This morning. Equity markets are in a confirmed uptrend. On Friday, major indexes closed mixed, with the DJI slightly lower while the SPX, NYSE, and NASDAQ posted small gains on weaker volume. Recent distribution days number four (on September 21st, 30th, October 15th and 19th), with two for the DJI and NASDAQ, three for the SPX, and four for the NYSE composite. On dollar weakness, December SPX futures are at 1183.30, up +7.02 points after fair value adjustment. Next resistance is at 1185.01; next support is at 1180.07.
Technical indicators are mixed, but improving. All major indexes closed above their 20-, 50-, 100-, and 200-day moving averages. The NYSE composite index stands +12.9% above its August 26th closing low. Notably, for the 1st time since July 2, the SPX’s 50-day moving average (1122.47) closed above its 200-day moving average (1121.56), joining the DJI, NYSE composite, and NASDAQ in this more bullish configuration. The NASDAQ’s 50-day moving average crossed above 200-day moving average on October 21st for the first time since July 14th, joining the DJI and NYSE composite, whose 50-day crossed above 200-day moving averages on October 1st and 15th, respectively. Directional movement indicators are positive. Relative strength indices indicate that markets are slightly overbought.
Overnight USD LIBOR is 0.22563%, unchanged from the prior day. USD 3-month LIBOR is unchanged at 0.28844%. Asian equity markets closed mixed, with the Nikkei and Hang Seng -0.27% and +0.47%, respectively. European equity markets are higher, with the Eurostoxx50 +0.16%, FTSE +0.60%, and DAX +0.63%. On EuroStoxx financials are down -0.58%, the worst performing market segment. Eurozone sovereign CDS spreads are wider. In currency markets, the dollar is weaker, while the euro, pound, and yen are stronger. The euro trades at US$1.4035, compared to US$1.3954 yesterday. The dollar is trading at historical lows against the yen, currently at 80.62. U.S. Treasuries are mixed compared to Friday, with the 2- and 10-year maturities yielding 0.351% and 2.529%, respectively, compared to 0.351% and 2.554% Thursday. The yield curve spread narrowed to +2.178%, from +2.203% 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 higher, with higher oil, precious metals, lower aluminum and copper, and agriculture prices.
Earnings. Earnings results have generally exceeded EPS and revenue expectations. Of the 132 S&P500 companies that reported earnings to date, 86% (113 of 132) beat operating EPS estimates, versus the historical average of 62%. Companies beat by an average of +10.5% (versus a historical average of +2%). EPS is up +49.7% over the prior year. Though challenged in the current operating environment, 104 companies (79%) reported increased revenues and 87 companies (66%) 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 -0.31% on average.
U.S. news. Earnings continue to dominate. At 8:30 the Chicago Fed National Activity Index reported -0.58, disappointing compared to -0.30 survey and -0.53 prior. At 10:00, existing home sales for September, and at 10:30, the Dallas Fed Manufacturing Activity report will be released. Fed Chairman Bernanke speaks this morning on mortgage finance, underwriting practices, modifications, and servicer foreclosure practices. Goldman added Citigroup to its conviction buy list.
Overseas news. As expected, the G-20 finance ministers’ meeting is ending with a currency accord based on goodwill and peer pressure rather than any enforceable sanction regime. August Eurozone industrial new orders exceeded expectations, rising 5.3% over July and comparing to 3.0% estimates. Greece’s finance minister said Greece will meet next year’s 7.6% target budget deficit and will not need to extend the EU/IMF loan repayment schedule. Yesterday, Italy’s Banco Popolare announced a €2 billion capital raise, compared to its current €3.85 billion market capitalization.
Friday’s equity markets. Equity markets closed mixed, on lower volume. Earnings continued to surprise positively. The SPX, NYSE, and NASDAQ ended with small gains; the DJI closed down -0.13%. Early strength quickly gave way to mild selling pressure, which some attributed to caution in front of a weekend meeting of G-20 finance ministers. Market breadth was positive. Market segments closed mixed, with oil and gas, technology, and consumer services the best performers, while telecommunications, utilities, and basic materials 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. Political uncertainties ahead of the mid-term elections are the principal negative, but the September-October rally has taken all major indexes back above their early August and then September highs, to levels last seen in early May, before the euro-crisis and flash crash. All indexes are at least +4.68% higher in 2010. 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. Despite the broader market’s recovery, financial stocks remain more than -20.6% below their April highs. Tax uncertainties, monetary policy, dollar weakness, and the flatter yield curve qualify as additional market negatives.
