This morning. Equity markets are in a confirmed uptrend. Yesterday, major indexes closed mixed on lower volume. The DJI and NYSE composite indexes closed slightly higher, while the NASDAQ and SPX indexes closed lower. 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 +11.8% above its August 26th closing low. Its 50-day moving average crossed above the 100-day moving average September 15th, but remains -0.64% below the 200-day moving average, compared to -2.35% on September 15th. Directional movement indicators are positive, and the trend is strengthening. Relative strength indices have the market moving into an overbought range. After this morning’s new and continuing jobless claims report for the latest week, December SPX futures are at 1162.70, up +6.43 points after fair value adjustment. Next resistance is at 1163.25; next support is at 1155.77.
Overnight USD LIBOR is 0.22500%, compared to 0.22563% the prior day. USD 3-month LIBOR is 0.28906%, compared to 0.28969% the prior day and the lowest posting since March 26th. For the 2nd consecutive day, Asian equity markets closed mixed, with the Nikkei -0.07% and the Hang Seng +0.02%. European equity markets are higher, with the Eurostoxx50 +0.22%, FTSE -0.04%, and DAX +0.07%. EuroStoxx financials are up +0.17%. Eurozone sovereign CDS spreads are mixed, with wider Ireland, narrower Greece. Others are flat. In currency markets, the dollar is weaker against the yen, euro, and pound. The euro trades at US$1.3975, compared to US$1.3930 Tuesday. U.S. Treasuries are mixed compared to Wednesday, with the 2- and 10-year maturities yielding 0.359% and 2.401%, respectively, compared to 0.383% and 2.398% the prior day. The yield curve spread widened to +2.042%, from +2.015% 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, precious metals, aluminum, copper, and agricultural products prices.
U.S. news. Today’s economic reporting focuses the latest weekly initial and continuing jobless claims, and September chain store sales. Initial jobless claims were 445K, better than survey 455K. The September jobs report will be released on Friday, October 8.
Overseas news. The Bank of England maintained its benchmark interest rate and asset purchase plan size, as expected. As expected, the European Central Bank also left its benchmark interest rate unchanged. September U.K. home prices plunged the most in one month since 1983. Protesting austerity measures, Greek public workers held a strike today that closed government offices, schools, and airports. Spain auctioned €3.2 billion of 3-year debt, with better demand compared to the prior auction and lower than expected yields.
Wednesday’s equity markets. Equity markets were uninspired, closing mixed after Tuesday’s strong gains. Volumes were lower. A weaker than expected ADP employment report for September refocused market concerns on Thursday’s initial jobless claims and especially Friday’s September jobs reports. With equity buyers and sellers on the sidelines, market focus was on the US dollar, which traded lower against other major currencies, and US Treasuries, which continued to rally strongly, with both moves attributable to likely quantitative easing by the Federal Reserve. Market breadth was slightly negative. Market segments closed mixed, with basic materials, oil and gas, and industrials best. Utilities, technology, and telecommunications were the worst performers.
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 and then September highs, to levels last seen in mid-May, before the summer’s market correction began in earnest. All indexes are at least +3.65% higher in 2010. Market strength is most evident in NASDAQ composite, which in the past week saw 358 new 52-week highs, compared to 113 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 -17.6% below their April highs. Tax uncertainties, 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 -1.24% to 21.49 from 21.76 at Tuesday’s close.
The XLF, BKX, and KRX closed higher, +2.29%, +3.14%, and +2.95%, respectively.
NYSE Indicators. Volume fell -20.9% to 979.93 million shares, from 1.239 billion shares Tuesday and below the 1.016 billion share 50-day moving average. Market breadth was negative, and up volume lagged down volume. Advancing stocks lagged decliners by -187 (compared to +1902 Tuesday), or 0.94:1. Up volume trailed down volume by 0.85:1.
SPX. On lower volume, the SPX fell -0.78 points, or -0.07% to close at 1159.97, +2.85% above its August 9th close of 1127.79, the highest close prior to that month’s correction and +1.07% above last month’s closing high of 1147.70 on September 28th. The SPX closed +3.68% above its 200-day moving average (1118.78), which trended higher on the day, and +4.70% above its 50-day moving average (1107.94), closing above that average for the 24th consecutive day. The SPX closed +8.96% above the 1064.59 close on the August 27th positive reversal, and +7.38% above the September 1st follow-through close of 1080.29. The SPX closed -4.71% below its April 23rd closing high of 1217.28. The 20-, 50-, 100-, and 200-day moving averages rose.
Technical indicators are mixed but improving, as the SPX closed above the 200-day moving average for the 18th consecutive day, above its monthly August 7th and September 28th highs, but below 1160, the latest market resistance point. The directional momentum indicator is positive, but the trend is stable. Relative strength fell to 64.87 from 65.30, at the lower end of an overbought range. Next resistance is at 1163.25; next support at 1155.77.
BKX. In light trading, financial stocks were fractionally lower. The BKX traded within a narrow range, with respective intraday high and low of 48.10 and 47.57, respectively. The BKX closed at 47.74, down -0.18 points or -0.38%. The index closed +11.0% above its August 30 closing low of 42.98, the trough of the recent correction.
Volume was lower, falling -35.6% to 126.8 million shares, compared to 196.9 million shares and 124.1 million share 50-day average. The BKX closed -17.6% below its 57.95 April 23rd closing high.
Technical indicators are improving, though mixed. The BKX closed above its 20-, 50-, and 100-day moving averages (46.86, 46.54, and 47.64, respectively), with the 20-day moving average above the 50-day moving average for the 3rd consecutive day and above its 100-day moving average for the 2nd consecutive day. It closed below its 200-day moving average (48.70). 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 -2.15 points) below the 200-day moving average for the 36th consecutive day. The directional movement indicator is positive, with a stable trend. Relative strength retreated to 56.90 from 58.08, in a neutral range. Next resistance is 48.04; next support at 47.51.
Valuation. The SPX trades at 13.8x estimated 2010 earnings ($83.88) and 12.1x estimated 2011 earnings ($95.95), compared to 13.8x and 12.2x 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 12.9x 2011 earnings, compared to 1.45x tangible book value and 13.2x 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 +41.0%. 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:
· FITB – rated new outperform at Oppenheimer, price target of $16
· BBT – rated new market perform at Oppenheimer
· MTB – upgraded to market perform at KBW, price target of $72
· C, JPM, GS, BLK – initiated at buy at Nomura
· BAC, MS, LM – initiated at neutral at Nomura
· WBS – repays another $100 million of TARP, $200 million still outstanding out of an original $400 million received.
· MTB – prices 22% Allied Irish stake sale at $77.50 per share.
Disclosure: Long BBT, C, JPM, GS, BLK, BAC, MS, WBS