This morning. U.S. equity markets are in correction. All the major indexes closed below their respective 20- and 50-day moving averages. The SPX closed -3.32% below its recent April 2nd 1419.04 high. 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 11th consecutive day. Shorter-term averages remain above longer term averages. The SPX is in bull market territory, closing up +27.7% above the 1074.77 October 4th intraday low. Financial stocks have outperformed, with the BKX up +46.9% in the same period.
In Asia, equity markets closed mixed, with the better strength in Tokyo and Shanghai. Commentary focused on stronger than expected 1Q2012 earnings. AAPL's strong earnings and revenues suggested that consumer spending remains higher than previously thought. European equity markets are rallying. The French election run-off is scheduled for May 6th. Also, Greek parliamentary elections are on May 6th. The FOMC concludes its two day meeting with Bernanke's news conference at 2:00. The market expect no material changes in the FOMC statement, suggesting the end of operation twist this quarter. The dollar is mixed. U.S. options markets suggest a neutral short-term outlook. Commodities prices are higher. U.S. Treasury yields are higher, with the 10-year at 1.979%, down from 1.974% the prior day. U.S. repo rates are at 8 bps.
After a fair value adjustment of -2.43 points, June SPX equity futures are at 1378.30, up +10.73 points. The SPX opens at 1371.97, -1.18% and -0.61% below its respective 20- and 50-day moving averages, and +3.06% and +7.74% above its respective 100- and 200-day moving averages. Next resistance is at 1376.09. First support is at 1367.34.
Tuesday. Markets closed mixed, with Nasdaq lower on speculation that AAPL would miss its 1Q2012 EPS and revenue targets. Otherwise, commentary focused on generally strong 1Q2012 earnings reports. Economic news was light. The NYSE composite rose +0.60%, followed by the DJI and SPX, which rose +0.58% and +0.37%, respectively. The Nasdaq lost -0.30%. From its prior 1371.97 close, the SPX opened modestly to the upside, but rallied strongly at 10:00 on mixed economic reports, in which consumer confidence disappointed, but the Richmond Fed manufacturing index surprise positively. By mid-morning, the SPX rallied to its 1375.57 intraday high. The SPX subsequently drifted lower to 1368 by mid-afternoon. The SPX closed -1.18% and -0.61% below its 20- and 50-day moving averages. NYSE volume fell -4.15% to 0.94x the 50-day moving average. Market breadth was positive. Most market segments closed higher. Leaders were telecommunications, financials, and industrials, which rose at least +1.03%. Laggards were basic materials, which rose +0.04%, and consumer goods and technology, which fell at least -0.42%.
DJ transports outperformed the industrials, rising +1.17% to close at 5246.73, up from 5185.81 the prior day, and -2.28% below its 5368.93 February 3rd closing high. The index closed +0.12% and +0.48% 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 -1.98% below its recent April 2nd high.
Technical indicators improved, though 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 -4.59% with the VIX ending at 18.10 at the close. The CBOE put/call skew rose to 118.36, up +1.00% from 117.19 the prior session, within a 115-120 neutral range.
Immediate support is 1367, then 1355 (a -38.2% Fibonacci retrace), 1343 (the March low), 1325 (the February low), 1316 (a 61.8% Fibonacci retrace), 1297 (the January 12th high), and 1293 (the October 27th high). Immediate resistance is 1376, then 1380 (the 50-day moving average), 1388 (the 20-day moving average), then 1419 (the April high).
Trading desks characterized the day's trade as "tentative", supported by strong earnings and a quieter Europe, where sovereign yields fell in most markets.
The distribution day count was unchanged at 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 better strength in Tokyo and Shanghai. Volumes fell. Commentary focused on strong 1Q2012 U.S. earnings. In Tokyo, the NKY closed up +0.98% on a -8.40% volume decrease. The index closed below 10,000 for the 16th consecutive day. In Hong Kong, the HSI closed down -0.15% on a -17.2% volume decrease. In Shanghai, the SHCOMP rode +0.75% on a -1.95% decrease in volume.
In Japan, the NKY closed at 9,561.01, down from 9,468.04 at the prior close. The index opened near its early session 9,582.73 intraday high, but lost ground through the morning to set a late morning intraday low of 9,530.02. The index rallied back to 9,560 in early afternoon and traded narrowly around that level into the close. The index closed -6.77% below its recent March 27th high, and -1.58% and -1.81% below its respective 20- and 50-day moving averages. Most market segments closed higher. Leaders were financials, technology, and industrials, which rose at least +1.33%. Laggards were basic materials, up +0.22%, and telecommunications and oil and gas, which fell at least -0.36%.
