This morning. After yesterday’s disappointing trade, equity futures are higher. After fair value adjustment, December SPX futures are up +1.95 points at 1225.00. Next resistance is at 1231.45. Next support is at 1219.65.
Equity markets are in a confirmed uptrend, but disappointed yesterday, surging at the open, but closing mixed on heavy volume. The intraday highs were reached within the 1st quarter hour. An afternoon rally faded after 3:00, and profit taking erased most gains. The NASDAQ and SPX closed fractionally higher. The DJI and NYSE composite closed-0.03% and -0.01% lower.
Asian equity markets closed mixed, with the Nikkei +0.90% and Hang Seng -1.43%. Markets expect that Chinese monetary authorities will raise rates this weekend. European equity markets are mixed, with the Eurostoxx50 +0.41%, FTSE -0.02%, and DAX -0.12%. On the EuroStoxx, financials are up +1.29%, the best performing market segments.
Overnight USD LIBOR is 0.24094%, down from 0.24156% Tuesday but above the November 0.22563% lows. USD 3-month LIBOR is unchanged at .30219%, but above the +0.28438% lows of mid-November. The dollar and pound are stronger compared to the euro and yen. The euro trades at US$1.3214, compared to US$1.3261 the prior day and USD$1.3308 the day before. The dollar trades at ¥84.13, compared to ¥83.49 Tuesday and ¥82.66 the prior day. U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.596% and 3.219%, respectively, compared to 0.532% and 3.126% Monday. The yield curve spread widened to +2.623% from +2.594% yesterday. 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 higher, with higher petroleum and natural gas, higher precious metals, lower aluminum, higher copper, and higher agricultural prices.
U.S. news. Attention remains on the tax compromise that will extend the Bush-era tax cuts in exchange for extending unemployment benefits. Despite the president’s boffo press conference performance yesterday, congressional democrats are critical, and U.S. bond markets reacted poorly, with the yield on the 10-year bond rising 28.5 basis points in the past two days. Economic reports includes consumer credit, consumer confidence and mortgage applications.
Overseas news. Yesterday, the Irish government won an initial series of votes on its €6 billion austerity budget. In October, German industrial production rose three times more than expected, increasing 2.9% over September compared to a 1% forecasted increase. German car makers cut short the annual holiday manufacturing break to accommodate surging Chinese demand. In November, French business confidence rose, beating expectations of no change. A Chinese central bank advisor said U.S. fiscal health is worse than Europe. Japanese firms reached an importing agreement with foreign rare earth suppliers, reducing future dependence on China.
· RF – after yesterday’s close, announced the hiring of a new Chief Risk Officer, Matthew Lusco, from KPMG.
· S&P upgraded the U.S. life insurance sector to stable.
· Goldman Sachs Financial Services Conference concludes today. Today’s presenters include: BK, FHN, KEY, CMA, USB, HBAN, COF, RF, BBT, and BLK
Tuesday’s equity markets. Enthused at the prospect of an extension of Bush-era tax rates, markets gapped up more than 1%, but stalled immediately, and late in the day, suffered a bearish reversal, closing mixed. Combined with heavy volume, the action was bearish. Trading desks attributed the sell off to several factors, including a 3:00 news report that federal investigators were expanding their insider trading probe, the spike in Treasury yields throughout the afternoon (a new headwind to equities as investors reallocate to Treasuries), Congress’ poor reception of the president’s tax compromise (which he defended again in an afternoon press conference), consumer credit (beating on headline but with a lower credit card receivable), and re-weighting of the S&P500 after the sale of Treasury’s Citigroup shares.
At the close, the DJI and NYSE composite were -0.03% and -0.01% lower, while the NASDAQ and SPX ended +0.14% and +0.05% higher. NASDAQ closed at a new yearly high. The SPX closed at 1223.75, -0.17% below its 2010 closing high. In December, the NYSE leads the other major indexes, up +4.15%, compared to the SPX, NASDAQ, and DJI, up +3.66%, +4.01%, and 3.21%, respectively. Impressively, segment strength has rotated to financials, with the BKX up +6.81% in December and outperforming for the first time since early April. Market breadth was mildly positive. Market segments were mixed. Industrials, telecommunications, and consumer goods were the best performers. Financials, oil and gas, and utilities were the worst.
Market sentiment is improving. The latest week’s (December 3rd) AAII Investor Bullish Sentiment index rose +4.77% to 49.66 from 47.40 on November 25th. This is a bullish reading, but below the November 4th level, when markets were still in a confirmed uptrend. Sentiment indicators are highly variable, but this reading is probably best read as bearish.
Technical indicators are improving. Major indexes are at least +7.72% higher in 2010, but at 1223.75, the SPX closed -0.17% below its November 5th close, its high point this year. All major indexes closed above their 200-week moving averages. All major indexes closed above their respective 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. Directional movement indicators are positive, and the trend is strengthening. Short-term relative strength indicators moved into the upper end of a neutral range. Market volatility ended slightly lower. The VIX closed down -0.17% to 17.99 from 18.02 at Monday’s close.
