This morning. Equity futures are modestly lower this morning, in train with weakness in Asian and European equity markets today. The SPX opens at 1324.57. March SPX futures are at 1316.50, down -5.30 points after fair value adjustment. Next SPX resistance is at 1327.62. Next support is at 1318.78. In Washington, Bernanke testifies on monetary policy before the House Financial Services Committee, with attendant headline risk. Citigroup CEO Pandit is on CNBC this morning, with generally upbeat comments concerning his company’s prospects, due especially to its international footprint and reviving U.S. economic prospects. Markets are in a confirmed uptrend.
Tuesday, after some initial weakness, equity markets moved though interim resistance at 1320 on the SPX and “melted up” through most the day’s remainder to close at the intraday high. Volume was mixed at best – slightly higher on the NYSE composite, but well below the 50-day moving average and lower on the other major exchanges. As they have every day since February 2nd – Groundhog Day – all major indexes closed at fresh 2.5 year highs. The DJI posted the day’s best gain with a +0.59% advance, followed by the NYSE composite, Nasdaq, and SPX, which ended +0.52%, +0.47%, and +0.42% higher. Market breadth was positive, and up volume exceeded down volume. Market volatility declined, with the VIX again below 16. On the SPX, the next key resistance point is 1333, double the March 2008 low. The number of distribution days was unchanged with 4 on the NYSE, 3 on the Nasdaq, and one on the DJI and SPX. Distribution days track index declines of more than -0.25% on increased volume, in the past 25 trading days.
In world equity markets, Chinese markets fully reopened overnight, after monetary authorities raised rates there yesterday. Asian equity markets ended lower. The Nikkei closed down -0.17%, the Hang Seng closed down -1.36%, and Shanghai composite closed off -1.00%, on heavy volume. Since its November 8th high, the SHCOMP is down -12.2%, moving well into correction. In Europe, the Eurostoxx50, FTSE, and DAX are lower, -0.19%, -0.27%, and -0.33%, respectively. On the EuroStoxx, financials are down -0.34%.
LIBOR trends remain unremarkable. Overnight USD LIBOR was unchanged at +0.23550%, but down from 0.25188% at year-end. USD 3-month LIBOR was unchanged at 0.31200%, compared to 0.30281% at year-end. In early trading, the dollar is slightly better against the pound, and weaker against the euro and yen. The euro trades at US$1.3650, up from US$1.3625 Tuesday and US$1.3583 the prior day. For the 14th consecutive day, the euro closed above its 50-, 100-, and 200-day moving averages. The dollar trades at ¥82.53, from ¥82.36 Tuesday and ¥82.33 the prior day. Treasury yields are lower, with 2- and 10-year maturities yielding 0.817% and 3.709%, respectively, compared to 0.849% and 3.737% Tuesday. The yield curve spread narrowed slightly to +2.892% compared to +2.888% 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 +2.89% on February 17, 2010. Commodities are mostly higher, with higher petroleum and lower natural gas, higher precious metals, aluminum and copper, and agricultural prices.
U.S. news and economic reporting. Economic reporting is light again today and this week. ABC consumer confidence for the latest week fell to -46, worse than survey and prior. MBA mortgage applications for the latest week fell -5.5%, probably due to weather conditions.
Overseas news. This morning, a Bundesbank official said that President Axel Weber may not seek a second term next year, increasing the uncertainty over European Central Bank President Jean-Claude Trichet’s successor. In January, U.K. food prices increased at a +4.6% annual rate, compared to estimates for a +4.0% annual rate and the highest rate in 19 months. A state-run Chinese newspaper said the People’s Central Bank of China may raise bank reserve requirements again later this month.
· XL – after yesterday’s close, XL reported core 4Q10 EPS of $0.74 compared to estimates of $0.66; book valued increased to $29.78 from $29.56; the company repurchased 11.8 million shares.
· KEY – downgraded to market perform at RBC Capital, price target remains at $10
· NYX – upgraded to buy at BMO Capital, price target raised to $40 from $32
4Q2010 Earnings. The fourth quarter’s earnings results have so far exceeded EPS and revenue expectations. Of the 309 S&P500 companies that reported earnings to date, 73% (227 of the 309) beat operating EPS estimates, versus the historical average of 62%. Companies beat by an average of +7.3% (versus a historical average of +2%). EPS is up +39.6% over the prior year. Though challenged in the current operating environment, 236 companies (76%) reported increased revenues and 217 companies (70%) beat revenue estimates.
With all 24 BKX members reporting, 75% (18 out of 24) beat operating EPS estimates. Bank revenues disappointed slightly, missing estimates by -0.59% on average. Fifteen banks (63%) reported increased revenues over the prior year’s quarter and 17 banks (71%) beat revenue estimates.
Tuesday’s equity markets. Volume was unimpressive, but the major indexes extended their gains, setting new 2.5 year highs for the 3rd consecutive day. The DJI climbed for a seventh straight day, matching its July 2010 streak of consecutive gains, rising +0.59% to 12,233.15. The underlying themes remain the same: there continues to be a relatively strong underlying bid and a lack of sellers, either long or short , as players let their long positions ride. Strong 4Q2010 earnings, improved U.S. economic fundamentals, and positive fund flows into equities undergird the advance. Trading desks report that short sellers are unwilling to take new positions after the failed sell-off on January 28th. Long investors are not taking profits, but continue to accumulate shares, especially on weakness. Traders interpret the unimpressive volume as consistent with a steady, but not overdone tape that appears inclined to trade higher. The VIX declined to 15.81, down -2.89%, from Monday’s 16.28 close. The lower volatility provides opportunity to hedge gains with indexed futures and options.
