This morning. Equity markets are in a confirmed uptrend. Yesterday, led by the NASDAQ, major indexes closed significantly higher through multiple resistance levels, on increased volume. Distribution days number four since the uptrend commenced on August 27th (on September 7th, 17th, 21st, and 30th), one for the DJI, two for the SPX and NASDAQ, and three for the NYSE composite.
All major indexes closed above their 20-, 50-, and 100-, and 200-day moving averages. The NYSE composite index stands +11.5% above its August 26th closing low. Its 50-day moving average crossed above the 100-day moving average September 15th, but remains -0.73% below the 200-day moving average, narrowing from -2.35% on September 15th. Directional movement indicators are positive, but trends are stable. Relative strength indices have the market moving into an overbought range. After a disappointing September ADP employment report, December SPX futures are at 1153.70, down -2.65 points after fair value adjustment. Next resistance is at 1168.78; next support is at 1146.70.
Overnight USD LIBOR is 0.22563%, unchanged from the prior day. USD 3-month LIBOR is 0.28969%, compared to 0.29000% the prior day. For the 2nd consecutive day, Asian markets closed higher, with the Nikkei +1.81% and the Hang Seng +1.07%. European equity markets are higher, with the Eurostoxx50 +0.79%, FTSE +0.60%, and DAX +0.75%. Financials are up 0.92% on the EuroStoxx. Eurozone sovereign CDS spreads continue to narrow, extending the recent trend. In currency markets, the dollar and yen are slightly stronger, the euro is weaker, and the pound is unchanged. The euro trades at US$1.3818, compared to US$1.3639 Monday. U.S. Treasuries are stronger compared to Tuesday, with the 2- and 10-year maturities yielding 0.391% and 2.438%, respectively, compared to 0.399% and 2.472% the prior day. The yield curve spread narrowed to +2.047%, from +2.073% 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 mixed, with lower petroleum, higher precious metals, aluminum, and copper, and lower agricultural products prices.
U.S. news. Today’s economic reporting included ABC consumer confidence report for the week ended October 3 (slightly worse than prior), MBA mortgage applications for the week ended October 1 (slightly better than prior), and the ADP employment report for September (a disappointing -39K versus +20K survey). 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. Fitch cut Ireland’s long-term foreign and local currency ratings to A+ from AA-. August German factory orders increased almost four times more than estimates. Greece’s 2006-2009 deficit and debt figures will be revised higher, according to EU officials. A Bank of Japan official said it will not impose a capital surcharge on mega-banks beyond new Basel III requirements. The IMF cut the 2011 world growth forecast to 4.2% from 4.3% and its U.S. growth forecast to 2.3% from 2.9%.
Tuesday’s equity markets. Spurred by the Bank of Japan’s rate cut and stronger than expected ISM non-manufacturing report for September, equity markets turned in another strong performance, their best since September 24th. Markets were strong out of the gate, gapping through multiple resistance levels throughout the day, and closed near their intraday highs on higher volume that exceeded 50-day averages. Market bread was very positive. All market segments closed at least +1.18% higher, with basic materials, industrials, and financials the best performers; telecommunication, consumer goods, and utilities performed worst.
Market sentiment remains variable, as there have been several failed uptrends in recent months. The sustainability of the current uptrend has its skeptics, but the uptrend has proved more durable than recent others. Political uncertainties ahead of the mid-term elections are the principal negative, but the September-October rally has taken all major indexes back above their early August highs, September highs, to levels last seen in mid-May, before the market correction began in earnest. All indexes are at least +3.5% higher in 2010. Market strength is most evident in NASDAQ composite, which in the past week saw 350 new 52-week highs, compared to 114 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 more than -17% 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 has moved into the lower end of an overbought range. Market volatility is elevated. The VIX fell -7.52% to 21.76 from 23.53 at Monday’s close.
The XLF, BKX, and KRX closed higher, +2.29%, +3.14%, and +2.95%, respectively.
NYSE Indicators. Volume rose +31.3% to 1.239 billion shares, from 943.71 million shares Monday and above the 1.018 billion share 50-day moving average. Market breadth was extremely positive, and up volume led down volume by a wide margin. Advancing stocks led decliners by +1902 (compared to -1347 Monday), or 4.37:1. Up volume led down volume by 15.5:1.
SPX. On increased volume, the SPX rose +23.72 points, or +2.09% to close at 1160.75, +2.92% above its August 9th close of 1127.79, the highest close prior to that month’s correction and +1.14% above last month’s closing high of 1147.70 on September 28th. The SPX closed +3.778% above its 200-day moving average (1118.50), which trended higher on the day, and +4.85% above its 50-day moving average (1107.02), closing above that average for the 23rd consecutive day. The SPX closed +9.03% above the 1064.59 close on the August 27th positive reversal, and +7.45% above the September 1st follow-through close of 1080.29. The SPX closed -4.64% below its April 23rd closing high of 1217.28. The 20-, 50-, and 200-day moving averages rose. The 100-day moving average was unchanged.
Technical indicators are mixed but improving, as the SPX closed above the 200-day moving average for the 17th consecutive day, above its monthly August 7th and September 28th highs, and above 1160, having pierced multiple resistance levels in yesterday’s trade. The directional momentum indicator is positive, but the trend is stable. Relative strength rose to 65.30 from 62.49, moving into an overbought range. Next resistance is at 1168.78; next support at 1146.70.
BKX. Like the broader market, financials gapped through resistance, reaching 47.30 in the first few minutes, but after 10:00, gained strength more gradually than the broader market indexes, moving from a middling performer to among the top performing market segments. The BKX rose +1.46 points, or +3.14%, to close at 47.92, +11.7% above its August 30 closing low of 42.98, the trough of the recent correction.
Volume was higher, rising +67.5% to 196.9 million shares, compared to 117.56 million shares the prior day and 124.4 million share 50-day average. The BKX closed -17.3% below its 57.95 April 23rd closing high.
Technical indicators are improving, though mixed. The BKX closed above its 20- and 50-day moving averages (46.76 and 46.57, respectively), with the 20-day moving average above the 50-day moving average for the 2nd consecutive day. The BKX crossed above its 100-day moving average (47.69) for the first time since May 19th. It closed below its 200-day moving average (48.67). The 20- and 200-day moving average moved higher. The 50- and 100-day moving averages trended lower. The 50-day moving average closed (by -2.10 points) below the 200-day moving average for the 35th consecutive day. The directional movement indicator is positive, with a stable trend. Relative strength rose to 58.08 from 50.33, in a neutral range. Next resistance is 48.54; next support at 46.89.
Valuation. The SPX trades at 13.8x estimated 2010 earnings ($83.88) and 12.2x estimated 2011 earnings ($95.95), compared to 13.6x and 11.9x 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%, +3.7%, and +4.9%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings by +14.4% and +30.2%, respectively.
Large-cap banks trade at a median 1.45x tangible book value and 13.2x 2011 earnings, compared to 1.41x 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 +40.9%. 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:
· MTB – Allied Irish will sell its $2.2 billion stake through a public offering
· WL – seeking a capital infusion from private equity groups, may try to sell itself.
· CMA – raised to buy at Deutsche Bank, price target of $44
· FHN – raised to buy at Deutsche Bank, price target of $14
· CYN – rated new hold at CRT Capital
· NYB – rated new buy at CRT Capital, price target of $19
· SBNY – rated new hold at CRT Capital
· PRU – upgraded to hold at Barclays
Disclosure: Long CMA, SBNY