This morning. After another mixed session, equity futures are slightly higher, with March SPX futures at 1256.50, up +2.46 points after fair value adjustment. Markets remain in a confirmed uptrend. Distribution days number 2 on the SPX and NYSE and 3 for the NASDAQ. Volume drifted up from Monday’s holiday and weather-diminished levels, but participation will likely be subdued through the New Year. Next SPX resistance is at 1260.20. Next support is at 1256.52.
After several days’ consecutive losses, Asian equity markets closed higher. The Nikkei, Hang Seng, and Shanghai indexes closed +0.50%, +1.54%, and +0.68%, respectively, as the 7-week long correction has produced some attractive valuations. The SHCOMP is -12.9% below its November 8th high. European equity markets are mixed, with the Eurostoxx50, FTSE, and DAX +0.69%, -0.41%, and DAX +0.35%, respectively. On the EuroStoxx, financials are middling performers, up +0.63%.
Overnight USD LIBOR continues to edge up, at 0.24563% from 0.24438% on December 24. USD 3-month LIBOR is at 0.30281%, unchanged since December 20th. In early trading, the dollar is weaker against the euro, yen, and pound. The euro trades at US$1.3133, compared to US$1.3115 yesterday and USD$1.3165 the prior day. The dollar trades at ¥82.19, compared to ¥82.38 Tuesday and ¥82.81 Monday. U.S. Treasury yields are lower, with 2- and 10-year maturities yielding 0.727% and 3.464%, respectively, compared to 0.743% and 3.479% Tuesday. The yield curve spread is essentially unchanged at +2.737% compared to +2.736% 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 generally lower, with lower petroleum and natural gas, mixed precious metals, lower aluminum, higher copper, and mixed agricultural prices.
U.S. news. Economic reporting is light today, with ABC consumer confidence for the week ended December 26th falling to -44 from -41, and showing an odd divergence from positive consumer spending trends. Yesterday, news flows disappointed on a negative October CaseShiller report. The 5-year Treasury auction was weaker than expected.
Overseas news. Chinese automaker BYD said it will miss its 600k vehicle sales target for 2010. Russia plans to maintain its grain export ban until July 1st. In December, Germany’s consumer price index increased more than expected, rising 1.0% over the prior month compared to estimates of a 0.9% increase.
· MTB – price target raised to $91 from $86 at C, maintains hold
· GS – 4Q10 EPS estimates cut to $3.75 from $4.20 at CLSA
· MS – 4Q10 EPS estimates cut to $0.40 from $0.61 at CLSA
Tuesday’s equity markets. In a reprise of Monday’s trade, equity markets shrugged off negative news and closed mixed on better, but unimpressive holiday volume. The SPX, DJI, and NYSE composite rose +0.08%, +0.18%, and +0.14%, respectively; the NASDAQ fell -0.16%. In December, the NYSE leads the other major indexes, up +6.74%, compared to the SPX, DJI, and NYSE, up +6.60%, +5.17%, and +6.59, respectively. Financials were middling performers, ending up +0.02% on the day. Despite news of an Allstate (NYSE:ALL)suit against Countrywide, BAC was among the better performers, up another +0.53%, perhaps benefitting from Ally Financial’s favorable rep and warranty settlement with GSE Fannie Mae. The 0.55% loss rate on unpaid principal balances suggests that BAC, JPM, and WFC mortgage putback costs may be substantially lower than many analysts’ estimates.
Despite a disappointing (though October-dated) CaseShiller report, markets opened higher, but quickly met with resistance as the SPX approached 1260 and retreated to intraday lows at 10:30. Markets marked time through mid-day, but rallied back to intraday highs late in the day, before weakening into the close. Trading desks generally cited the same ongoing themes: 1) little in the way of high-conviction trades; 2) bullish and complacent investor sentiment; and 3) a bid on weakness. Financials’ outperformance has allowed other sectors to consolidate earlier gains despite individual earnings disappointments.
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. Directional movement indicators are positive, and the trend is strengthening. The principal negative is that short-term relative strength indicators are have moved into the lower end of an overbought range. Prospective resistance levels are 1259 on the SPX, followed by 1265 and 1280; technical support is at 1250, followed by 1242, and 1234.
Market volatility moved up in early trading, but eased as markets rallied and ended with the VIX down -0.85% at 17.52, from 17.67 the prior day. Market sentiment is positive, probably excessively so. The latest week’s (December 23rd) AAII Investor Bullish Sentiment index is elevated, up +26.0% to 63.30 from 50.23 on December 16th. This is the highest reading since 2004. Sentiment indicators are highly variable and are often best read as contrarian in their aspect.
Financial stocks closed higher, with the XLF, BKX, and KRX ending +0.01%, +0.46%, and +0.50%, respectively. While the broader indices are at or near two-year highs and have recovered their post-September 2008 losses, financial stocks have not, with the BKX closing -9.40% below its April highs and -36.4% below its best level of 82.55 in September 2008.
