This morning. Equity markets are in a confirmed uptrend. Major indexes closed lower yesterday, but on lower volume. There was no change in the distribution day count, numbering four since the uptrend commenced on August 27th, (September 7th, 17th, 21st, and 30th), one for the DJI, two for the SPX and NASDAQ, and three for the NYSE composite.
The NYSE composite index stands +9.11% above it August 26th closing low. All major indexes closed above their 20-, 50-, and 100-, and 200-day moving averages. The 50-day moving average crossed above the 100-day moving average September 15th, but remains -0.82% below the 200-day moving average, compared to -2.35% on September 15th. Directional movement indicators are positive, but trends are stable. Relative strength indices have the market in the upper end of a neutral range. December SPX futures are at 1142.20, up +9.62 points after fair value adjustment. Next resistance is at 1146.17; next support is at 1129.88.
Overnight USD LIBOR is 0.22563%, unchanged from the prior day. USD 3-month LIBOR is 0.29000%, compared to 0.29063% the prior day. Asian markets closed higher, with the Nikkei +1.47%, responding to the BOJ announcement of more quantitative easing, and the Hang Seng +0.09%. European equity markets are higher, with the Eurostoxx50 +0.35%, FTSE +0.09%, and DAX +0.05%. Financials are up 0.73% on the EuroStoxx. Eurozone sovereign CDS spreads have narrowed consistently over the past week, becoming a trend. In currency markets, the dollar is weaker; the euro, yen, and pound are stronger. The euro trades at US$1.3792, compared to US$1.3685 Friday. U.S. Treasuries are generally stronger compared to Monday, with the 2- and 10-year maturities yielding 0.407% and 2.454%, respectively, compared to 0.407% and 2.476% the prior day. The yield curve spread narrowed to +2.047%, from +2.069% 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. Across the commodity complexes, prices are generally higher, with higher petroleum and precious metals, mixed aluminum and copper, and higher agricultural products prices.
U.S. news. Today’s economic reporting is light, consisting of the ISM non-manufacturing composite for September at 10:00. Reporting heavies up tomorrow with the ABC consumer confidence report for the week ended October 3, MBA mortgage applications for the week ended October 1, and the ADP employment report for September. Thursday’s reports include the latest weekly initial and continuing jobless claims, and September chain store sales. The September jobs report will be released on October 8.
Overseas news. The Euro-zone’s September composite output fell less than expected. The Bank of Japan surprised markets by cutting the benchmark interest rate to 0% from 0.1% and announcing a 5 trillion yen ($60 billion) stimulus fund to buy government bonds and other assets. Australia left its benchmark rate unchanged, surprising expectations of an increase. Euro Group President Junker called for the Chinese yuan to appreciate further. Moody’s issued positive comments on Greece’s austerity reforms and budget progress.
Monday’s equity markets. Despite some favorable housing and durable goods reports, equity markets struggled from the open, trading lower in a weak trade through resistance at 1142 and 1137 on the SPX before finding support at 1132, and recovering weakly to 1137 at the close. A technical rebound in the dollar explains some of the day’s equity weakness. All market segments closed lower, with telecommunications, utilities, and consumer good performing best; technology, industrials, and basic materials performed worst.
Market sentiment remains variable, as there have been several failed uptrends in recent months. The sustainability of the current uptrend is viewed skeptically, but the uptrend has proved more durable than recent others, which failed after a few days. Political uncertainties ahead of the mid-term elections are the principal negative, but the September rally has taken all major indexes back above their early August highs, and all indexes are higher in 2010. Market strength is evident in NASDAQ composite, which in the past week saw 345 new 52-week highs, compared to 122 new lows. The latest week’s (Sept 30th) AAII Investor Sentiment index stood at 42.53, down from 44.97 on September 23rd, but up from 20.74 on August 26th, the low recent reading. Despite the broader market’s recovery, financial stocks remain nearly -20% below their April highs. Dollar weakness and the flatter yield curve qualify as additional market negatives.
Technical indicators are mixed, with the major indices above their respective 20-, 50-, and 100-, and 200-day moving averages, but 200-day moving averages remain above 50-day moving averages. Directional movement indicators are positive. Short-term relative strength indicators suggest that the market is at the lower end of an overbought range. Market volatility is elevated. The VIX rose +4.58% to 23.53 from 22.50 at Friday’s close.