Technical indicators are mixed, but improving. Major indices are above their respective 20-, 50-, and 100-, and 200-day moving averages. Friday, for the 1st time since July 2nd, the SPX 50-day moving average crossed above its 200-day moving average, joining the DJI, NYSE, and NASDAQ composite in this bullish configuration. Directional movement indicators are mixed, and short-term relative strength indicators in the lower-end of an overbought range. Market volatility is elevated, but trending lower. The VIX closed down -2.54% to 18.78 from 19.27 at Thursday’s close, below 19 for the 1st day in the past 8 days.
Financials generally underperformed the broader markets. The XLF, BKX, and KRX closed mixed, -0.03%, +0.33%, and +0.21%, respectively.
NYSE Indicators. Volume was light, declining -26.8% to 773.0 million shares, from 1.056 billion shares the prior day, and compared to the 1.025 billion share 50-day moving average. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by +593 (compared to -59 Thursday), or 1.50:1. Up volume lagged down volume by 1.50:1.
SPX. On lower volume, the SPX rose +2.82 points to close at 1180.26, closing above 1183.08. Volume declined -26.1% to 615.07 million shares, from 832.5 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 positive technical developments on the DJI, NYSE composite, and NASDAQ. The SPX closed +0.59% higher for the week, and higher for the 3rd consecutive week. Weekly volume was -9.46% less than the prior week.
Within the 1st quarter hour, the SPX moved to an intraday high of 1183.93, but never tested resistance at 1189, meandering throughout the day’s remainder between 1179 and 1183. The SPX closed +4.98% above its August 9th close of 1127.79 (the highest close prior to that month’s correction) and +3.16% above last month’s closing high of 1147.70 on September 28th. The SPX closed +5.49% above its 200-day moving average (1121.56), which trended higher on the day, and +5.40% above its 50-day moving average (1122.47), closing above that average for the 36th consecutive day. The SPX closed +11.3% above the 1064.59 close on the August 27th positive reversal, and +9.52% above the September 1st follow-through close of 1080.29. The SPX closed -2.81% 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. 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 positive technical developments on the DJI, NYSE composite, and NASDAQ. The momentum indicator is positive, though the trend is weakening. Relative strength rose to 64.78 from 63.78, extending into a short-term overbought range. Next resistance is at 1185.01; next support is at 1180.07.
BKX. On lower volume, financial stocks extended the prior day’s gains, closing up 0.33% or +0.15 points to 45.84. For the week, the BKX rose +0.75 points. The BKX ended below the 50-day moving average. The index closed +7.00% above its August 30 closing low of 42.98, the trough of the recent correction.
The BKX opened higher, quickly reaching an intraday high of 46.22, but lost ground through midday, to an intraday low of 46.67 shortly after 12:00. In the final two hours, markets rallied weakly into the close. Volume fell to 109.36 million shares, down -25.5% to 109.36 million shares, from 146.72 million shares Wednesday, and below the 144.42 million share 50-day average. The BKX closed -20.6% 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 (46.65, 46.09, 47.22, and 48.87, respectively). The 20-, 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 rose to 46.35 from 45.31, in the lower end of a neutral range. Next resistance is 46.25; next support at 45.70.
Valuation. The SPX trades at 14.0x estimated 2010 earnings (revised up to $84.29 from $84.19) and 12.5x estimated 2011 earnings (revised up to $96.13 from $96.04), compared to 14.0x and 12.3x respective 2010-11 earnings Friday. 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 +29.4%, respectively.
Large-cap banks trade at a median 1.46x tangible book value and 12.1x 2011 earnings, compared to 1.45x tangible book value and 12.1x 2011 earnings Friday. 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 +35.0%. 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:
· C – added to conviction buy list at Goldman, price target of $5.50
· PFG – raised to buy at Goldman, price target of $31.00
Disclosure: Long C