U.S. Futures Improve to Mixed; Chinese Volatility Spikes

This morning.  The earnings season continues with mixed results against diminished estimates.  U.S. futures are now modestly mixed, but better than earlier pre-session lows. After fair value adjustment, June S&P 500 futures (ESM6) are up +1.85 points.   The market outlook is “confirmed uptrend”. The distribution day count is 4 on the Nasdaq and S&P 500 (SPX).

Asian equity indexes closed mixed, but with renewed volatility in China. The Nikkei 225 (NKY) rose +0.19%. In China, the Hang Seng (HSI) fell -0.93%, while the Shanghai composite (SHCOMP) fell -2.31%. China’s weakness was attributed to technical factors, as recent upward market momentum became “exhausted”. In Europe, indexes opened lower, but improved moving into the afternoon. The Euro Stoxx 50 (SX5E), CAC 40, and DAX are up +0.42%, +0.15%, and +0.18%, respectively. The FTSE 100 is down -0.15%. The Madrid IBEX 35 is up +1.22%, while the Milan FTSE MIB is up +0.34%.

Economic reporting is light; in the U.S., March existing home sales are reported at 10:00. Commodities are mixed. The current WTI contract is down -2.19% at $4018, +2.52% above its 20-day moving average. Currencies are mixed, with a slightly stronger euro compared to the dollar. Sovereign rates are mostly lower. The Treasury 10-year yield is 1.7781%, down -0.70 bps from the prior close.

In Tuesday’s trade, the S&P 500 index (SPX) gapped higher to early intraday highs, but weakened and briefly reversed lower in early afternoon. The index strengthened and reversed higher in mid-afternoon, and closed with a modest +0.31% gain. The SPX opens at 2100.84, +6.1% above the 1810.10 February 11th intraday low, but -1.03% below the May 21, 2015, record high 2130.82 close.

Technical indicators (SPX relative strength (RSI) and Williams R% (WLPR [i] )) are in neutral and overbought ranges, respectively. Put/call ratios are neutral to bullish, but not suggestive of a highly overbought equity market.

The SPX futures traded opens +0.89% above the 2082.25 DeMark SPX 240-minute combo risk level. Notably, the June S&P500 futures completed a sell countdown on April 1st. On April 13th, a bullish price flip initiated a sell setup, which extended to 6 in yesterday’s trade.

Traders’ Take . The year’s market action has focused attention on slow world economic growth, lower 2015-16 earnings and revenues, initially weaker, but now mixed credit metrics, and the receding risk of economic recession, especially in light of the recent and prospective FOMC policy actions. Markets cheered the recent FOMC capitulation, but economic growth prospects remain muted, despite a weaker dollar comparison to last year and generally firmer commodities prices.

Indexes remain within 2015-16 trading ranges, and traders lack much conviction.  Most regard the current rally as a relief rally that has carried the SPX back above its 200-day moving average. Traders continue to recommend that both rallies and sell-offs be faded.   Short-term momentum measures are in the upper end of neutral ranges.

Equity market volatility has recently matched or exceeded volatility in bonds, foreign exchange, and commodities. Government-managed sovereign rates and foreign exchange heighten concerns that markets cannot price risk appropriately.

Subdued 4Q2015 GDP growth and 1Q2016 growth prospect add to worries that 2016-17 earnings estimates must be further reduced.  The Atlanta Fed’s April 19th 1Q2016 GDPNow model forecast is +0.3%, unchanged from April 13th, but down from +1.9% on March 15th. As of February 4th, its GDP-Based recession indicator index stood at 10.0%.

Slow world economic growth and the “collapse” of world productivity growth continue to threaten the 7-year long rally in the price of fixed income, equity asset, and other assets.

Sentiment has improved, but traders remain “on edge”. Several factors weigh:  

1. U.S. financial markets may be vulnerable to stronger than expected economic news;

2. The “data-dependent” Fed seems inclined to raise rates, though it describes the pace of any increase as “slow”;

3. Earnings in each of the past 6 quarters are below the prior year’s, and future earnings estimates continue to ratchet down;  

4. Market price/earnings multiples are elevated; and

5. Dollar and commodity price volatility remains elevated.

In today’s trading, the euro is slightly stronger compared to the dollar. The euro trades at USD1.1371, up +0.11% compared to USD1.1358 at the prior close. The euro is +8.73% better than its March 13, 2015, USD1.0458 low, and trades +0.38% above its 20-day moving average. The ruble/dollar cross (RUBUSD) is up +0.46% on the session, and trades +9.56% better than its 30-day low. The WTI active contract is down -2.19% to $40.18, compared to $41.08 the prior day, +14.0% better than its $35.24 30-day low and -5.44% off its $42.49 30-day high. Tuesday, high yield corporate credit (HYG) rose +0.42%, +1.84% better than its 30-day low, and -0.14% worse than its 30-day high.

