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Yesterday's Gains End Equity Correction, Confirm Resumption of Bull Market

|Includes:American International Group Inc (AIG)
This morning.  Yesterday, equity markets confirmed the end of the April-August correction and signaled the extension of the bull market that commenced in March 2009.  Markets are in a confirmed uptrend.  On heavier volume, the equity markets’ uptrend rocketed ahead yesterday, erasing losses from the April-August correction and closing at new yearly highs.  For the 2nd consecutive day, financial stocks led markets higher, spurred by mid-afternoon reports that regulators will permit strong institutions to repurchase shares and raise dividends.  Recent distribution days number three (on October 15th, 19th, and 27th), with three for the DJI and NYSE, two  for the SPX, and 1 for the NASDAQ.  This morning, December SPX futures are at 1219.60, up +1.74 points after fair value adjustment.  Next resistance is at 1228.76; next support is at 1205.85.
Technical indicators are generally positive and improving.  The NYSE closed above its 200-week moving average (7782.43 versus 7744.02), confirming recent similar moves by the NASDAQ, DJI, and SPX.  All major indexes closed above their 20-, 50-, 100-, and 200-day moving averages.  Their respective 50-day moving averages are above 200-day moving averages.  The NYSE composite index stands at its best level of 2010, +16.8% above its August 26th closing correction low.  Directional movement indicators are positive, and associated trends are strengthening.  Market volatility is at 6-month lows.  Relative strength indices have markets in a short-term overbought range.
Asian equity markets closed higher, with the Nikkei and Hang Seng +2.86% and +1.62%, respectively.  After release of the better than expected US employment report, European equity markets are higher, with the Eurostoxx50 +0.10%, FTSE +0.24%, and DAX +0.41%.  On the EuroStoxx, financials are down -0.23%, the 3rd worst performing market segment.  Eurozone sovereign CDS spreads continue to widen, with Ireland at another record level, and Greece, Spain, and Portugal retesting recent highs. 
Despite unfavorable sovereign CDS trends, LIBOR trends remain unremarkable.  Overnight USD LIBOR is 0.22563%, essentially unchanged from +0.22625% on September 30th.  USD 3-month LIBOR is 0.28563, compared to 0.28563% Thursday, and down from 0.29000% at the end of September.  In currency markets, the dollar is slightly stronger against the euro, pound, and yen.  The euro trades at US$1.4119, compared to US$1.4207 the prior day.  The dollar trades at ¥80.91, compared to ¥80.75 yesterday.  U.S. Treasuries are mixed, with the 2- and 10-year maturities yielding 0.335% and 2.503%, respectively, compared to 0.328% and 2.489% yesterday.  The yield curve spread widened immaterially to +2.168% from +2.161% 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.  With the stronger dollar, commodities are mixed, with higher oil, lower precious metals, but higher aluminum and copper, and generally lower agriculture prices.
3Q2010 Earnings.  Earnings results have generally exceeded EPS and revenue expectations.  Of the 406 S&P500 companies that reported earnings to date, 77% (311 of 406) beat operating EPS estimates, versus the historical average of 62%.  Companies beat by an average of +7.0% (versus a historical average of +2%).  EPS is up +34.2% over the prior year.  Though challenged in the current operating environment, 323 companies (80%) reported increased revenues and 249 companies (61%) beat revenue estimates.  With all 24 BKX members reporting, 79% (19 out of 24) beat operating EPS estimates, with a +25.3% average operating EPS surprise.  Bank revenues have disappointed slightly, missing expectations by -0.30% on average.
U.S. news.  News focus is on the October employment report at 8:30, and September pending home sales at 10:00.  Nonfarm payrolls surprised with a gain of +151K, compared to survey of +60K, and private payroll expansion of +159K versus an expected +80K gain.  Manufacturing payrolls disappointed with a loss of -7K jobs, compared to an expected gain of +5K
Overseas news.  Third quarter Spanish GDP was flat, decelerating from a +0.20% increase in the second quarter.  The Financial Times reports that the London clearing house LCH.Clearnet is requiring higher cash deposits to trade Irish sovereign debt.  September Euro-zone retail sales missed expectations with a +1.1% increase, compared to +1.3% estimates.  Today, the Bank of Japan left its benchmark interest rate unchanged, as expected.
Thursday’s equity markets.  The bull market is back.  Extending Wednesday afternoon’s strong upward move, equity markets gapped up at the open, trended higher throughout the day, and closed at the day’s highs.  All major indexes closed above their respective previous 2010 highs.  Market breadth was positive, and up volume exceeded down volume.  All market segments closed at least +0.40% higher, with financials, basic materials, and oil and gas the best performers, while consumer services, utilities, and health care fared worst.
Market sentiment is increasingly bullish, but markets appear short-term overbought.  The uptrend that commenced on August 30th is resilient, and is beginning to take on attributes of a market expansion.  In addition to setting new 2010 and post-March 2009 highs, all major indexes closed above their respective 200-week moving averages and their 50-day moving averages are above their respective 200-day moving averages.  All indexes are at least +8.32% higher in 2010.  The latest week’s (November 4th) AAII Investor Bullish Sentiment index stood at 48.23, down from 51.23 on October 28th and compared to 20.74 on August 26th.  This is probably better read as a bearish indicator.
