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Most Eurozone Equity Indexes Reverse Early Losses; U.S. Equities In Correction, Futures Lower, But Improve

This morning. After Friday's sharp sell-off, the U.S. equity market is again in correction, end the brief uptrend that began on April 25th. All major indexes closed below their respective 20- and 50- moving averages, but above their 100- and 200-day moving averages. The SPX closed -3.52% below its recent April 2nd 1419.04 high. The SPX's 20-day moving average moved lower, as it has in 18 of the past 19 trading days, and closed below its 50-day moving average for a 2nd consecutive day. The 50-, 100-, and 200-day moving averages continue to trend higher. The SPX is in bull market territory, closing up +27.3% above the 1074.77 October 4th intraday low. Financial stocks have outperformed, with the BKX up +44.9% in the same period.

There are no scheduled U.S. economic reports. In Asia, equity markets closed mixed with better strength in mainland China. Commentary focused on Friday's U.S. equity sell-off and Sunday's French and Greek elections, which raise new doubts with respect to Eurozone sovereign debt management. In Europe, equity markets are mixed after narrowing or erasing large losses early in their session. London is closed. The dollar is mixed. U.S. options markets suggest a bullish short-term outlook. Commodities prices are mixed. U.S. Treasury yields are lower, with the 10-year at 1.858%, down from 1.879% the prior day. U.S. repo rates are at 19 bps.

After a fair value adjustment of +2.85 points, June SPX equity futures are at 1357.30, down -8.05 points. The SPX opens at 1369.10, -1.03% and -1.26% below its respective 20- and 50-day moving averages, and +1.96% and +7.25% above its respective 100- and 200-day moving averages. Next resistance is at 1384.42. First support is at 1360.87.

Friday. April's U.S. employment report disappointed, and equities opened lower, with the SPX opening at 1385, down from 1391.57 at Thursday's close. The lower trend persisted into early afternoon, as the SPX finally found support at 1370 and testing and retesting that level through the close. Despite the -0.1% decline in the unemployment rate, the report's soft underbelly was difficult to disguise and suggested that the recent stronger economic rebound was again moderating. At the close, the Nasdaq lost -2.25%, followed by the SPX, NYSE composite, and DJI, which traded off -1.61%, -1.45%, and -1.27%, respectively. Perhaps the best news was that NYSE volume fell -2.24%, to +1.02x the 50-day moving average, and indication that the sell-off lacked wide participation. The SPX closed -1.03% and -1.26% above its respective 20- and 50-day moving averages. Market breadth was negative. Market segments were mixed. Leaders were utilities, which rose +0.06%, and telecommunications and consumer goods, which fell at least -0.92%. Financials dropped -1.53%. Laggards were consumer services, oil and gas, and technology, which fell at least -1.72%.

The DJ transports outperformed the industrials, falling -1.07% to close at 5227.64, down from 5284.33 the prior day, and -2.63% below its 5368.93 February 3rd closing high. The index closed -0.20% and -0.05% below its respective 20- and 50-day moving averages. The TRAN has not confirmed multiple DJI new highs subsequent to February 3rd. The DJI closed -1.82% below its recent May 1st high.

Technical indicators weakened as the SPX lost its 20- and 50-day moving averages. 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 rose +9.11%, with the VIX ending at 19.16 at the close. The CBOE put/call skew fell to 115.83, down -0.30% from 116.18 the prior session, and within a neutral 115-120 range.

Immediate SPX support is 1360, then 1357 (the April low), 1357 (a -38.2% Fibonacci retrace), 1343 (the March low), 1325 (the February low), 1318 (a -61.8% Fibonacci retrace), 1297 (the January 12th high), and 1293 (the October 27th high). Immediate resistance is 1383 (the 20-day moving average), then 1387 (the 50-day moving average), then 1399, and 1419 (the April high).

Trading desks focused on absence of any rebound during Friday's sell-off to the bottom of the recent 1370-1400 SPX range, but noted the unexceptional volume and generally quiet trade after the initial early trade off.

The distribution day count rose on the SPX and DJI, with a count of 2 on the DJI and Nasdaq, 3 on the SPX and NYSE composite, since April 24th confirmation reset. The BKX count is 3.