The 1Q2015 earnings season commenced on March 15th, and now 61 of 500 S&P 500 companies reported respective earnings and revenues surprises of +4.45% and +0.09%.

After a fair value adjustment of +0.60 points, the June 2016 S&P 500 futures contract (ESM6) prices at 2096.00.  The SPX opens +1.92% and +5.14% above its respective 20- and 50-day moving averages, and +5.33% and +4.30% above its respective 100- and 200-day moving averages.  Initial resistance is 2106.01. Initial support is 2093.64, then 2086.47.

Equity indexes gapped higher and rose to mid-morning intraday highs, but weakened in early afternoon, when indexes briefly reversed lower. Indexes found support, and closed mixed.  From its prior day 2100.80 close, the SPX traded to an early 2104.05 intraday high, but reversed lower to an early afternoon 2091.68 intraday low. The index closed at 2100.80, up +0.31%.

Most SPX market segments closed higher. Leaders were materials, energy, and financials, which rose at least +1.11%. Laggards were utilities, which rose +0.12%, and consumer discretionary and technology, which fell at least -0.48%.

The KBW Bank Index (BKX) rose +1.82% to 68.40, compared to 67.18 the prior day. The index remains in correction, down -14.9% below the July 22, 2015, 80.41 multi-year high close.  This week, the BKX is up +2.55%, compared to a gain of +6.99% the prior week. In April, the BKX is up +6.49%, compared to March, when the BKX closed up +6.61%. In 2016, the BKX is off -6.40%, compared to 2015, when the BKX lost -1.59%. The BKX closed -43.5% below its 121.06 February 7, 2007, all-time high. The BKX is “death crossed”, with its 50-day moving average -9.77% below its 200-day moving average.

Other notable indexes closed mixed. The DJ Transports (TRAN) rose +1.29% and is in correction, down -12.1% from its December 29, 2014, record close, and “death crossed”, with its 50-day moving average -2.18% below its 200-day moving average. The Russell 2000 (RTY) rose +0.08%, in correction, -12.0% below its June 23rd record close, and “death crossed” by -5.67%. The Nasdaq Internet (QNET) index fell -1.28%, -7.15% below its December 4th record close, and “death crossed” by -2.17%. The Nasdaq Biotech (NBI) index fell -1.94%, deep in bear market territory, -29.8% off its July 21st record close and “death crossed” by -16.8%.

This week, the SPX, DJI, Nasdaq, and NYSE composite are up +0.96%, +0.87%, +0.04%, and +1.56%, respectively, compared to the prior week, when the indexes gained +1.62%, +1.82%, +1.80%, and +2.33%.   In April, the SPX, DJI, Nasdaq, and NYSE composite are up +6.60%, +7.08%, +6.84%, and +6.787%, respectively, compared to March, when the SPX, DJI, Nasdaq, and NYSE composite closed up +6.60%, +7.08%, +6.84%, and +6.78%, respectively.

In 2016, most indexes are higher. The SPX, DJI, and NYSE composite are up +2.78%, +3.61%, and +3.69%, respectively, while the Nasdaq is off -1.34%. In 2015, the Nasdaq rose +5.73%, while the SPX, DJI, and NYSE composite closed down -0.73% -2.33%, and -6.42%.

SPX technicals were little changed. The SPX above its 5-, 10-, 20-, 50-, 100-, and 200-day moving averages. Since January 11th, the SPX is “death crossed”, with its upward trending 1998.12 50-day moving average is -0.80% below its upward trending 2014.22 200-day moving average.

SPX relative strength (RSI) rose to 67.89, compared to 66.52 the prior day. The index is in the upper end of a neutral (20-70) range, up from an oversold 28.45 on January 13th.

SPX Williams R% (WLPR) remains overbought at -4.626, compared to an overbought -0.526 the prior day, in an overbought range since April 13th (-20.0 signals overbought, -80.0 signals oversold).

Volatility rose . From its 13.24 prior close, the CBOE SPX volatility index (VIX) closed at 13.04, down -1.51% on the session, -9.30% below its 14.38 20-day moving average. The recent high was 28.14 on February 11th. The VIX now suggests a 68% probability that the 30-day change in the SPX will be no greater than ±4.52%, compared to ±4.59% the prior session.