In China, the Hang Seng closed at 20,646.29, down from 20,677.16 at the prior close. The index closed -4.77% below its February 29th high. Volatility fell -3.08% as the VHSI closed -5.11% below its 20-day moving average. The index gapped higher to open above 20,740, but reversed and traded lower to a late afternoon 20,584.98 intraday low. The index rallied back to breakeven in the final hour, but weakened again into the close. The HSI closed -0.05% and -1.63% below its respective 20- and 50-day moving averages. Most market segments ended higher. Leaders were consumer goods, oil and gas, and industrials, which closed up at least +0.25%. Financials rose +0.07%. Laggards were utilities, telecommunications, and technology, which closed down at least -0.31%.
In Shanghai, the SHCOMP closed at 2,406.81, down from 2,388.83 at Tuesday's close. The SHCOMP opened lower, falling to a 2,376.78 early morning intraday low, but it then reversed and rallied through late afternoon to a 2,411.35 intraday high. The index closed -2.72% below its recent 2,474.07 March 14th high. The index closed +3.07% and +1.34% above its respective 20- and 50-day moving averages. All market segments closed at least +0.25%. Leaders were consumer services, basic materials, and industrials, which closed up at least +1.11%. Laggards were telecommunications, health care, and financials.
In Europe, equities are rallying and trade near their intraday highs. Commentary focuses on stronger than expected 1Q2012 earnings. The Euro Stoxx 50, FTSE 100, and DAX are up +1.46%, +0.11%, and +1.23%, respectively. All trade below their 20- and 50-day moving averages. The FTSE 100 also trades below its respective 100-day moving average. The Euro Stoxx 50 and CAC also trade below their 100- and 200-day moving averages. Compared to the prior day's 2,284.08 close, the Euro Stoxx 50 trades at 2,317.64, compared to the 2,329.10 intraday high. The index is -2.73% and -6.18% below its respective 20- and 50-day moving averages. Most market segments are higher. Leaders are financials, basic materials, and telecommunications, which are up at least +1.66%. Laggards are consumer services, up +0.21%, and health care and utilities, which are off at least -0.04%.
Libor, LOIS, Currencies, Treasuries, Commodities:
- USD LIBOR is 0.14400%, down from 0.14500% 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 0.46585%, unchanged from 0.46565% the prior day, but down from the January 4th peak of 0.58250%.
- The US Libor-OIS (LOIS) spread is 32.49, down from 32.78 bps the prior day, and compares to the recent January 6th high of 50.05 bps. Euribor-OIS is 39.20 bps, down from 39.80 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 -44.375, up from -45.88 bps the prior day, 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 8 bps, compared to an August 2nd high of 33 bps.
- U.S. Treasury yields are slightly higher, with 2- and 10-year maturities yielding 0.270% and 1.979%, respectively, compared to 0.266% and 1.974% Monday. The yield curve widened to +1.709%, from +1.707% 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 +2.73% on April 25, 2011.
- The U.S. dollar is mixed, weaker compared to the euro and Japanese yen, but stronger compared to the British pound. The dollar trades at US$79.124, compared to a US$79.038 intraday low and US$79.225 the prior day, and mixed compared to its US$79.421 50-day, US$79.668 100-day, and US$78.061 200-day averages. The euro trades at US$1.3217, compared to an intraday high of US$1.3237 and its US$1.3197 close the prior day. The euro compares to its US$1.3209 50-day and $1.3117 100-day averages. In Japan, the dollar trades at ¥81.23, compared to ¥81.32 the day prior. The yen trades better than its 50-day moving average ¥81.66.
- Commodities prices are higher, with higher energy, precious metals, aluminum and copper, and agriculture prices.
- The VIX ended at 18.10, down -4.59% from 18.97 at the prior close. The VIX is +2.85% above its 17.60 20-day moving average.
- The Euro Stoxx 50 volatility index (V2X) is down -4.63% to 27.33, compared to 28.66 at the prior day's close. The V2X index trades +4.48% above its 26.16 20-day moving average, -11.9% below the 31.02 30-day high, and +58.3% above the 17.26 30-day low.
- The Hang Seng volatility index (VHSI) closed at 19.18, down -3.08% from 19.79 the prior day. The VHSI index trades -5.11% below its 20.21 20-day moving average.
- CBOE skew rose +1.00% to 118.36 from 117.19 at the prior day's close, and within 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:
· Today's focus is this afternoon's FOMC rate decision, due at 12:30, followed at by Chairman Bernanke's news conference at 2:00.
· At 8:30, March durable goods orders fell -4.2%, compared to -1.7% survey and +2.2% prior. Ex-transportation, durables fell -1.1%, compared to survey +0.5% and +1.6% prior.
Overseas News. In the first quarter, the Eurozone bank lending survey showed credit standards eased substantially, and more than anticipated by the prior survey. In the first quarter, U.K. GDP contracted by -0.2%, missing estimates for a +0.1% gain and placing the economy in recession after falling for two straight quarters. Today, Standard & Poors cut its outlook on India to negative from stable and warned of a possible ratings downgrade.