In Asia, most equity markets sold off sharply on increased volume, though responding to Friday's disappointing U.S. employment report and European election results. Japanese equity markets reopened after a two day holiday and sold off -2.62% on a +40.7% increase in volume. In Hong Kong, the HSI fell -2.78% on a 61.0% increase in volume. In Shanghai, the SHCOMP was unchanged, down -0.07 points, on a +6.11% increase in volume. Commentary focused on weekend polls in France and Greece, with views that they "fuel" debt crisis concerns. European economic reports were mixed, with better than expected German March factory orders, but accompanied by a disappointing Eurozone investor confidence report.

In Japan, the NKY closed at 9,119.14, down from 9,380.25 at the prior close, its lowest close since mid-February. The index gapped lower to open at 9,200, but quickly sold off to 9,100, and traded narrowly between 9,160 and 9,110 through the rest of the day. The index closed -11.1% below its recent March 27th high, and -4.57% and -6.53% below its respective 20- and 50-day moving averages. Only utilities closed higher, up +0.83%. Other leaders were telecommunications, and health care, which closed off at least -1.11%. Laggards were financials, consumer goods, and oil and gas, which closed at least -3.56% lower.

In China, the Hang Seng closed at 20,536.65, down from 21,086.00 at the prior close. The index gapped lower to open just above 20,650 and traded narrowly through the session's remainder, finding support at 20,500. The index rallied modestly into the close. The index closed -5.27% below its February 29th high. Volatility rose +18.6% as the VHSI closed +12.5% above its 19.81 20-day moving average. The HSI closed -1.05% and -2.04% below its respective 20- and 50-day moving averages. All market segments closed at least -0.95% lower. Leaders were telecommunications, utilities, and consumer goods. Financials lost -2.65%. Laggards were consumer services, oil and gas, and technology, which lost at least -3.36%.

In Shanghai, the SHCOMP erased early losses and closed at 2,451.95, down just -0.07 points from 2,452.01 at the prior close. The index gapped lower to open at 2,440 and traded narrowly through early afternoon, then weakened to find support at the mid-afternoon 2,433.34 intraday low, and rallied strongly through the close. The index closed -0.89% below its recent 2,474.07 March 14th high. The index closed +3.47% and +2.88% above its respective 20- and 50-day moving averages. Most market segments closed higher. Leaders were health care, utilities, and technology, which closed up at least +0.84%. Laggards were financials, oil and gas, and telecommunications, which fell at least -0.35%.

In Europe, equity markets have rallied off their early morning lows and are modestly mixed. London is closed. The Euro Stoxx50 and CAC 40 reversed early, sharp losses and presently trade higher at their intraday highs. Spanish and Italian equity indexes are up about one percent, after reversing early session losses of nearly -2..0%. Commentary focuses on this weekend's elections in France and Greece and their sovereign debt implications. The Euro Stoxx50 and CAC are up +0.06% and +0.12%, respectively. The DAX is down -0.51%, narrowing early session losses of more than -2.0%. Compared to its prior 2,248.34 close, the Euro Stoxx50 gapped lower to open below 2,230 and dropped quickly to the 2,204.73 intraday low, set minutes later. The rally ensued immediately, with the index fully reversing losses by early afternoon. The index trades -4.57% and -6.53% below its respective 20- and 100-day moving averages. The FTSE100, CAC, Euro Stoxx50, and DAX all traded below their respective 20-, 50-, 100-, and 200-day moving averages. Only the FTSE100 and DAX trade above their 200-day moving averages.

Libor, LOIS, Currencies, Treasuries, Commodities:

