Early Gains Pared on Dollar Reversal

Includes: RF, SBNY, SNV, UBS, XLF
by: Gary Townsend

This morning. Equity markets are in a confirmed uptrend. On Monday, spurred by early dollar weakness, markets moved more than +1% higher, but lost most of that ground as the dollar rebounded against most currencies later in the day. Major indexes closed only slightly higher on increased volume. Recent distribution days number three (on September 30th, October 15th and 19th), with three for the DJI and NYSE, two for the SPX, and 1 for the NASDAQ. December SPX futures are at 1177.70, down -4.92 points after fair value adjustment. Next resistance is at 1192.93; next support is at 1181.53.

Technical indicators are mixed, but improving. All major indexes closed above their 20-, 50-, 100-, and 200-day moving averages, and their respective 50-day moving averages have all moved back above their 200-day moving averages. The NYSE composite index stands +13.2% above its August 26th closing low. Directional movement indicators are positive. Relative strength indices indicate that markets have moved into an overbought range.

Though highly volatile in recent months, LIBOR trends are now unremarkable. Overnight USD LIBOR is 0.22563%, unchanged in the past 3 days. USD 3-month LIBOR is unchanged at 0.28844%. Asian equity markets closed lower, with the Nikkei and Hang Seng -0.25% and -0.11%, respectively. European equity markets are higher, with the Eurostoxx50 -0.66%, FTSE -0.83%, and DAX -0.31%. On EuroStoxx financials are down -0.90%, the 3rd worst performing market segment. Eurozone sovereign CDS spreads are narrower.

In currency markets, the dollar and pound are stronger, while the euro and yen are weaker. The euro trades at US$1.3923, compared to US$1.3965 yesterday. The dollar rebounded to ¥81.24 from ¥80.81 yesterday. U.S. Treasuries are mixed compared to Friday, with the 2- and 10-year maturities yielding 0.367% and 2.585%, respectively, compared to 0.359% and 2.561% Friday. The yield curve spread widened to +2.218% from +2.202% the prior day. In the past year, the 2- and 10-year spread has varied from a low of +1.959% on August 26, 2010, and a high of +2.90% on January 11, 2010. On the weaker dollar, commodities are mixed, with lower oil and precious metals, higher aluminum and copper, and generally lower agriculture prices.

Earnings. Earnings results have generally exceeded EPS and revenue expectations. Of the 169 S&P500 companies that reported earnings to date, 85% (143 of 169) beat operating EPS estimates, versus the historical average of 62%. Companies beat by an average of +9.73% (versus a historical average of +2%). EPS is up +48.2% over the prior year. Though challenged in the current operating environment, 134 companies (80%) reported increased revenues and 108 companies (64%) beat revenue estimates. With 22 of 24 BKX members reporting, 82% (18 out of 22) beat operating EPS estimates, with a +25.8% average operating EPS surprise. Bank revenues have disappointed slightly, missing expectations by -0.29% on average.

U.S. news. Earnings continue to dominate. August CaseShiller home price indices disappointed. October consumer confidence is released at 10:00.

Overseas news. Third quarter U.K. GDP rose twice as much as forecast, increasing +0.8% over the prior quarter compared to 0.4% estimates. In September, Japan’s corporate service price index registered an increasing rate of deflation.

Friday’s equity markets. On increased volume, equity markets closed slightly higher, after giving up impressive early gains. For the 2nd consecutive day, early strength quickly gave way to selling pressures. Earnings continued to surprise positively, but a short pre-market speech by Bernanke on mortgage foreclosures hurt financial stocks, which lagged throughout the day. A dollar reversal from weakness to strength staunched early positive market momentum. Afternoon remarks on mortgage foreclosure by FDIC Chair Bair seemed to add to a poor afternoon trade. At the end, market breadth was positive. Market segments closed mostly higher, with basic materials, health care, and consumer services the best performers, while oil and gas, utilities, and financials were the worst performers.

Market sentiment remains variable, as there have been several failed uptrends in recent months. The sustainability of the current uptrend has its skeptics, but the uptrend has been resilient. All major index 50-day moving averages have recaptured their 200-day moving averages. The September-October rally has brought all major indexes back above their early August and then September highs, to levels last seen in late April, before the euro-crisis and flash crash. All indexes are at least +5.03% higher in 2010. Despite the broader market’s recovery, financial stocks remain -21.5% below their April highs. Political uncertainties ahead of the mid-term elections have probably become a near-term positive. The latest week’s (October 21st) AAII Investor Bullish Sentiment index stood at 49.62, up from 47.10 on October 14th, but up from 42.53 on September 30th and 20.74 on August 26th, the 52-week low. This is probably better read as a bearish indicator.

Technical indicators are mixed, but improving. Major indices are above their respective 20-, 50-, and 100-, and 200-day moving averages. With 50-day moving averages back above respective 200-day moving averages, markets are in a more bullish configuration. Directional movement indicators are positive, but short-term relative strength indicators in the lower-end of an overbought range. Market volatility is elevated, but trending lower. The VIX closed up +5.70% to 19.85 from 18.78 at Friday’s close, below 20 for the 4th consecutive trading day.

