This morning. Equity futures are higher, as earning season commenced with an earnings beat from Alcoa (AA), which reported its best profit since 2008. Friday, JPMorgan (JPM) initiates the banks’ earnings season. Also, Asian equity markets are generally higher on a HSBC upgrade of regional markets. European equities are higher after Japan pledged to buy Euro-sovereign debt. Monday was another mixed trading day, with positive breadth, but lower volume. Markets are in a confirmed uptrend. Distribution days (index losses of more than -0.25%, on increased volume in the past 25 trading days) number 4 for the NASDAQ, 3 on NYSE composite, 1 for the SPX, and none for the DJI. March SPX futures are at 1271.60, up +5.85 points after fair value adjustment. Next SPX resistance is at 1273.45. Next support is at 1264.11.
Asian equity markets closed mixed, with Chinese equities higher on lower volume. HSBC raised Taiwanese, Singapore, and Malaysian stock markets to overweight. The Nikkei, Hang Seng, and Shanghai closed -0.29%, +0.99%, and +0.44%, respectively. Volume was -11.9% lower on the SHCOMP, where financials were the 2nd best performer, up +0.96%. The SHCOMP is in a confirmed uptrend after a sharp -13.5% decline starting November 9th and ending December 28th. On news that Japan will purchase European sovereign debt, European equity markets are higher. Purchases are likely to have credit enhancement from a central European facility. The Eurostoxx50, FTSE, and DAX are up +1.11%, +1.31%, and +0.88%, respectively. On the EuroStoxx, financials are middling performers, up +1.20%.
LIBOR trends remain unremarkable. Overnight USD LIBOR is 0.24000%, down from 0.24125% Monday, and down from 0.25188% at year-end. USD 3-month LIBOR is 0.30313%, unchanged since January 6th and compared to 0.30281% at year-end. In early trading, the dollar is slightly stronger against the yen and pound, but weaker against the euro. The euro trades at US$1.2971, compared to US$1.2951 Monday and US$1.2907 the prior day. Technically, the euro has broken down, below its 200-day moving average US$1.3073, but this has happened before, as recently as late November. The dollar trades at ¥82.93, compared to ¥82.71 Monday and ¥83.15 the prior day. The yen is much better than its ¥86.48 200-day moving average. Treasury yields are lower, with 2- and 10-year maturities yielding 0.561% and 3.293%, respectively, compared to 0.569% and 3.328% Friday. The yield curve spread widened to +2.732% compared to +2.714% 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 higher, with higher petroleum, lower natural gas, higher precious metals, but lower aluminum and copper, and higher agricultural prices.
U.S. news. The trans-Alaska oil pipeline remains closed after springing a leak over the weekend. Shipments are expected to resume in the next two days. Today’s economic reporting calendar is light, but heavies up tomorrow. The NFIB December small business optimism report disappointed at 92.6, below prior 93.2 and survey 94.5. At 10:00, we’ll see the IBD/TIPP economic optimism report for January, and wholesale inventories for November.
Overseas news. French port unions called for a 24-hour strike tomorrow protesting night work and overtime. Portugal’s Prime Minister said the country did not intend to seek IMF/EU aid. Meanwhile, a Portuguese central bank official said the country may need to seek assistance and spoke positively of that outcome. Greek 6-month bill yields rose by 8 basis points as the country’s €1.95 billion auction saw lower demand. Italy’s €7 billion 12-month bill auction also saw lower demand while yields rose 5 basis points. In December, French business confidence rose.
Company news/research:
· FHN – raised to strong buy at Raymond James
· GS – releases a 63 page report today to investors describing the sources of its proprietary trading revenues
· MI – cut to neutral at Guggenheim
· CIT – initiated at buy at Citi
· MS – yesterday, the company said it will spin off its remain proprietary trading units.
Tuesday’s equity markets. Markets continued to impress, as investors bought an early dip and lifted equity indexes to a mixed close. The NASDAQ led the other indexes with a bullish positive reversal, ending +0.17% at a fresh 100-week high. The DJI, SPX, and NYSE composite closed lower, -0.32%, -0.14%, and -0.18%, respectively. Volumes were lower. The strongest market segments were basic materials, technology, and industrials, all closing up at least +0.15%. Health care, utilities, and telecommunications were the weakest segments.
Trading desks reported a continuation of recent themes, 1) bids on weakness, 2) unexceptional conviction whether long or short, 3) shrugging off of negative news, and 4) generally positive news flow (e.g., recent merger and acquisition activity).
Technical indicators are generally positive. Markets are in a confirmed uptrend that began in early September, and after a consolidation in November, extended robustly through one of the strongest Decembers on record. All major indexes closed above their respective 200-week and 20-, 50-, 100-, and 200-day averages. Markets are in a bullish configuration, with 50-day moving averages above respective 200-day moving averages. New 52-week highs minus new lows fell to its lowest level this year, at +110 from +125 the prior day. The HILO trend is positive, as the 10-day moving average rose to 166.70, above respective 20- and 50-day moving averages (157.35 and 157.50). Directional movement indicators are positive, and the trend is strengthening. Relative strength indicators have retreated to a neutral range. Prospective resistance levels are 1277 on the SPX, followed by 1285, and 1300; technical support is at 1260, followed by 1250, and 1230.
