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Stocks Move, But Volume Disappoints; Still Lack Confirmation that the Correction's Done

|Includes: BLK, Goldman Sachs Group Inc. (GS), LM, NTRS, PFG, SF, TCBI, TD
This morning.  Equity futures are slightly lower this morning, after initial jobless claims for the latest week disappointed. European sovereign debt concerns eased. Asian and European markets are up for a 2nd consecutive day. The dollar strengthened after 8:30, when the latest week’s initial jobless claims disappointed. Commodities are mixed.
Yesterday’s gains were the best since September 1st, when a +30.57 point gain confirmed that a market uptrend began with the prior day’s positive reversal on increased volume.  With the  end of the 10-week long uptrend on November 16th, equity markets remain in correction, as yesterday’s volume disappointed and failed to confirm a new uptrend. Nonetheless, after yesterday’s gains, losses in this correction have been modest, with the SPX just -1.61% below its November 5th close, its best of the year. Futures point to a slightly lower open today. After fair value adjustment, December SPX futures are down -2.72 points at 1202.30, near the worst levels of the morning. Next resistance is at 1213.59; next support is at 1192.58.
Asian equity markets closed higher, with the Nikkei +1.81% and Hang Seng +0.86%.  European equity markets are higher, with the Eurostoxx50 +0.48%, FTSE +0.77%, and DAX +0.11%.  On the EuroStoxx, financials are up +1.34%, still rebounding from oversold conditions and the 2nd best performing market sector.  Eurozone sovereign CDS spreads are narrower.
Regarding LIBOR, the recent upward bias may have peaked.  Overnight USD LIBOR is 0.23969%, down from 0.24000% yesterday but above the November 0.22563% lows.  USD 3-month LIBOR held steady at +0.30344% compared to yesterday, but above the +0.28438% on November 22. The dollar is stronger against the pound and yen, but weaker apropos the euro.  The euro trades at US$1.3161, compared to US$1.3139 the prior day.  The dollar trades at ¥84.30, compared to ¥84.19 yesterday.  U.S. Treasury yields are higher compared to yesterday, with 2- and 10-year maturities yielding 0.555% and 3.005%, respectively, compared to 0.532% and 2.964%.  The yield curve spread widened to +2.450% from +2.432% yesterday.  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 higher, with higher petroleum and natural gas, precious metals, aluminum, and copper, and mixed agricultural prices.
U.S. news.  The latest week’s initial jobless claims 436 K, above survey 424K, but the 4-week average continued to decline. The Labor Department’s November employment report will be released Friday.
Overseas news.  This morning, European Central Bank left its benchmark interest rate unchanged at 1.0%, as expected.  Earlier today, Spain sold €2.5 billion of 3-year notes, toward the upper end of the indicated range, at lower yields than anticipated, and under heavier demand than the prior auction.   Spain also announced actions to sell assets, like airports, next year to reduce 2011 new debt sales by 33% less than prior expectations.  In today’s trading, an index of European bank credit default swaps dropped the most since July.  The third quarter French unemployment rate held steady at 9.7%, beating expectations for an increase to 9.8%.  The IMF is expected to see its lending capacity double to $450 billion over the next few months, giving it more resources to deal with Europe.  An advisor to the People’s Bank of China said the bank will gradually tighten monetary policy throughout 2011. 
Company news/research:
·         PFG – upgraded to conviction buy at Goldman Sachs
·         SF – upgraded to buy at Goldman Sachs
·         BLK – initiated at outperform at Wells Fargo
·         LM – initiated at neutral at Wells Fargo
·         TCBI – will be added to the S&P SmallCap 600 Index on December 7th after the close.   
·         TD – reports 4Q10 EPS of $1.38, missing estimates of $1.46 on lower trading revenue and underwriting fees.
·         NTRS – purchases Waterline Partners, an $807 million AUM firm in Los Angeles, purchase price not disclosed but expected to be ~$15 million.
·         Banks are in settlement talks with regulators over CDO practices leading up to the financial crisis. 
·         The Basel Committee said they finalized some details of the new Basel III capital and liquidity rules and will publish the specifics in the next few weeks.
Wednesday’s equity markets.  December began with a bang, as all the major indexes shook off their recent torpors and reacted constructively to positive economic news. The NYSE composite closed up +2.32%, and the DJI, SPX, and NASDAQ all added more than 2%. However, volumes were lower across the board. Whether the correction is done requires further market confirmation.
The SPX gapped up more than 15 points, and by 10:00 had traded to 1200, a level unseen since November 12th. Markets moved again at 12:00, when Goldman Sachs upgraded its 2011 economic outlook. All indexes closed near their intraday highs. Market breadth was positive.  All market segments were at least +1.17 higher on the day. Oil and gas, basic materials, and industrials were the best performers.  Consumer goods, telecommunications, and utilities were the laggards.
Market sentiment is improving, despite the correction that commenced November 16th.  Major indexes are at least +5.83% higher in 2010, but the SPX closed -1.61% below its November 5th close, its high point this year. While the broader indices have recovered most of their correction losses, financial stocks have not, with the BKX closing -20.8% below its April highs and still in bear market territory.
The latest week’s (December 3rd) AAII Investor Bullish Sentiment index rose +4.77% to 49.66 from 47.40 on November 25th. This is a bullish reading, but below the November 4th level, when markets were still in a confirmed uptrend.  Sentiment indicators are highly variable, but this reading is probably best read as bearish.
