This morning. After Tuesday’s breather, equity markets posted solid gains Wednesday, Volume declined. The DJI, SPX and NASDAQ closed at fresh 2-year highs. The NYSE composite stands just below last Monday’s 2-year closing high. March SPX futures are higher, up +1.31 points after fair value adjustment at 1273.50. Distribution days number 2 for the SPX, 3 for the NYSE, and 4 for the NASDAQ. Markets remain in a confirmed uptrend. Next SPX resistance is at 1275.33. Next support is at 1263.87.
Asian equity markets closed mixed, with Chinese equities lower for the 2nd consecutive day on a rumor that a large insurer was undercapitalized. The Nikkei, Hang Seng and Shanghai closed +1.44%, +0.12%, and -0.50%, respectively. Volume was lower on the SHCOMP, avoiding a distribution day. The SHCOMP is in a confirmed uptrend after a sharp -13.5% decline starting November 9 and ending December 28. European equity markets are higher, following yesterday’s strong U.S. equity gains. The Eurostoxx50, FTSE, and DAX are higher, +1.01%, +0.72%, and +1.18%, respectively. On the EuroStoxx, financials are up +1.05%.
LIBOR trends are unremarkable. Overnight USD LIBOR is 0.24375%, unchanged from yesterday and 0.25188% at year-end. USD 3-month LIBOR is 0.30313%, up from 0.30281% yesterday, and the first uptick since December 20. In early trading, the dollar is slightly weaker against the euro, yen and pound. The euro trades at US$1.3104, compared to US$1.3149 Wednesday and US$1.3308 the prior day. The dollar trades at ¥83.17, compared to ¥83.25 Wednesday and ¥82.04 the prior day. Treasury yields are lower, with 2- and 10-year maturities yielding 0.689% and 3.432%, respectively, compared to 0.704% and 3.465% Wednesday. The yield curve spread narrowed to +2.743% compared to +2.761% 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. Commodities are extending their sell-off, with lower petroleum but higher natural gas, lower precious metals, aluminum, and copper, and mixed agricultural prices.
U.S. news. Economic reports are light today, with another weekly initial jobless claims report at 8:30, which provides another data point prior to tomorrow’s December jobs report. Initial claims were 409K, compared to survey 408K and 388K prior. Continuing claims were 4103K, compared to 4080K survey and 4128K prior. Yesterday’s strong ADP employment report helped reverse yesterday’s early negative move. The 112th Congress convened yesterday, and the accompanying breathless commentary continues this morning.
Overseas news. This morning, France will reconsider its 35 hour work week, with officials calling the existing requirement “untenable.” Greek Prime Minister Papandreou continues to push for Eurozone bonds. At today’s meeting, the European Commission will press a proposal that imposes a haircut on senior bank bondholders.
In December, the U.K. purchaser managers index fell to 49.7, missing estimates and falling below 50 for the first time since April 2009. Some Chinese provinces are cutting off power to high usage industries amid a coal shortage. Japan’s December PMI rose to 50.2, the second consecutive rise and the highest level since April 2010.
- Comerica (CMA) – Cut to sell at Citi, price target remains at $40
- CMA – Cut to market perform at Oppenheimer
- CMA, KeyCorp (KEY) – Rated new reduces at Nomura
- SunTrust Banks (STI) – Cut to underperform at Oppenheimer
- Fifth Third Bankcorp (FITB)/Regions Financial (RF)/STI – Cautious comments from WSJ’s Heard on the Street column, saying lofty valuations leave little room for M&A premiums.