  • USD LIBOR is 0.14700%, unchanged from 0.14700% 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 0.46585% the prior day, but down from the January 4th peak of 0.58250%.
  • The US Libor-OIS (LOIS) spread is 32.08, unchanged from 32.08 bps the prior day, and compares to the recent January 6th high of 50.05 bps. Euribor-OIS is 37.90 bps, unchanged from 37.90 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 -41.50, unchanged from -41.50 the prior day, and 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 19 bps, compared to an August 2nd high of 33 bps.
  • U.S. Treasury yields are mixed, with 2- and 10-year maturities yielding 0.262% and 1.858%, respectively, compared to 0.254% and 1.879% Friday. The yield curve narrowed to +1.596%, from +1.625% 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 +2.74% on July 4, 2011.
  • The U.S. dollar is mixed, slightly stronger compared to the euro, and slightly weaker compared to the Japanese yen and British pound. The dollar trades at US$79.685, compared to a US$80.034 intraday high and US$79.498 the prior close, and mixed compared to its US$79.434 50-day, US$79.608 100-day, and US$78.264 200-day averages. The euro trades at US$1.3026, compared to an intraday low of US$1.3192 and its US$1.3199 close the prior day. The euro compares to its US$1.3192 50-day and $1.3121 100-day averages. In Japan, the dollar trades at ¥79.82, compared to ¥79.85 at the prior close. The yen trades better than its 50-day moving average ¥81.70.
  • Commodities prices are mixed, with mixed energy, lower precious metals, lower aluminum, and copper, and mixed agriculture prices.

Volatility, Skew:

  • The VIX ended at 19.16, up +9.11% from 17.56 at the prior close. The VIX is +5.79% above its 18.11 20-day moving average.
  • The Euro Stoxx 50 volatility index (V2X) is up +2.44% to 30.10 from 29.38 at the prior day's close. The V2X index trades +8.18% above its 27.82 20-day moving average, -4.54% below the 31.53 30-day high, and +47.1% above the 20.46 30-day low.
  • The Hang Seng volatility index (VHSI) closed at 18.63, up +12.5% from 18.79 the prior day. The VHSI index trades -0.27% below its 22.35 20-day moving average.
  • CBOE skew fell -0.30% to 115.83 from 116.18 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: There are no scheduled economic reports.

Overseas News. This weekend, Socialist candidate Francois Hollande defeated incumbent Nickolas Sarkozy for the French Presidency. Also this weekend, Greece's two major political parties, which both supported the EU/IMF bailout, suffered material setbacks during elections, putting a ruling coalition in jeopardy and risking new elections next month. In March, German factory orders increased more than expected, rising +2.2% over the prior month compared to +0.5% estimates. In May, Eurozone investor confidence declined more than forecast, falling to -24.5 from -14.7 and compared to estimates of -15.3.

Company News: None.

1Q2012 Earnings. The first quarter's earnings reports have exceeded expectations. Of the 422 S&P 500 companies that reported earnings to date, 70% (295 out of 422) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat EPS expectations by an average of +6.4% (versus a historical average of +2%). Aggregate EPS is up +6.5% over the prior year. Though challenged in the current operating environment, 72% of companies reported increased revenues over the prior year and 67% 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 all BKX members reporting first quarter earnings, 79% beat operating EPS estimates and 79% beat revenue estimates. In the first quarter, the BKX earned $1.18 per share, compared to $0.77 and $0.99 per share in 4Q11 and 1Q11, a +54.1% and +18.6% increase, respectively, and beat consensus estimates by +19.5%.

Valuation. The SPX trades at 13.0x estimated 2012 earnings ($105.05) and 11.6x estimated 2013 earnings ($118.36), compared to 13.2x and 11.8x respective 2011-12 earnings Friday. The 10-year average median Price/Earnings multiple is 20.0x. Since the beginning of 2012, analysts changed 2012 and 2013 earnings estimates by -3.4%, and +0.5%, respectively. Analysts expect 2012 and 2013 earnings to exceed 2011 earnings ($94.97) by +10.6% and +24.6%, respectively.

Large-cap banks trade at a median 1.45x tangible book value, and 11.2x and 9.9x 2012and 2013 consensus earnings, respectively, compared to 1.44x tangible book value and 11.5x/10.1x 2012/2013 earnings Friday. 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 $4.58 per share, compared to $4.22 and $3.13 in 2011 and 2010, a +7.1% and +46.1% increase, respectively.