While the broader indices have reconfirmed an extension of the bull market that commenced in March 2009, financial stocks remain in a sharp correction, -17.8% below their April highs, finally moving out of bear market territory after yesterday’s gains.
Technical indicators are positive and 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 generally bullish configuration.  For the 1st time since late July 2008, the NYSE composite closed above its 200-week moving average, confirming similar recent positive DJI, SPX, and NASDAQ trends.  Directional movement indicators are positive with a strengthening Short-term relative strength indicators have moved back into an overbought range.  Market volatility is elevated, but the VIX closed down -5.32% to 18.52 from 19.56 at Wednesday’s close, below 20 for the 2nd time in the past 8 sessions.
For the 2nd consecutive day financials outperformed.  The XLF, BKX, and KRX closed up +3.33%, +3.61%, and +3.84%, respectively.
NYSE Indicators.  Volume rose +24.6% to 1.375 billion shares, from 1.103 billion shares the prior day, and compares to the 1.053 billion share 50-day moving average.  By large margins, market breadth was positive, and up volume led down volume.  Advancing stocks led decliners by +2050 (compared to +453 Wednesday), or 5.20:1.  Up volume led down volume by 9.57:1.
ValuationThe SPX trades at 14.4x estimated 2010 earnings (revised up to $85.07 from $84.90) and 12.7x estimated 2011 earnings ($96.35), compared to 14.1x and 12.4x 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 +11.6%, +4.1%, and +4.8%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings by +13.2% and +28.2%, respectively.
Large-cap banks trade at a median 1.43x tangible book value and 12.8x 2011 earnings, compared to 1.40x tangible book value and 12.4x 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 +34.2%.  In 3Q2009, large-cap banks earned a combined $5.91 per share while the BKX Index earned -$1.24 per share.  In 3Q2010, large-cap banks earned $13.78 and the BKX earned $0.71 per share.
SPX.  On increased volume, the SPX rose +23.10 points, or +1.93% to end at 1221.06, setting a new post-March 2009 high.  Volume rose +26.8% to 1.09 billion shares, from 859.41 million shares the prior day.  For the 10th consecutive day, its 50-day moving average closed above its 200-day moving average (1143.48 versus 1123.83, respectively).  For the 3rd consecutive day, the SPX closed above its 200-week moving average (1193.28).
Markets gapped up out of the gate, extending the prior day’s strong late afternoon rally.  After these strong initial gains, markets trended higher throughout the day, and closed just short of the 1221.25 intraday high.  The SPX closed +6.78% above its 50-day moving average (1143.48), closing above that average for the 44th consecutive day, and +7.90% above its 200-day moving average (1123.83), which trended higher on the day.  The SPX closed +14.7% above the 1064.59 close on the August 27th positive reversal, and +13.0% above the September 1st follow-through close of 1080.29.  The SPX closed +0.31% above its April 23rd closing high of 1217.28, and +78.9% above its March 6, 2009 bear market low.  The 20-, 50-, 100-, and 200-day moving averages rose.
Technical indicators are positive, as the SPX recaptured its April 2010 high, moving back into expansion from correction, and confirming the bull market that commenced in March 2009.   The directional momentum indicator is positive, with a strengthening.  Relative strength rose to 77.62 from 70.22, moving further into a short-term overbought range.  Next resistance is at 1228.76; next support is at 1205.85.
BKX.  On heavy volume, the KBW bank index closed at 47.65, up +1.66 points or +3.61%.  The index closed +10.9% above its August 30 closing low of 42.98, the trough of the recent correction, but -17.8% below its April 23rd closing high, moving out of bear market territory, but still deep in correction.
For the 2nd consecutive day, financial stocks outperformed the broader indexes.  The BKX opened higher, but slightly lagged the broader indexes until a report at 2:00 that regulators will begin approval of dividend and share repurchase requests.  The BKX rose to an intraday high of 47.76 at 3:45, giving back slightly into the close.  Volume rose +124.0% to 258.96 million shares from 115.58 million shares the prior day, and above the 146.12 million share 50-day average.
Technical indicators improved.  The BKX closed above its 20-, 50-, and 100-day moving averages (46.20, 46.22, and 46.99, respectively), but below its 200-day moving average (48.81).  The 20- and 50-day moving averages trended higher, the 100-day trended lower, and the 200-day was unchanged.  The 50-day moving average closed (by -2.59 points) below the 200-day moving average, as it has since August 16.  The directional movement indicator switched to positive, with a stable trend.  Relative strength rose to 60.70 from 49.27, moving to the top of a  neutral range.  Next resistance is 48.27; next support at 46.51.
Company news & research:
·         AIG – reported 3Q operating EPS of -$1.47, compared to estimates of -$3.47. 

Disclosure: AIG

Disclosure: No positions.

Disclosure: No positions
Stocks: AIG