- Mid-cap banks – Cut to market perform at Credit Suisse
- Discover (DFS) ($20 price target), American Express (AXP) ($46), Wells Fargo (WFC) ($33), U.S. Bankcorp (USB) ($28), FITB ($15), BB&T (BBT) ($27), Zions Bankcorp (ZION) ($25), City National (CYN) ($62), First Horizon (FHN) ($12), STI ($29), and Synovus Financial (SNV) ($2.60) – all rated new neutrals at Nomura
- PNC Financial (PNC)/Huntington Bancshares (HBAN)/RF – Rated new buys at Nomura
- Capital One (COF) – Rated new buy at Nomura, price target of $52
- BBT - Raised to buy at Oppenheimer
- COF – rated new buy at Nomura, price target of $52
- JP Morgan Chase (JPM)/BlackRock (BLK)/Goldman Sachs (GS)/Prudential (PRU) – Top 2011 long financial ideas at Credit Suisse
- COF/AXP – top 2011 specialty finance picks at BofA/ML
- PNC – raised to a short term buy ahead of 4Q10 earnings at UBS
- Annaly Capital Management (NLY) – Raised to buy at BofA/ML
Wednesday’s equity markets. Despite strong economic news, markets gapped lower, but quickly reversed, moved into positive territory by noon, and rallied through the afternoon to close just short of the day’s highs, as on the week’s previous closes. Though markets opened lower, they never tested initial support levels. The SPX ended an impressive +12.27 points above its intraday low. All major indexes ended higher, with the NASDAQ +0.78%, followed by the SPX, DJI and NYA, +0.50%, +0.27%, and +0.22%, respectively. Volumes in each were lower.
Themes were similar to those of recent days. Early weakness was viewed as a buying opportunity. Economic data far exceeded surveys. As indicated by volumes, investors continued to build long positions, rather than take profits or position short. The best performing market segments were financials, telecommunications and technology, which all ended up at least +0.58%. Health care, basic materials and utilities were the worst performers, with only the latter closing lower.
Technical indicators are generally positive. All major indexes closed above their respective 200-week and 20-, 50-, 100-, and 200-day averages. Markets are in a generally bullish configuration, with 50-day moving averages above respective 200-day moving averages. New 52-week highs versus lows were +159, compared to +178 the prior day. The new HILO trend is trended upward, with a 10-day moving average 167.6 above the respective 20- and 50-day moving averages (155.90 and 154.74). Directional movement indicators are positive, and the trend is strengthening. The principal negative is that short-term relative strength indicators have moved into an overbought range. Prospective resistance levels are 1280 on the SPX, followed by 1290-94, and 1300; technical support is at 1260, followed by 1250, and 1230.
Market volatility moved significantly intraday, as the VIX rose as high as 18.24 at 1:00, but closed down -1.31% at 17.38, compared to 17.61 the prior day. Market sentiment is positive, probably excessively so, though off recent highs. The latest week’s (January 6) AAII Investor Bullish Sentiment index rose to 55.88, up +8.27% from 51.61 on December 30. Sentiment indicators are highly variable and are often best read as contrarian in their aspect. Despite positive sentiment, there are many market skeptics, too, and they have hardly capitulated, based on endless business network interviews and research that passes this desk.
Once again, financial stocks seized market leadership, with the (XLF), BKX, and KRX ending +1.20%, +1.35%, and +1.60%, respectively, in heavier trading. Credit card-related AXP and COF rose +2.48% and +4.21%, respectively. Money center and investment banks performed exceptionally well, with Bank of America (BAC) adding another +1.83% and C +1.43%. PNC rose +1.93%, MS +1.26%, and GS +0.53%. Regional banks actually outpaced the larger banks. While the broader indices are near two-year highs and have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -6.90% below its April highs and -34.7% below its best level of 82.55 in September 2008.
NYSE Indicators. Volume declined -4.35% to 1.043 billion shares, from 1.090 billion shares Tuesday, and compares to a 988.11 million share 50-day moving average. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by +626 (compared to +1220 Tuesday), or 1.52:1. Up volume led down volume by 2.37:1.