Tuesday, the 10-year Treasury bond yield rose +1.40 bps to 1.7851%, compared to 1.7711% at the prior close. Today, the 10-year bond yield is down -37 bps to 1.7817%.

World sovereign bond yields are lower. German 10-year yields are down -0.20 bps to 0.167%, compared to 0.169% the prior day.  The Japanese 10-year yield is -0.133%, compared to -0.123% the prior session. Respective Spanish and Italian 10-year debt yields are 1.532% and 1.392%, respectively, compared to 1.539% and 1.402% the prior day.

1Q2016 SPX Earnings. Earnings season commenced on March 16th, and 66 of 500 S&P 500 companies have reported respective adjusted earnings and revenue surprises of +3.70% and +0.06%. Consumer discretionary (11 of 85) leads with respective adjusted earnings of 9.96% and +0.39%, followed by technology (12 of 67) lead with respective adjusted earnings and revenue surprises of +4.81% and +0.40%. Health care (4 of 57) lags with respective earnings and revenue surprises of +2.81% and +0.38%.

As of April 13th, expected 1Q2016 SPX operating earnings are $25.68 , compared to actual $23.06 in 4Q2015, a QoQ increase of +11.4%, and actual $25.81 in 1Q2015, a YoY decrease of -0.50%. Expected 2Q2016 and 3Q2016 SPX adjusted EPS are $28.93 and $30.96, respectively, YoY changes of +10.7% and +21.7%.

4Q2015 SPX Earnings. 500 S&P 500 companies reported respective adjusted earnings and revenue surprises of +2.89% and -0.59%. Materials (27 of 27) lead with respective earnings and revenue surprises of +16.9% and -1.78%, respectively. Financials (90 of 90) had respective earnings and revenues surprises of +2.36% and +0.08%. Utilities lagged with respective earnings and revenue surprises of -48.6% and -17.1%.

Valuation.   In mid-April, compared to December-end, respective forward earnings estimates for 2016 and 2017 are lower. Respective SPX estimates for 2015, 2016, and 2017 are now $100.45, $117.47, and $135.60.

Price earnings multiples are elevated. With SPX equities trading at 19.6x (compared to 19.4x the prior day) weighted average (50.0/40.0%/10.0%) 2015-17 earnings ($110.77), attention focuses on prospective 2016 earnings and valuations (19.6x times survey 2015-17 SPX weighted average operating earnings suggests a 2154.39 SPX level in the next year, a +2.55% rise from the prior close).

The SPX trades at 18.6x 2014 earnings ($113.01), 20.8x estimated 2015 earnings, 17.9x estimated 2016 earnings, and 15.5x estimated 2017 earnings.  The 10-year average median price/earnings multiple is 15.9x.  Analysts expect 2016 and 2017 earnings to grow +16.9% and +15.4%, respectively, compared to an estimated -11.1% reduction in 2015.

The KBW Bank Index (BKX) trades at 10.7x 2015 earnings ($6.37), 12.1x estimated 2016 earnings ($5.67), and 10.7x estimated 2017 earnings ($6.37). Analysts expect 2016 EPS will fall -10.9% and will grow +12.3% in 2017, compared to +12.1% in 2015.

Composite, index, and equity options improved to neutral to bullish, from neutral at the prior close. Composite options improved to bullish, from neutral.  Index options improved to bullish, from neutral. Equity options are neutral, unchanged.

The composite put/call ratio is 0.61, compared to 0.98 the prior day, and better compared to its 5- and 10-period moving averages of 0.76 and 0.86, respectively.  The index put/call ratio is 0.51, compared to 1.37 the prior day, and better compared to its respective 5- and 10-period moving averages of 0.88 and 0.97.  The equity put/call ratio closed the session at 0.76, compared to 0.79 the prior day, and worse compared to its 5- and 10-period moving averages of 0.73 and 0.82, respectively.

NYSE Volume, Breadth Indicators.  Wednesday’s volume rose +5.89% to 902.73 million shares, compared to 852.55 million shares the prior day, 0.99x the 910.50 million share 20-day moving average. Market breadth was positive, and up volume led down volume.  Advancing stocks led by +1,224 (compared to +1,405 the prior day), or 2.36:1.  Up volume was 3.84:1 down volume.