Financials underperformed the broader markets. The XLF, BKX, and KRX closed lower, -0.35%, -1.04%, and -1.55%, respectively.

NYSE Indicators. Volume rose +30.3% to 1.30 billion shares, from 773.0 million shares the prior day, and compared to the 1.028 billion share 50-day moving average. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by +593 (unchanged from Friday), or 1.49:1. Up volume lagged down volume by 1.81:1.

SPX. On increased volume, the SPX rose +2.54 points to close at 1185.62, up +0.21%. Volume rose +34.7% to 828.6 million shares, from 615.07 million shares the prior day.

Also, for the 1st time since July 1st, its 50-day moving average closed above its 200-day moving average (1122.47 versus 1121.56, respectively), confirming similar recent positive technical developments on the DJI, NYSE composite, and NASDAQ.

By 10:00, the SPX had touched its intraday high of 1196.14, but quickly weakened and began to give up its early gains, with the SPX trading around 1188 through most of the afternoon. A late rally began after 2:30, and the SPX tested resistance at 1191 at 3:30 before trading lower into the close. The SPX closed +5.13% above its August 9th close of 1127.79 (the highest close prior to that month’s correction) and +3.30% above last month’s closing high of 1147.70 on September 28th. The SPX closed +5.43% above its 50-day moving average (1124.60), closing above that average for the 36th consecutive day, and +5.69% above its 200-day moving average (1121.76), which trended higher on the day. The SPX closed +11.4% above the 1064.59 close on the August 27th positive reversal, and +9.75% above the September 1st follow-through close of 1080.29. The SPX closed -2.60% below its April 23rd closing high of 1217.28. The 20-, 50-, 100-, and 200-day moving averages rose.

Technical indicators are mixed, but improving, as the SPX closed above its 20-, 50-, 100-, and 200-day moving averages, above its monthly August 7th and September 28th highs, and above 1180, the principal recent resistance point. For the 3rd consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average. The directional momentum indicator is positive, though the trend is weakening. Relative strength rose to 65.71 from 64.78 the prior day, extending into a short-term overbought range. Next resistance is at 1192.93; next support is at 1181.53.

BKX. On higher volume, financial stocks closed down -1.04% or -0.48 points to 45.51, below its 50-day moving average. The index closed +5.89% above its August 30 closing low of 42.98, the trough of the recent correction.

The BKX opened higher to an intraday high of 46.45, but quickly lost ground, trending lower to an intraday low of 45.41 at 2:45. A late rally quickly petered out, and the index trended lower into the close. Volume rose +73.1% to 189.26 million shares, from 109.36 million shares Friday, above the 146.45 million share 50-day average. The BKX closed -21.5% below its 57.95 April 23rd closing high.

Technical indicators are mixed. The BKX closed below its 20-, 50-, 100-, and 200-day moving averages (46.63, 46.09, 47.18, and 48.86, respectively). The 20-day moving average rose. The 50-, 100-, and 200-day moving averages trended lower. The 50-day moving average closed (by -2.78 points) below the 200-day moving average, as it has since August 16. The directional movement indicator is negative, with a stable trend. Relative strength fell to 43.51 from 46.35, in the lower end of a neutral range. Next resistance is 46.17; next support at 45.13.

Valuation. The SPX trades at 14.1x estimated 2010 earnings (revised up to $84.34 from $84.29) and 12.3x estimated 2011 earnings (revised up to $96.13 from $96.04), compared to 14.0x and 12.5x respective 2010-11 earnings yesterday. The 10-year average median Price/Earnings multiple is 20.0x. Since the beginning of the year, analysts increased 2010, 2011, and 2012 earnings estimates by +10.6%, +3.9%, and +4.8%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings by +14.0% and +29.3%, respectively.

Large-cap banks trade at a median 1.44x tangible book value and 12.2x 2011 earnings, compared to 1.44x tangible book value and 12.1x 2011 earnings yesterday. These compare to the 10-year average median multiples of 3.08x tangible book value and 15.9x earnings. Analysts expect 2011 large-cap bank earnings to exceed 2010 earnings by +34.8%. In 3Q2009, large-cap banks earned a combined $5.91 per share while the BKX Index earned -$1.24 per share. In 3Q2010, earnings estimates call for $13.79 and $0.60 per share, respectively.

Company news & research:

  • SNV reported GAAP and operating EPS of -$0.25 per share, missing estimates of -$0.22. Tangible book value declined to $2.53 from $2.77.
  • SBNY reported GAAP EPS of $0.66 and operating EPS of $0.62, compared to estimates of $0.54. Provision expense declined slightly to $10.4 million from $11.1 million in 2Q10. The allowance stood at $68.4 million, up $3.6 million from $64.8 million in 2Q10. NIM expanded +3 basis points to 3.41% while average interest earning assets increased +7.9% over the prior quarter.
  • RF reported GAAP and operating EPS of -$0.17 compared to estimates of -$0.10.
  • HBC is lining up a $65 per share offer for NTRS, according to a British paper.
  • UBS reported EPS of 22 cents, missing estimates.

Disclosure: Author is long SNV, SBNY