Technical indicators are positive. The SPX closed above another resistance level of 1323 with a very strong move in the last hour of the day, to close at 1324.57, up +0.42% and +2.99% in February. All major indexes closed above their respective 200-week and 20-,50-,100- and 200-day moving averages. Markets are in a bullish configuration, with the 50-day moving averages above their respective 200-day moving averages. New NYSE 52-week highs rose to +327, well above its 10-day moving average of 205.50. The relative strength indicator closed at 70.26, up from Monday’s close of 68.09 and in the bottom of the overbought range.
Eight market segments closed higher, with financials, industrials, and utilities the best performers. Telecommunications and health care declined modestly, -0.12% and -0.18% respectively.
Financials were a middling performer, with the best performers the super-regional banks WFC, USB, and PNC, and credit card companies AXP, COF, and DSC. The XLF, BKX, and KRX all closed higher, ending up +0.71%, +0.75%, and +0.13%, respectively. While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -4.56% below its April 2010 highs and -33.0% below its best level of 82.55 in September 2008.
NYSE Indicators. Volume rose +0.75% to 886.27 million shares, from 879.63 million shares Monday, well below the 1.003 billion share 50-day moving average. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by +841 (compared to +1173 Monday), or 1.78:1. Up volume led down volume by 1.82:1.
Valuation. The SPX trades at 13.8x estimated 2011 earnings ($95.99) and 12.1x estimated 2012 earnings ($109.04), compared to 13.7x and 12.1x 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 +3.8%, and +4.8%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($83.69) by +14.7% and +30.3%, respectively.
Large-cap banks trade at a median 1.59x tangible book value and 14.3x 2011 consensus earnings, compared to 1.61 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 operating earnings by +29.7%. In 4Q2010, large-cap banks earned $17.92 (the sum of 31 banks’ operating EPS), compared to $16.21 in 3Q2010. In 4Q2010, the BKX earned $2.99 per share, compared to $1.42 per share in 3Q2010.
SPX. On lower volume, the SPX rose +5.52 points, or +0.42%, to 1324.57, a new 30-month high. Volume fell -4.7% to 652.25 million shares, down from 684.14 million shares Monday, and below the 751.01 million share 50-day moving average. For the 77th consecutive day, its 50-day moving average closed above its 200-day moving average (1264.15 versus 1159.41, respectively). The SPX closed above its 200-week moving average (1181.13).
The SPX opened slightly lower and sold off to an intra-day low of 1316.03 at 9:45. Selling lacked conviction, and the index reversed quickly to retake the break-even line by 10:00. The SPX struggled to stay above the 1320 level in the 10:00 hour, fluctuating above and below that mark through 11:20. Led higher by financials’ strength, the SPX climbed through the 1322 level by 12:30, but sold off back to 1320 by 1:30. An afternoon rally began at 1:45 the lifted the index consistently into the close and through 1324-level resistance at 3:49. The intra-day high of 1324.87 came five minutes before trading’s end. The index closed +4.78% above its 50-day moving average, closing above that average for the 108th consecutive day, and +14.24% above its 200-day moving average. The 20-, 50-, 100-, and 200-day moving averages rose.
Technical indicators are positive. The SPX set a new multi-year high, closed above 1300 for the sixth consecutive day, and closed above its April highs for the 47th straight session. The directional momentum indicator is positive, with an increasing trend. Relative strength rose to 71.21 from 69.40, moving to the lower end of an overbought range. Next resistance is at 1327.62; next support is at 1318.78.
BKX. On lower volume, the KBW bank index closed at 55.31, up +0.41 points or +0.75%. The index closed +28.69% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -4.56% below its April 23rd closing high.
Financials outperformed the market, and large-cap banks outperformed regionals. The BKX opened flat and sold off with the broader markets to an intra-day low of 54.69 at 9:36. The BKX rallied to break-even by 10:00 and crossed into positive territory for good by 10:20 with a sharp rally to the 55.20-level, a resistance point. The index fluctuated above and below the resistance through 2:30 when another rally took the index to its intra-day high of 55.40 at 3:10. The BKX fell back to the 55.30 level by 3:30 and maintained that level into the close. The index closed above 50 for the 35th straight day. Volume fell -4.1% to 106.13 million shares, down from 110.66 million shares Monday, and below the 160.53 million share 50-day average.
Technical indicators are positive. The BKX set a new post-May 2010 high. The BKX closed above its 20-, 50-, 100-, and 200-day moving averages (53.63, 51.73, 49.11, and 48.94, respectively), closing above the 200-day average for the 42nd straight session. The 20-, 50-, and 100-day averages increased while the 200-day decreased. The 50-day moving average closed (by +2.79 points) above the 200-day moving average, closing above it for the 19th straight day. The 100-day moving average closed (by +0.17 points) above the 200-day moving average, closing above it for the second straight day. The directional movement indicator is positive, and with an increasing trend. Relative strength rose to 65.26 from 63.24, the high end of a neutral range. Next resistance is 55.58; next support at 54.87.
Disclosure: I am long XL, PNC, USB, WFC, AXP, COF.