LIBOR, LOIS, Currencies, Treasuries, Commodities:

• USD 1-month LIBOR is 0.43875%, compared to 0.43625% the prior day.  
• USD 3-month LIBOR is at a 34-month high 0.63435% compared to 0.63310% the prior day, at their highest level since June 2009.
• The US LIBOR-OIS (LOIS) spread is +25.135 bps, compared to +25.085 bps the prior day, and compares to the June 12, 2012, 46.785 bps high.  Euribor-OIS is +9.70 bps, compared to +9.80 bps the prior day, and down from the December 27, 2011, high of 98.800 bps. [ii]
• The 3-month Euro basis swap curve is -22.755, compared to -22.317 bps the prior day, within a neutral -10 bps and -40 bps range. The curve is up from a trough of -147.00 bps on December 14, 2011, down from a record low of -5.038 bps on December 10, 2014.
• German 10-year debt yields 0.159% compared to 0.169% the prior day, and up from a record low of 0.075% on April 16, 2015.
• British 10-year debt yields 1.477%, compared to 1.508% the prior day, and up from a record low of 1.304% on February 11, 2016.
• Japanese 10-year debt yields are -0.133%, compared to -0.123% the prior day, and up from a record low -0.099% on March 8, 2016.
• Spanish 10-year debt yields are at 1.535%, compared to 1.539% the prior day.  
• Italian 10-year debt yields are 1.396%, compared to 1.402% the prior day. [iii]  
• U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.755% and 1.768%, respectively, compared to 0.757% and 1.785% the prior session. The yield curve narrowed -1.530 bps, with the 2- to 10-year spread at 1.012%, compared to 1.028% the prior day. [iv]
• The U.S. dollar is stronger compared to the Japanese yen and British pound, but weaker compared to the euro. The dollar trades at US$94.071, compared to the US$93.954 intraday low and US$93.976 the prior day, worse compared to its $95.928 50-day, US$97.136 100-day, and US$96.995 200-day averages.  The euro trades at US$1.1364, compared to a US$1.1380 intraday high and US$1.1358 the prior day.  The euro trades better compared to its US$1.1188 50-day and US$1.1061 200-day averages.  In Japan, the dollar trades at ¥109.24, compared to ¥109.21 the prior day.  The yen trades better than its ¥111.99 50-day moving average.
• Citigroup Economic Surprise Index worsened to -21.90, compared to -9.30 the prior session. The index is worse compared to its respective -11.28 and -8.39 5- and 10-day moving averages.  From a recent +47.00 high on September 4, 2014, the index trended lower and turned negative on January 30, 2015. After its -73.30 low in March 2015, the index subsequently trended higher to -2.70 on August 27th. The index turned positive on November 6th, but turned negative on November 17th, falling to a -55.70 low on February 4, 2016. [v]
• Commodities prices are mixed, with lower energy, mixed precious metals, higher aluminum and copper, and mixed agriculture prices.

Volatility, Skew:

• The CBOE SPX volatility index (VIX) rose +1.13% to 13.39, compared to 13.24 at the prior close.  The VIX is -6.87% below the 14.38 20-day moving average.  Its 30-day high is 19.59.  Its 30-day low is 12.98.  Its all-time closing low is 9.31 on December 22, 1993.  The long-term average is 19.80.
• Mid-session, the Euro Stoxx 50 volatility index (V2X) is 20.23, down -0.63% compared 20.36 at the prior day close.  The V2X index trades -13.5% below its 23.40 20-day moving average, -30.0% below the 28.92 30-day high, and +0.95% above the 20.04 30-day low.
• The Hang Seng volatility index (VHSI) closed at 20.17, up +2.49% on the session and compares to 19.68 at the prior close.  The VHSI index trades -3.13% below its 20.82 20-day moving average.  Its lowest historical close was 11.72, on June 30, 2005.
• CBOE SKEW (SKEW) rose +4.68% to 126.19, compared to 120.55 the prior day, above a neutral range (115-120), but below 130, a level that correlates well with short-term market tops.  The SKEW set a record high of 151.22 on October 15, 2015.  Its recent low was 111.31 on October 15, 2014. [vi]

U.S. Economic Reporting and News

• At 7:00, the latest week’s MBA mortgage applications rose +1.3%, compared to +10.0% prior.
• At 10:00, March MoM existing home sales, with +3.9% survey and -7.1% prior.

World Economic Reporting and News:

• Japan – March final YoY machine tool orders fell -21.2%, compared to -21.2% prior.
• Germany – March MoM PPI was +0.0%, compared to +0.2% survey and -0.5% prior. March YoY PPI fell -3.1%, compared to -2.9% survey and -3.0% prior.
• United Kingdom – ILO 3-month unemployment is +5.1%, compared to +5.1% survey and prior.

Keywords: Financial services, macro-economic, market outlook, value, volatility, technical, U.S. equities-large cap, fixed income – sovereign.