Valuation. The SPX trades at 13.5x estimated 2011 earnings (revised to $94.61 from $97.18) and 11.9x estimated 2012 earnings ($107.31), compared to 13.1x and 11.8x respective 2011-12 earnings yesterday. The 10-year average median Price/Earnings multiple is 20.0x. Since the beginning of 2010, analysts increased 2011 and 2012 earnings estimates by +2.3%, and +3.1%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings by +18.4% and +34.3%, respectively.
Large-cap banks trade at a median 1.58x tangible book value and 15.9x 2011 earnings, compared to 1.58x tangible book value and 14.5x 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 +34.3%. Analysts’ estimates for bank 4Q2010 earnings are 20.6% higher than were estimates for 3Q2010 earnings. In 3Q2010, large-cap banks earned $13.78 (the sum of 31 banks’ operating EPS), compared to $5.32 in 3Q2009. In 3Q2010, the BKX earned $0.71 per share, compared to -$1.24 per share a year earlier.
SPX. On lower volume, the SPX rose +6.36 points, or +0.50% at 1276.56. Volume fell -3.56% to 797.91 million shares from 827.31 million shares Tuesday, above the 778.32 million share 50-day moving average. For the 54th consecutive day, its 50-day moving average closed above its 200-day moving average (1220.88 versus 1147.83, respectively). The SPX closed above its 200-week moving average (1184.38).
Despite the ADP employment report surprise, the SPX opened lower, setting its intra-day low of 1265.36 at the open. The SPX immediately reversed, as stocks rallied through the morning as Treasury bonds prices sank. The SPX reached break-even by 10:15, but briefly fell back. After 10:30, the rally resumed, pushing the index to 1275, up +5 points by 11:30. Momentum slowed through the afternoon, but the index still rose, setting its intra-day high of 1277.63 at 3:12. The SPX traded sideways into the close to finish. The SPX closed +4.56 above its 50-day moving average (1220.88), closing above that average for the 86th consecutive day, and +11.21% above its 200-day moving average (1147.83). The 20-, 50-, 100-, and 200-day moving averages rose.
Technical indicators are positive. The SPX closed above its April highs for the 24th straight session, above 1270 for the third consecutive day, and set a new two-year high. The directional momentum indicator is positive, with an increasing trend. Relative strength rose to 76.10 from 73.63, well into an overbought range. Next resistance is at 1281.01; next support is at 1268.74.
BKX. On higher volume, the KBW bank index closed at 53.95, up +0.72 points or +1.35%. The index closed +25.52% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -6.90% below its April 23 closing high.
Once again, banks were the best performing market segment, and regional banks outperformed the large-cap banks. The BKX also opened lower, but with significant positive momentum. Aided by Goldman’s sell-side recommendation to buy BAC call options, the BKX turned positive by 9:45 and rallied straight through 1:00 to the 53.90 level. Buyers took a breather through the afternoon until the slight dip was bought after 2:15, pushing the index to an intra-day high of 53.00 at 3:12. Small profit taking after the mini-rally sent the index slightly down into the close, and the BKX finished at 53.95. The index closed above 50 for the 13th straight day. Volume rose +4.15% to 156.17 million shares, up from 149.94 million shares Tuesday, and above the 153.76 million share 50-day average.
Technical indicators are positive. The BKX closed above its 20-, 50-, 100-, and 200-day moving averages (51.39, 48.40, 47.24, and 49.08, respectively), closing above the 200-day average for the 20th straight session. The 20-, 50-, 100-, and 200-day averages all increased. The 50-day moving average closed (by -0.67 points) below the 200-day moving average, as it has since August 16, though the spread continues to tighten and signals a likely “golden” cross next week. The directional movement indicator is positive, at the highest level since mid-April, with an increasing trend. Relative strength rose to 74.06 from 71.23, an overbought range. Next resistance is 54.34; next support at 53.28.
Disclosure: I am long AXP, COF, NLY, JPM, SNV, BLK, GS, PNC, HBAN, CMA, JPM, BLK, USB.