The XLF, BKX, and KRX closed lower, -0.69%, -0.56%, and -0.95%, respectively.
NYSE Indicators. Volume fell -12.0% to 943.71 million shares, from 1.072 billion shares Friday and below the 1.014 billion share 50-day moving average. Market breadth was negative, and up volume lagged down volume. Advancing stocks trailed decliners by -1347 (compared to +1047 Friday), or 0.38:1. Up volume lagged down volume by 0.27:1.
SPX. On lower volume, the SPX fell -9.21 points, or -0.80% to close at 1137.03, +0.87% above its August 9th close of 1127.79, the highest close prior to that month’s correction and September’s subsequent uptrend. The SPX closed +1.69% above its 200-day moving average (1118.17), which edged higher on the day, and +3.83% above its 50-day moving average (1106.11), closing above that average for the 22st consecutive day. The SPX closed +6.80% above the 1064.59 close on the August 27th positive reversal, and +5.25% above the September 1st follow-through close of 1080.29. The SPX closed -6.59% below its April 23rd closing high of 1217.28. The 20-, 50-, and 200-day moving averages rose, while the 100-day moving average continues to trend lower.
Technical indicators are mixed, as the SPX closed above the 200-day moving average for the 16th consecutive day, well above its August 7th high, but below 1140, where markets have met tough resistance over the past two weeks. The directional momentum indicator is positive, but the trend is stable. Relative strength retreated to 57.30 from 62.49, into the upper end of a neutral range from slightly overbought. Next resistance is at 1146.17; next support at 1129.88.
BKX. Financials were a middling performing market segment. Large cap names generally outperformed regional and community bank names. The BKX fell -0.26 points, or -0.56%, to close at 46.46, +8.10% above its August 30 closing low of 42.98, the trough of the recent correction.
For the 3rd consecutive day, financials were initially strong, trading to an intraday high of 47.11 before 10:00 on somewhat better than expected economic news, but gave up these gains by noon, when markets turned distinctly lower. At approximately 12:10, the BKX touched an intraday low of 46.28, finding support there and rallying by 1:00 nearly to the prior day’s close, but tended to give ground through the day’s remainder in quiet trading.
Volume was lower, falling -28.7% to 117.56 million shares, compared to 164.85 million shares the prior day and 123.2 million share 50-day average. The BKX closed -19.8% below its 57.95 April 23rd closing high, just short of bear market territory.
Technical indicators are mixed. The BKX closed above its 20- and 50-day moving averages (46.63 and 46.60, respectively), with the 20-day moving average crossing above the 50-day moving average for the 1st time since August 10th. It closed below its 100- and 200-day moving averages (47.76 and 48.64, respectively). The 200-day moving average moved higher. The 20-, 50-, and 100-day moving averages trended lower. The 50-day moving average closed (by -2.04 points) below the 200-day moving average for the 34th consecutive day. The directional movement indicator is slightly positive, with a stable trend. Relative strength fell to 50.33 from 51.91, in a neutral range. Next resistance is 46.95; next support at 46.12.
Valuation. The SPX trades at 13.6x estimated 2010 earnings ($83.88) and 11.9x estimated 2011 earnings ($95.94), compared to 13.7x and 12.0x 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 +10.0%, +3.0%, and +4.7%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings by +13.5% and +29.9%, respectively.
Large-cap banks trade at a median 1.41x tangible book value and 12.7x 2011 earnings, compared to 1.42x tangible book value and 12.7x 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 +41.2%. In 3Q2009, large-cap banks earned a combined $5.91 per share while the BKX Index earned -$1.24 per share. In 3Q2010, earnings estimates call for $13.69 and $0.58 per share, respectively.
Company news & research:
· AXP – price target lowered to $47 from $52 at BofA/ML
· AXP – named a long research tactical idea at Morgan Stanley
· BLK – cut to Neutral from Conviction Buy list at Goldman Sachs due to valuation, price target raised to $180 from $173
· Positive bank sector 3Q earnings commentary from JPM analyst; no ratings changes; price targets raised at: C to $6 from $5.50, FITB to $15 from $13; PNC to $83 from $77; STI to $34 from $31.50; USB to $34 from $31.50; and WFC to $43 from $39; price target lowered at BBT to $33.50 from $36.
Disclosure: long BLK, JPM, C, PNC, USB, WFC