Technical indicators are generally negative, but improving.  Yesterday, the SPX closed back above its 200-week moving average (1188.62) after having closed below that level the prior two days.  The NYSE composite remains below its 200-week moving average (7603.73 vs. 7711.96).  The NASDAQ, DJI, and SPX closed above their respective 20-day moving averages.  The NYA is below its 20-day moving average. All closed above their respective 50-, 100-, and 200-day averages.  Markets are in a generally bullish configuration, with 50-day moving averages above respective 200-day moving averages.  Directional movement indicators are negative, with a strengthening trend.  After yesterday’s gains, short-term relative strength indicators rebounded to the middle of a neutral range.  Market volatility has decreased.  Yesterday, the VIX closed down -9.26% to 21.36 from 23.54 at Tuesday’s close, above 20.0 for the 5th time in the past 9 trading days.
Financials generally outperformed the SPX, with large caps underperforming the regional and smaller banks.  The XLF, BKX, and KRX closed up +2.02%, +2.41%, and +3.41%, respectively.
NYSE Indicators.  Volume decreased to 1.119 billion shares, down -27.2% from 1.536 billion shares Tuesday, but above the1.040 billion share 50-day moving average.  Market breadth was positive, and up volume led down volume by a wide margin.  Advancing stocks led decliners by +1686 (compared to -964 Tuesday), or 3.46:1.  Up volume led down volume by 13.3:1.
3Q2010 Earnings.  Earnings results have generally exceeded EPS and revenue expectations.  Of the 466 S&P500 companies that reported earnings to date, 76% (354 of 466) beat operating EPS estimates, versus the historical average of 62%.  Companies beat by an average of +6.5% (versus a historical average of +2%).  EPS is up +31.5% over the prior year.  Though challenged in the current operating environment, 371 companies (80%) reported increased revenues and 287 companies (61%) beat revenue estimates.  With all 24 BKX members reporting, 79% (19 out of 24) beat operating EPS estimates, with a +25.3% average operating EPS surprise.  Bank revenues disappointed slightly, missing expectations by -0.30% on average.
Valuation.  The SPX trades at 14.1x estimated 2010 earnings (increased to $85.25 from $85.16) and 12.5x estimated 2011 earnings (increased to $96.60 from $96.51), compared to 13.9x 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 +11.8%, +4.4%, and +5.4%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings by +13.3% and +28.7%, respectively.
Large-cap banks trade at a median 1.36x tangible book value and 12.9x 2011 earnings, compared to 1.34x tangible book value and 12.4x 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 +34.2%.  In 3Q2009, large-cap banks earned a combined $5.91 per share while the BKX Index earned -$1.24 per share.  In 3Q2010, large-cap banks earned $13.78 and the BKX earned $0.71 per share.
SPX.  On lower volume, the SPX rose +25.52 points, or +2.16% to 1206.07.  Yesterday marked the largest single day nominal and percentage increase since September 1st, when markets confirmed a new uptrend and end of the May-August correction.  However, volume disappointed, falling -21.0% to 879.50 million shares, from 1.113 billion shares Tuesday, though above the 837.79 million share 50-day moving average.  Volumes generally led through the day, but the prior day’s end-of-month comparison proved too much. For the 29th consecutive day, its 50-day moving average closed above its 200-day moving average (1179.39 versus 1134.27, respectively).  The SPX closed above its 200-week moving average (1188.62). 
Markets were strong at the open, surging 20 points to break 1200 in the first 8 minutes on better U.S. economic indicators and increased investor confidence in the Euro-zone.  The index held those gains through the morning until noon, when a Goldman Sachs upgrade of 2011 U.S. GDP and a subsequent recommendation to buy bank stocks fueled another leg up for equities to an intraday high of 1207.61.  The index traded in a narrow range through the rest of the day, closing at 1206.07, up 25.52 points or +2.16%.  The SPX closed +2.26% above its 50-day moving average (1179.39), closing above that average for the 62nd consecutive day, and +6.33% above its 200-day moving average (1134.27).  The SPX closed -0.92% below its April 23rd closing high of 1217.28.  The 20-, 50-, 100-, and 200-day moving averages all rose.
Technical indicators are mixed as the SPX closed below its April highs for the 14th consecutive day.  The directional momentum indicator switched to positive, with a stable trend strength.  Relative strength rose to 56.71 from 45.97, in the higher end of a neutral range.  Next resistance is at 1213.59; next support is at 1192.58. 
BKX.  On lower volume, the KBW bank index closed at 45.85, up 1.09 points, or +2.44%.  This was the index’s largest gain since the November 4th session, which saw gains fueled by potential bank dividend hike news.  The index closed +6.68% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -20.9% below its April 23rd closing high, still in bear market territory.
Financial stocks outperformed, and the regionals outperformed the large cap financials after underperforming for three straight sessions.  The BKX traded in close correlation to the SPX through the morning, rising strongly at the open, trading sideways through the morning, and lifting on Goldman’s GDP research and banking sector upgrade at 12pm.  Unlike broader markets, however, financials continued their climb through the afternoon, reaching an intra-day at the close and outperforming the SPX.  Volume was 172.25 million shares, down -14.6% from 201.68 million shares Tuesday, and compares to 150.81 million share 50-day average.
Technical indicators are negative.  The BKX closed below its 20-, 50-, 100-, and 200-day moving averages (46.42, 46.37, 46.66, 48.87, respectively).  The 20-day average increased, while the 50-, 100-, and 200-day averages trended lower.  The 50-day moving average closed (by -2.50 points) below the 200-day moving average, as it has since August 16th.  The directional movement indicator is negative, with a stable trend.  Relative strength rose to 48.98 from 41.12, the middle of a neutral range.  Next resistance is 46.21; next support at 45.15.

Disclosure: Long BLK, GS