to the 1370.30 intraday low. The index rallied in the final 90 minutes, narrowing the day's losses. The SPX closed -1.14% and -0.15% below its 20- and 50-day moving averages. NYSE volume rose +14.1% to 1.03x the 50-day moving average. Market breadth was negative. Most market segments closed lower. Leaders were health care and telecommunications, which closed up at least +0.20%. Financials lost -0.42%. Laggards were consumer goods, industrials, and technology, which fell at least -0.46%.

DJ transports underperformed the industrials, falling -1.41% to close at 5228.72, down from 5303.61 the prior day, and -2.61% below its 5368.93 February 3rd closing high. The index closed -0.29% below and +0.06% 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 -2.26% below its recent April 2nd high.

Technical indicators worsened. All major indexes closed below their respective 20- and 50-day moving averages. All closed above their respective 100- and 200-day moving averages. Volatility fell -1.50% with the VIX at 18.36 at the close. The CBOE put/call skew fell to 117.60, down -1.59% from 119.50 the prior session, within a 115-120 neutral range.

Immediate support is 1367, then, then 1353 (a -38.2% Fibonacci retrace), 1343 (the March low), 1325 (the February low), 1297 (the January 12th high), and 1293 (the October 27th high). Immediate resistance is 1379 (the 50-day moving average), then 1388, 1393 (the 20-day moving average, then 1401, and 1419 (the April high).

Trading desks reported a continuation of recent themes, i.e., the absence of much conviction and reluctance of participants to expand risk positions despite stronger than expected corporate earnings. They attributed the late afternoon recovery to the Federal Reserve's clarification that it will permit banks at least to July 2014 to comply with its yet-to-be published Volker Rule regulations. The Fed published a 300-page proposed rule last October, but also said that it is unlikely to finalize it by the July 21, 2012 deadline.

The distribution day count rose to 11 on the NYSE composite, 7 on the DJI and Nasdaq and 6 on the SPX. The BKX count rose to 8.

In Asia, equity markets closed mixed, with greater strength in China. Volumes were mixed. Commentary focused on Europe sovereign debt, recently mixed U.S. economic data, and views that China will ease monetary and other economic policies. In Tokyo, the NKY closed down -0.28% on a -7.58% volume decrease. The index closed below 10,000 for the 13th consecutive day. In Hong Kong, the HSI closed up +0.07% on a -3.63% volume decrease. In Shanghai, the SHCOMP rose +1.19% on a +22.5% increase in volume.

In Japan, the NKY closed at 9,561.36, down from 9,558.38 at the prior close. The index gapped lower to open at 9,570, but in early trading rallied to its 9,580.87 intraday high before trading off to its mid-morning 9,532.68 intraday low. The index improved modestly in the afternoon session, trading narrowly through the close. The index closed -6.77% below its recent March 27th high, and -2.43% and -1.48% below its respective 20- and 50-day moving averages. Most market segments closed lower. Leaders were telecommunications and financials, which closed up at least +0.02%, and industrials, which closed down -0.13%. Laggards were utilities, technology, and basic materials, which fell at least -0.52%.

In China, the Hang Seng closed at 21,010.64, down from 20,995.01 at the prior close. The index closed -3.09% below its February 29th high. Volatility rose +0.16% as the VHSI closed -5.75% below its 20-day moving average. The index opened lower and traded to a mid-morning 20,881.62 intraday low. The index rallied and reversed to a 21,076.43 mid-afternoon intraday high before weakening into the close. The HSI closed +1.63% and +0.07% above its respective 20- and 50-day moving averages. Most market segments ended higher. Leaders were telecommunications, industrials, and consumer goods, which closed up at least +0.57%. Financials rose +0.06%. Laggards were consumer services, oil and gas, and technology, which closed down at least -0.52%.

In Shanghai, the SHCOMP closed at 2,406.86, up from 2,378.63 at Thursday's close and at its best level since March 19th. The SHCOMP posted modest gains through mid-morning, but rallied into and through the afternoon to close just off the 2,407.29 intraday high. The index closed -2.72% below its recent 2,474.07 March 14th high. The index closed +3.19% and +1.50% above its respective 20- and 50-day moving averages. All market segments closed at least +0.32% higher. Leaders were telecommunications, financials, and industrials, which rose at least +1.20%. Laggards were technology, utilities, and health care.