Market volatility rose, as the VIX rose +2.33% to end at 17.54, compared to 17.14 the prior day. Market sentiment is positive, probably excessively so, though off recent highs. The latest week’s (January 6th) AAII Investor Bullish Sentiment index rose to 55.88, up +8.27% from 51.61 on December 30th, but below the 63.30 reading of December 23rd. 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.
Financial stocks closed mixed, as the XLF, BKX fell -0.25% and -0.32%, respectively, while the KRX rose +1.03%. 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 -9.04% below its April highs and -33.1% below its best level of 82.55 in September 2008.
NYSE Indicators. Volume fell -12.3% to 955.35 million shares, from 1.090 billion shares Friday, and compares to a 991.0 million share 50-day moving average. Market breadth was positive, but up volume lagged down volume. Advancing stocks led decliners by +76 (compared to -368 Friday), or 1.05:1. Up volume lagged down volume by 0.83:1.
Valuation. The SPX trades at 13.4x estimated 2011 earnings (raised to $94.98 from $94.79) and 11.8x estimated 2012 earnings (raised to $107.39 from $107.24), compared to 13.4x and 11.9x 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 +2.7, and +3.2%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings by +18.5% and +34.0%, respectively.
Large-cap banks trade at a median 1.58x tangible book value and 14.4x 2011 earnings, compared to 1.56x 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 19.1% 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.
Quarterly Bank Balance Sheet Analysis. According to the Federal Reserve’s latest weekly H.8 report (data through 12/29/10), the 25 largest domestic banks collectively reported a +1.0% increase in period-end loans over the third quarter, a -6.3% drop in reserves (to 3.81% of total loans, or a -$10.2 billion drop from the prior quarter), and a +3.4% increase in deposits.
Regarding loans, C&I loans increased approximately +2.2% over the third quarter levels, residential real estate climbed +2.0%, and credit card loans increased +1.2%, while home equity loans declined -3.9% and commercial real estate loans declined -3.2%.
SPX. On lower volume, the SPX fell -1.75 points, or -0.14% to 1269.75. While losses remain marginal, the index posted its third straight decline, its sixth decline in the previous eight sessions, and its first sub-1270 close in seven sessions. Volume fell -13.45% to 734.66 million shares from 848.82 million shares Friday, below the 779.74 million share 50-day moving average. For the 57th consecutive day, its 50-day moving average closed above its 200-day moving average (1226.14 versus 1149.41, respectively). The SPX closed above its 200-week moving average (1184.39).
The SPX gapped lower at the open to the 1264 level, as renewed peripheral Euro-zone concerns flared in overseas trading. Momentum swung twice before 10am, as an initial rally quickly retraced to an intra-day low of 1262.18 at 10:00. Consistent with this uptrend, buyers stepped in on the dip, and the index staged a rally through the morning and afternoon. The SPX reclaimed 1270 by 3:00 and retook Friday’s closing level at 3:30, but faded at the day’s end to finish at 1269.75. Newsflow and volume were light. The index closed +3.56% above its 50-day moving average, closing above that average for the 89th consecutive day, and +10.47% above its 200-day moving average. The 20-, 50-, 100-, and 200-day moving averages rose.
Technical indicators are positive. The SPX closed above its April highs for the 27th straight session. The directional momentum indicator is positive, but with a decreasing trend. Relative strength fell to 68.25 from 70.27, moving into the high end of a neutral range. Next resistance is at 1273.45; next support is at 1264.11.
BKX. On lower volume, the KBW bank index closed at 52.71, down -0.17 points or -0.32%. The index closed +22.6% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -9.04% below its April 23rd closing high.
Financials underperformed the market, and large-cap banks underperformed regionals’ positive returns. The morning’s trade fluctuated between sharp rallies and steep declines. The BKX gapped lower at the open, losing -1.20% in the first five minutes before a strong rally took the index nearly back to break-even by 9:45. The index promptly sold-off again, returned to its opening lows and set the intra-day low of 52.20 at 10:18. Another sharp rally took the index back to 52.80 within 20 minutes, but another ensuing sell-off retraced those gains completely by 11:15. Sellers appeared fatigued, and calmer trading re-established the financials’ positive momentum through the late morning and afternoon. Like the SPX, the BKX reclaimed its previous closing level at 3:30 before a small sell-off into the close. The index closed above 50 for the 16th straight day. Volume fell -35.75% to 127.00 million shares, down from 188.85 million shares Friday, and below the 157.42 million share 50-day average.
Technical indicators are positive. The BKX closed above its 20-, 50-, 100-, and 200-day moving averages (51.82, 48.85, 47.45, and 49.09, respectively), closing above the 200-day average for the 23rd straight session. The 20-, 50-, 100-, and 200-day averages all increased. The 50-day moving average closed (by -0.24 points) below the 200-day moving average, as it has since August 16th, although the spread continues to tighten and signals a “golden” cross by Friday. The directional movement indicator is positive, but the trend is weakening. Relative strength fell to 62.12 from 63.67, the high end of a neutral range. Next resistance is 53.00; next support at 52.31.
Disclosure: I am long JPM, GS, MS.