Options. Options markets are bullish. Composite options markets are neutral, index options markets are neutral, and equity options markets are very bullish. The composite put/call ratio closed at 1.02, compared to 1.01 the prior day and above its 5- and 10-period moving averages of 0.96 and 0.89 respectively. The index put/call ratio closed at 1.43, compared to 1.12 the prior day, above the 5- and 10-period moving averages of 1.32 and 1.28, respectively. The equity put/call ratio closed the day at 0.90, compared to 0.98 the prior day, above its 5- and 10-period moving averages of 0.83 and 0.71 respectively.

Price Exhaustion/Trend Reversal. 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 a reversal. The BKX successfully tested this support on April 23rd's open. Upward resistance rests near 1412 and 50.25, respectively, with the SPX level reversing May 1st's rally.

NYSE Indicators. Volume fell -2.24% to 825.24, 1.02x the 50-day moving average, from 825.24 million shares Thursday. Market breadth was negative, and up volume lagged down volume. Advancing stocks lagged decliners by -1,545 (compared to -1,194 the prior day), or 0.32:1. Up volume lagged down volume by 0.17:1.

SPX. On higher volume, the SPX fell -22.47 points, or -1.61%, to 1369.10, the 75th straight close above 1300 but the 19th close above 1400 in the last 22 sessions. Volume rose +0.63% to 585.40 million shares, up from 581.76 million shares Thursday but below the 614.57 million share 50-day moving average. For the first time in eight sessions, the SPX closed below its 50-day moving average (1386.64)but remained above its 200-day moving average (1276.54) for the 89th time in the past 90 sessions. The SPX closed above its 200-week moving average (1134.82) for the 145th straight session.

From its prior close at 1391.57, the SPX opened lower to 1385, immediately setting the intra-day high. Through 12:40, the market continued declining, reaching 1368. The index traded mostly flat through the close, setting the intra-day low of 1367.96 at 2:45 and closing under the 1370 level.

Technical indicators are positive. The SPX closed above 1200 for the 107th straight session, above 1300 for the 73rd session, but below 1400 for the 19th time in the last 22 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. The 20-day moving average fell for the 19th straight session. For first time in eight sessions, the SPX closed (by -1.03%) below its 20-day moving average (1383.40). The index closed (by -1.26%) below its 50-day moving average for the first time in eight sessions. The index closed (by +1.96%) above its 100-day moving average (1342.77) for the 108th straight session. The SPX closed +7.25% above its 200-day moving average for the 89th time in the past 90 sessions. The directional momentum indicator switched to negative for the first time in seven sessions, and the trend is weak and declining. Relative strength fell to 42.73 from 51.20, a neutral range. Next resistance is at 1384.42; next support is at 1360.87.

BKX. On higher volume, the KBW bank index fell -0.96 points, or -1.99%, to 47.18, its 82nd straight close above 40 but its 23rd straight close below 50. Volume rose +6.82% to 61.35 million shares, up from 57.43 million shares Thursday but below the 76.57 million share 50-day average. The BKX closed +9.77% above its August 30, 2010, closing low of 42.98, the trough of the 2010's correction, but -18.5% and -15.2% 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 48.14, the BKX opened lower to 47.90 and set the intra-day high of 48.00 at 9:32. Through 11:40, the index declined to the intra-day low of 47.06. A small rebound to 47.30 by 1:20 lost momentum, and the index traded mostly flat through the close to finish at the low end of the day's 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 +44.9% from the 32.56 October 4th intra-day low compared to a +27.5% 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 87th straight session, the 20-day closed (by +0.15 points) above the 50-day, but the gap shrank and will likely cross by Wednesday. The 50-day moving average closed (by +5.98 points) above the 200-day moving average for the 52nd straight session, and the gap widened. The 100-day moving average closed (by +3.14 points) above the 200-day moving average for the 34th straight session, and the gap widened. For the first time in seven sessions, the BKX closed (by -1.72%) below its 20-day moving average, which fell for the 16th straight day. The index closed (by -1.41%) below its 50-day moving average for the first time in 92 sessions, since December 20th, 2011. The index closed (by +4.81%) above the 100-day moving average for the 93rd straight session. The index closed (by +12.67%) above its 200-day moving average for the 75th time in 76 sessions. The directional movement indicator switched to negative for the first time in three days, and the trend is weak and stable. Relative strength fell to 43.46 from 49.67, a neutral range. Next resistance is 47.77; next support at 46.83.