In Europe, equities are moderately higher, and trade near their intraday highs. Commentary focuses on better than expected German confidence. The Euro Stoxx 50, FTSE 100, and DAX are up +0.91%, +0.26%, and +0.81%, respectively. The FTSE 100 trades -0.20% below its 20-day moving average. All others trade below their respective 20- and 50-day moving averages. The FTSE 100 trades -1.58% below and +0.59% above its respective 50- and 100-day moving averages. The Euro Stoxx 50 and CAC trade below their 100- and 200-day moving averages. Compared to the prior day's 2,284.67 close, the Euro Stoxx 50 trades at 2,305.29, compared to the 2,317.14 intraday high. The index is -4.57% and -6.95% below its respective 20- and 50-day moving averages. Most market segments are higher. Leaders are financials,, telecommunications, and basic materials, which are up at least +1.39%. Laggards are industrials and oil and gas, which are up at least +0.14%, and technology, off -0.61%.

Libor, LOIS, Currencies, Treasuries, Commodities:
 

  • USD LIBOR is 0.14800%, unchanged from 0.14800% the prior day. The recent low was 0.13850% on March 1st, down from the December 30th 0.15400% high. USD 3-month LIBOR is 0.46565%, unchanged from 0.46565% the prior day, and down from the January 4th peak of 0.58250%.
  • The US Libor-OIS (LOIS) spread is 32.97 bps, up from 32.76 bps the prior day, and compares to the recent January 6th high of 50.05 bps. Euribor-OIS is 39.65 bps, up from 39.60 the prior day and the December 27th high of 98.80 bps. Moves in the LOIS indicate changes in intra-bank lending risk premiums.
  • The Euro 3-month basis swap is -48.00, down from -47.125 bps the prior day, but 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 7 bps, compared to an August 2nd high of 33 bps.
  • U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.266% and 1.981%, respectively, compared to 0.266% and 1.967% Thursday. The yield curve widened to +1.714%, from +1.700% 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 +2.75% on April 20, 2011.
  • The U.S. dollar is weaker compared to the euro and British pound, but weaker compared to the Japanese yen. The dollar trades at US$79.310, compared to a US$79.245 intraday low and US$79.561 the prior day, and mixed compared to its US$79.432 50-day, US$79.647 100-day, and US$78.000 200-day averages. The euro trades at US$1.3187, compared to an intraday high of US$1.3206 and its US$1.3138 close the prior day. The euro compares to its US$1.3204 50-day and $1.3123 100-day averages. In Japan, the dollar trades at ¥81.73, compared to ¥81.61 the day prior. The yen trades worse than its 50-day moving average ¥81.48.
  • Commodities prices are mostly higher, with higher energy, precious metals, aluminum and copper, and mixed agriculture prices.


Volatility, Skew:
 

  • The VIX ended at 18.36, down -1.50% from 18.64 at the prior close. The VIX is +7.33% above its 17.11 20-day moving average.
  • The Euro Stoxx 50 volatility index (V2X) is down -4.19% to 27.10, compared to 28.28 at the prior day's close. The V2X index trades +8.00% above its 25.09 20-day moving average, -12.6% below the 31.02 30-day high, and +57.0 above the 17.26 30-day low.
  • The Hang Seng volatility index (VHSI) closed at 19.21, up +0.16% from 19.18 the prior day. The VHSI index trades -5.75% below its 20.38 20-day moving average.
  • CBOE skew fell -1.59% to 117.60 from 119.50 at the prior day's close, and 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:

· There are no scheduled U.S. economic reports.

Overseas News. In April, a survey of German business confidence rose unexpectedly, setting the highest level in 9 months. In March, U.K. retail sales (not including fuel) rose more than expected, climbing +1.5% over the prior month compared to +0.4% expectations.

Company News:

· COF reported 1Q12 GAAP and continuing operating EPS of $2.72 and $1.79, beating estimates of $1.40

1Q2012 Earnings. The first quarter's earnings reports have so far exceeded expectations. Of the 91 S&P500 companies that reported earnings to date, 85% (77 out of 91) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat EPS expectations by an average of +8.7% (versus a historical average of +2%). Aggregate EPS is up +6.3% over the prior year. Though challenged in the current operating environment, 73% of companies reported increased revenues over the prior year and 76% beat revenue estimates. 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 20 of the 24 BKX members reporting first quarter earnings, 75% beat operating EPS estimates while 80% beat revenue estimates. 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 13.1x estimated 2012 earnings ($104.75) and 11.7x estimated 2013 earnings ($117.94), compared to 13.2x and 11.7x 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 -3.6%, and +0.1%, respectively. Analysts expect 2012 and 2013 earnings to exceed 2011 earnings ($94.97) by +10.3% and +24.2%, respectively.