· FITB - upgraded to buy at Deutsche Bank, $17 price target
The first quarter's earnings reports have so far exceeded expectations. Of the 158 S&P500 companies that reported earnings to date, 83% (131 out of 158) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat EPS expectations by an average of +9.3% (versus a historical average of +2%). Aggregate EPS is up +11.4% over the prior year. Though challenged in the current operating environment, 70% of companies reported increased revenues over the prior year and 72% 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 23 of the 24 BKX members reporting first quarter earnings, 78% beat operating EPS estimates and 78% 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 ($104.86) and 11.6x estimated 2013 earnings ($118.12), compared to 13.0x and 11.6x 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 -3.5%, and +0.3%, respectively. Analysts expect 2012 and 2013 earnings to exceed 2011 earnings ($94.97) by +10.5% and +24.4%, respectively.
Large-cap banks trade at a median 1.38x tangible book value, and 11.5x and 10.0x 2012and 2013 consensus earnings, respectively, compared to 1.37x tangible book value and 11.4x/9.8x 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 0.91, compared to 0.82 the prior day and below its 5- and 10-period moving averages of 0.91 and 0.93 respectively. The index put/call ratio closed at 1.39, compared to 1.15 the prior day, above the 5- and 10-period moving averages of 1.36 and 1.34, respectively. The equity put/call ratio closed the day at 0.68, compared to 0.60 the prior day, above its 5- and 10-period moving averages of 0.64 and 0.64, 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. The BKX successfully tested this support at yesterday's open. Short term resistance rests near 1395 and 50.25, respectively.
NYSE Indicators. Volume fell -4.15% to 752.12 million shares, +0.94x the 50-day moving average, from 784.67 million shares Monday. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by +1,052 (compared to -1,440 the prior day), or 2.07:1. Up volume lagged down volume by 2.43:1.
SPX. On lower volume, the SPX rose +5.03 points, or +0.37%, to 1371.97, the 67th straight close above 1300 but the 14th straight close below 1400. Volume fell -2.84% to 608.86 million shares, down from 626.69 million shares Monday and below the 619.35 million share 50-day moving average. For the fourth straight session, the SPX closed below its 50-day moving average (1380.38)but remained above its 200-day moving average (1273.40) for the 81st time in the past 82 sessions. The SPX closed above its 200-week moving average (1134.19) for the 137th straight session.
From its prior close at 1366.94, the SPX opened higher to 1368 before dropping nearly back to break-even at 9:45 and setting the intra-day low. Through 11:15, the index rallied to the intra-day high of 1375.57 but retraced nearly all the gains back to 1368 by 2:30. A small rally into the close lifted the index above 1370 at the bell.
Technical indicators are mostly positive. The SPX closed above 1200 for the 99th straight session, above 1300 for the 65th session, but below 1400 for the 13th 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 14th straight session, the SPX closed (by -1.18%) below its 20-day moving average (1388.32). The index closed (by -0.61%) below its 50-day moving average for the fourth straight session. The index closed (by +3.06%) above its 100-day moving average (1331.18) for the 100th straight session. The SPX closed +7.74% above its 200-day moving average for the 81st time in the past 82 sessions. The directional momentum indicator is negative for the 10th time in 11 sessions, and the trend is weak and increasing. Relative strength rose to 45.75 from 43.52, a neutral range. Next resistance is at 1376.09; next support is at 1367.34.
BKX. On lower volume, the KBW bank index rose +0.55 points, or +1.16%, to 47.83, its 74th straight close above 40 but its 15th straight close below 50. Volume fell -17.98% to 63.76 million shares, down from 77.74 million shares Monday and below the 80.46 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 47.28, the BKX opened higher to 47.37, immediately setting the intra-day low. Through 10:30, the index rallied to 47.85 before retracing gains back to 47.60 at 11:00. The index made three more attempts at 11:05, 12:30, and 1:45 to break above 47.90, each time falling back to the 47.60-47.70 level. A rally into the bell closed the index near its 12:30 intra-day high of 47.88.
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 +27.7% 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 79th straight session, the 20-day closed (by +1.20 points) above the 50-day, but the gap shrank. The 50-day moving average closed (by +5.50 points) above the 200-day moving average for the 44th straight session, and the gap widened. The 100-day moving average closed (by +2.45 points) above the 200-day moving average for the 26th straight session, and the gap widened. For the 13th straight sessions, the BKX closed -1.39% below its 20-day moving average, which fell for the eighth straight day. The index closed (by +1.11%) above its 50-day moving average for the 84th straight session. The index closed (by +8.09%) above the 100-day moving average for the 85th straight session. The index closed (by +14.42%) above its 200-day moving average for the 67th time in 68 sessions. The directional movement indicator is negative, and the trend is weak and stable. Relative strength rose to 49.10 from 45.43, a neutral range. Next resistance is 48.05; next support at 47.45.