NYSE Indicators. Volume recovered to 560.21 million shares, up +19.8% from Monday’s 467.6 million shares, but barely half the 1.014 billion share 50-day moving average. Market breadth was negative, though up volume led down volume. Advancing stocks lagged decliners by -125 (compared to +439 Monday), or 0.92:1. Up volume led down volume by 1.17:1.
3Q2010 Earnings. Earnings results have generally exceeded EPS and revenue expectations. Of the 492 S&P500 companies that reported earnings to date, 76% (373 of 492) beat operating EPS estimates, versus the historical average of 62%. Companies beat by an average of +6.5% (versus a historical average of +2%). EPS is up +30.7% over the prior year. Though challenged in the current operating environment, 394 companies (80%) reported increased revenues and 303 companies (62%) 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 14.8x estimated 2010 earnings ($85.30) and 13.0x estimated 2011 earnings ($97.18), compared to 14.7x and 12.9x respective 2010-11 earnings yesterday. The 10-year average median Price/Earnings multiple is 20.0x. Since the beginning of 2010, analysts increased 2010, 2011, and 2012 earnings estimates by +11.9%, +5.1%, and +5.7%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings by +13.9% and +28.9%, respectively.
Large-cap banks trade at a median 1.54x tangible book value and 14.4x 2011 earnings, compared to 1.53x tangible book value and 14.3x 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 +21.4%. 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 -$1.24 per share (negative due to a -$10 billion, compared to $0.71 per share a year earlier.
SPX. On higher volume, the SPX rose +0.97 points, or +0.08% to 1258.51, just shy of the 1258.84 two-year high set last week. Volume rose +17.4% to 417.36 million shares from 355.47 million shares Monday, below the 807.73 million share 50-day moving average. For the 48th consecutive day, its 50-day moving average closed above its 200-day moving average (1210.56 versus 1144.82, respectively). The SPX closed above its 200-week moving average (1185.05).
Helped by strength in financials, the SPX gapped higher at the open to the 1260 level, a resistance point. Failing there, the index retraced gains quickly, hitting the flat line by 9:45. A disappointing consumer confidence number at 10:00 sank the index into negative territory, to an intra-day low of 1256.22 by 10:15. Trading sideways through the morning, a 12:00 rally lifted markets back to break even, and a weak 5-year Treasury auction at 1:00 sustained the rally’s momentum. Equities climbed straight through the afternoon, reaching a peak of 1259.90 at 3:30. Markets sold off in the final 10 minutes of trading, and the SPX ended at 1258.51, up 0.97 points or +0.08%. The SPX closed +3.96% above its 50-day moving average (1210.56), closing above that average for the 80th consecutive day, and +9.93% above its 200-day moving average (1144.82). The SPX closed above its April-high closing level of 1217.28 for the 18th straight session. The 20-, 50-, 100-, and 200-day moving averages rose.
Technical indicators are positive. The SPX closed above its April highs for the 17th straight session. The directional momentum indicator is positive, with a stable trend. Relative strength rose to 71.12 from 70.72, an overbought range. Next resistance is at 1260.20; next support is at 1256.52.
BKX. On higher, but light volume, the KBW bank index closed at 52.50, up +0.24 points or +0.46%, the index’s highest close since May 17th. The index closed +22.25% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -9.40% below its April 23rd closing high.
Financials outperformed the market, and large-cap banks underperformed regionals. The BKX opened strongly, rising on the prior night’s Ally Financial put-back settlement with Fannie. The index reached 52.55 by 9:45, but the consumer confidence-driven market selloff at 10:00 forced the BKX lower to 52.40. News of an Allstate lawsuit against Countrywide just before noon caused a financial sector sell-off. As they have consistently this month, buyers bought the dip, and the index quickly recovered to 52.40 by 12:15. The weak 5-year Treasury auction at 1:00 spurred another rally, lifting the BKX above its opening highs. The index traded at the 52.55 level from 1:30 until just before the close. Closing bell profit taking forced the index down, and the BKX finished at 52.50, up 0.46% on the day and achieving its best close since May 17th. The index closed above 50 for the seventh straight day. Volume rose +4.45% to 70.58 million shares, up from 67.57 million shares Wednesday, but well below the 161.68 million share 50-day average.
Technical indicators are positive. The BKX closed above its 20-, 50-, 100-, and 200-day moving averages (49.62, 47.57, 46.91, and 49.04, respectively), closing above the 200-day average for the 14th straight session. The 20-, 50-, 100-, and 200-day averages all increased. The 50-day moving average closed (by -1.47 points) below the 200-day moving average, as it has since August 16th. The directional movement indicator is positive, with a strengthening trend. Relative strength rose to 70.56 from 69.67, moving into an overbought range. Next resistance is 52.65; next support at 52.31.
Disclosure: I am long JPM, WFC, BAC, GS, MS.