Large-cap banks trade at a median 1.37x tangible book value, and 11.4x and 9.9x 2012and 2013 consensus earnings, respectively, compared to 1.44x tangible book value and 11.4x/9.9x 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. Composite options markets are neutral, index options markets are neutral, and equity options markets are neutral. The composite put/call ratio closed at 0.99, compared to 0.98 the prior day and above its 5- and 10-period moving averages of 0.96 and 0.96 respectively. The index put/call ratio closed at 1.42, compared to 1.59 the prior day, above the 5- and 10-period moving averages of 1.34 and 1.37, respectively. The equity put/call ratio closed the day at 0.67, compared to 0.60 the prior day, above its 5- and 10-period moving averages of 0.66 and 0.65, 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 2011, and repeatedly through February with the most recent reading on March 26st on the SPX and March 21st and 16th on the BKX. The SPX recorded a weekly price exhaustion signal during the week of its 2012 high in early April. On April 4th, the SPX closed below the lowest level in the previous four days and followed through with lower trading the next day, signaling a potential reversal's initiation. April 11th's rebound in the SPX and BKX came off important support levels near 1350 and 46.80, respectively. A breakdown below those support levels may accelerate the reversal. Short term resistance rests near 1395 and 50.25, respectively.

NYSE Indicators. Volume rose +14.1% to 822.922 million shares, +1.03x the 50-day moving average, from 720.97 million shares Wednesday. Market breadth was negative, and up volume lagged down volume. Advancing stocks lagged decliners by -530 (compared to -1,015 the prior day), or 0.70:1. Up volume led down volume by 0.53:1.

SPX. On higher volume, the SPX fell -8.22 points, or -0.59%, to 1376.92, the 64th straight close above 1300 but the 11th straight close below 1400. Volume rose +19.41% to 662.13 million shares, up from 554.50 million shares Wednesday and above the 612.67 million share 50-day moving average. For the first time in three sessions, the SPX closed back below its 50-day moving average (1378.93)but remained above its 200-day moving average (1273.00) for the 78th time in the past 79 sessions. The SPX closed above its 200-week moving average (1133.50) for the 134th straight session.

From its prior close at 1385.14, the SPX opened flat, fell to 1380 by 10:00 but then rallied to the intra-day high of 1390.46 at 10:45. Through 2:30, the index sold off, turning negative at noon and reaching the intra-day low of 1370.30. A rebound into the bell was insufficient to recapture the 50-day moving average at 1378, and the index closed towards the lower end of the day's mostly negative range.

Technical indicators are mostly positive. The SPX closed above 1200 for the 97th straight session, above 1300 for the 63rd session, but below 1400 for the 11th straight session. 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. The 20-day moving average declined. For the 11th straight session, the SPX closed (by -1.14%) below its 20-day moving average (1392.77). The index closed (by -0.15%) above its 50-day moving average for the first time in three sessions. The index closed (by +3.88%) above its 100-day moving average (1325.47) for the 97th straight session. The SPX closed +8.16% above its 200-day moving average for the 78th time in the past 79 sessions. The directional momentum indicator switched back to negative for the seventh time in eight sessions, and the trend is weak and declining. Relative strength fell to 47.05 from 50.04, a neutral range. Next resistance is at 1388.15; next support is at 1367.99.

BKX. On higher volume, the KBW bank index fell -0.36 points, or -0.75%, to 47.83, its 71st straight close above 40 but its 12th straight close below 50. Volume rose +38.63% to 86.87 million shares, up from 62.67 million shares Wednesday and above the 80.18 million share 50-day average. The BKX closed +11.28% above its August 30, 2010, closing low of 42.98, the trough of the 2010's correction, but -17.46% and -14.02% 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 48.19, the BKX opened higher to 48.51, immediately setting the intra-day high. At 10:00, existing home sales data disappointed expectations, and the BKX sank to 47.80. A brief rally back above the break-even line at 11:00 was sold, and the index fell to the intra-day low of 47.48 at 2:35. A rally into the bell could not retake the 48.0 level, and the index closed towards the lower end of the day's mostly negative range.

Technical indicators are mostly positive. On a percentage basis, bank stocks have outperformed the broader market's rebound from the October lows, rising +46.9% from the 32.56 October 4th intra-day low compared to a +28.2% rebound in the SPX. However, the BKX has yet to recapture its 2011 high, whereas the SPX did so in February 2012. 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 76th straight session, the 20-day closed (by +1.66 points) above the 50-day, but the gap shrank. The 50-day moving average closed (by +5.33 points) above the 200-day moving average for the 41st straight session, and the gap widened. The 100-day moving average closed (by +2.07 points) above the 200-day moving average for the 23rd straight session, and the gap widened. The BKX closed -2.02% below its 20-day moving average for the 10th straight session. The index closed (by +1.44%) above its 50-day moving average for the 81st straight session. The index closed (by +8.99%) above the 100-day moving average for the 82nd straight session. The index closed (by +14.38%) above its 200-day moving average for the 64th time in 65 sessions. The directional movement indicator switched back to negative, and the trend is weak and declining. Relative strength fell to 48.57 from 50.62, a neutral range. Next resistance is 48.40; next support at 47.37.