Financials were mixed, with the XLF and KRX slightly outperforming the SPX, while the BKX underperformed and closed lower on the day. The XLF, BKX, and KRX closed +0.16%, -0.08%, and +0.06%, respectively. While the broader indices have recovered most of their correction losses, financial stocks have not, with the BKX closing -17.5% below its April highs.
NYSE Indicators. Volume rose+101.9% to 1.622 billion shares, from 803.6 million shares Monday, and below the 1.045 billion share 50-day moving average. Volume rose for the 1st time in 6 trading days. Market breadth was slightly positive, and up volume led down volume. Advancing stocks led decliners by +16 (compared to -42 Monday), or 1.01:1. Up volume led down volume by 1.93:1.
3Q2010 Earnings. Earnings results have generally exceeded EPS and revenue expectations. Of the 472 S&P500 companies that reported earnings to date, 77% (358 of 466) beat operating EPS estimates, versus the historical average of 62%. Companies beat by an average of +6.4% (versus a historical average of +2%). EPS is up +31.4% over the prior year. Though challenged in the current operating environment, 376 companies (81%) reported increased revenues and 290 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 disappointed slightly, missing expectations by -0.30% on average.
Valuation. The SPX trades at 14.4x estimated 2010 earnings ($85.27) and 12.7x estimated 2011 earnings ($96.65), compared to 14.3x and 12.7x 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 +11.8%, +4.5%, and +5.4%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings by +13.3% and +28.6%, respectively.
Large-cap banks trade at a median 1.41x tangible book value and 13.4x 2011 earnings, compared to 1.42x tangible book value and 13.4x 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 +33.9% and expect 4Q2010 earnings to exceed 3Q2010 earnings by +24.6%. 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 higher volume, the SPX rose +0.63 points, or +0.05% to end at 1223.75. Volume surged 121.6% to 1.352 billion shares from 609.19 million shares Monday, above the 845.67 million share 50-day moving average. For the 33rd consecutive day, its 50-day moving average closed above its 200-day moving average (1186.25 versus 1136.64, respectively). The SPX closed above its 200-week moving average (1187.64).
Following Monday evening’s tax-rate deal announcement, the SPX gapped higher at the open, setting a new intra-day high for the year of 1235.05 at 9:33. Those levels were short lived, as profit-taking followed throughout the morning pushing the index back under 1228. Markets attempted yet another afternoon rally after 12:30, as the index rebounded to the 1233 level. At 3:00, headlines of an expanded SEC investigation into insider trading sent the index lower. News of congressional Democratic leadership discontent with the tax package also weighed at the close, and the index gave up almost all the day’s gains. The SPX failed to close above the year’s closing high of 1225.85 from November 5th. The SPX closed +3.16% above its 50-day moving average (1186.25), closing above that average for the 66th consecutive day, and +7.66% above its 200-day moving average (1136.64). The SPX remained above its April-high closing level of 1217.28 and closed -17 basis points below its yearly high of 1225.85 set on November 5th. The 20-, 50-, 100-, and 200-day moving averages rose.
Technical indicators are positive. The SPX closed above its April highs for the fourth straight session. The directional momentum indicator is positive, with increasing trend strength. Relative strength rose to 62.02 from 61.81, at the lower end of an overbought range. Next resistance is at 1231.45; next support is at 1219.65.
BKX. On higher volume, the KBW bank index closed at 47.81, down -0.04 points, or -0.08%. The index closed +11.24% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -17.50% below its April 23rd closing high.
Financial stocks underperformed, though the regionals outperformed the large cap financials. Similar to the SPX, the BKX set an intra-day high 3 minutes after the opening bell, but quickly traded off into negative territory by 10:30. Financials fluctuated between gains and losses through the morning until the afternoon’s broader market rally lifted the financial index, albeit less significantly. The 3:00 sell-off sent financials back to the break-even line where they traded through the close, finishing slightly negative and near the intra-day low. Volume surged to 634 million shares, due largely to trading in Citigroup, up 564% from 95.48 million shares Monday and above the 161.98 million share 50-day average.
Technical indicators are positive. The BKX closed above its 20-, 50-, and 100-day moving averages (46.45, 46.50, and 46.59, respectively), but again closed below its 200-day moving average (48.89) as it has since August 10th. The 50-, 100-, and 200-day averages increased, while the 20-day average trended lower. The 50-day moving average closed (by -2.39 points) below the 200-day moving average, as it has since August 16th. The directional movement indicator is positive, with an increasing trend. Relative strength fell to 58.95 from 59.24, the upper end of a neutral range. Next resistance is 48.36; next support at 47.48.
Disclosure: I am Long GS, CMA, BLK, COF, USB.