This morning. Happy New Year. The best is yet to come.
On the last trading day of 2010, equity futures are slightly lower, with March SPX futures at 1251.40, down -2.03 points after fair value adjustment. The DJI, SPX, NASDAQ, and NYSE composite stand just below their 2010 and 2-year highs. All week long, volumes have been holiday-light, about half normal volumes, and sparse participation is expected again today. Markets are in a confirmed uptrend. Yesterday’s losses were too insignificant to add to the recent distribution day count, which number 2 on the SPX and NYSE and 3 for the NASDAQ. Next SPX resistance is at 1260.54. Next support is at 1255.77.
Asian equity markets closed higher, with Chinese equities up for a 3rd consecutive day. The Nikkei was closed. The Hang Seng and Shanghai indexes closed +0.16% and +1.76%, respectively. The SHCOMP is in correction, -11.1% below its November 8th high, but a positive reversal on December 29th may have signaled the beginning of a new uptrend. European equity markets are partially closed and close early. The Eurostoxx50, FTSE, and CAC are lower, -0.24%, -1.19%, and -0.80%, respectively. On the EuroStoxx, financials are among the better performers, down -0.15%.
Overnight USD LIBOR continues its recent upward move, to 0.25188% from 0.24688% yesterday and 0.24563% the day prior, but this may reflect holiday-related market inefficiencies. USD 3-month LIBOR is at 0.30281%, unchanged since December 20th. In early trading, the dollar is weaker against the euro, yen, and pound. The euro trades at US$1.3388, compared to US$1.3291 yesterday and USD$1.3225 the prior day. The dollar trades at ¥81.30, compared to ¥81.53 Thursday and ¥81.62 the prior day. Treasury yields are lower, with 2- and 10-year maturities yielding 0.633% and 3.334%, respectively, compared to 0.641% and 3.365% Thursday. The yield curve spread narrowed to +2.701% compared to +2.724% 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. Commodities are mixed, with lower petroleum, but higher natural gas, higher precious metals, lower aluminum, higher copper, and higher agricultural prices.
U.S. news. There are no scheduled economic reports today, though yesterday’s reports were uniformly positive, with better than expected initial jobless claims for the latest week, very strong Chicago PMI for December, greater than expected pending home sales for November, and improved NAPM-Milwaukee for December. Dow Jones reports that Illinois may require, as has California, that its bond underwriters disclose all trading in state CDS, a move meant to reduce speculation on the probability of state defaults.
Overseas news. Greek Prime Minister Papandreou called for the creation of Euro-zone bonds. The People’s Central Bank of China fixed the yuan’s peg to the dollar at a fresh high.
· Ally – U.S. Treasury converts $5.5 billion of preferred stock into common shares, giving the government 75% common ownership and paving the way for the U.S. Treasury’s exit.
Thursday’s equity markets. Slack volume and a slightly lower close characterized the day’s trade, as equity markets closed with immaterial losses on the penultimate day of 2010. Market segment results were mixed, as oil and gas, telecommunications, and basic materials performed best, while utilities, health care, and financials performed worst, with financials giving ground for the 2nd consecutive day. Themes were unchanged: 1) little in the way of high-conviction trades; 2) bullish and complacent investor sentiment; resistance to the upside, but 4) a bid on weakness. The SPX, DJI, NASDAQ, and NYSE composite fell -0.15%, -0.14%, -0.12%, and -0.15%, respectively. Twice, the SPX tested resistance at 1260, but again couldn’t close above that level, having traded to 1261.09 intraday. In December, the NYSE leads the other major indexes, up +7.01%, compared to the SPX, DJI, and NASDAQ, up +6.55%, +5.12%, and +6.59%, respectively.
Technical indicators are generally positive. All major indexes closed above their respective 200-week and 20-, 50-, 100-, and 200-day averages. Markets are in a generally bullish configuration, with 50-day moving averages above respective 200-day moving averages. New 52-week highs were +143 over new lows, compared to +165 the prior day. Directional movement indicators are positive, and the trend is strengthening. The principal negative is that short-term relative strength indicators are at the top of a neutral range. Prospective resistance levels are 1260 on the SPX, followed by 1265 and 1280; technical support is at 1250, followed by 1242, and 1234.
Market volatility changed little, moving higher as markets strengthened mid-day, but falling through the afternoon. The VIX ended at 17.52, up +1.39% from 17.28 the prior day. Market sentiment is positive, probably excessively so, though off recent highs. The latest week’s (December 30th) AAII Investor Bullish Sentiment index declined to 51.61, down -3.17% from 63.30 on December 23rd. Sentiment indicators are highly variable and are often best read as contrarian in their aspect.
Financial stocks closed lower, with the XLF, BKX, and KRX ending -0.31%, -0.29%, and -0.04%, respectively, all in slow trading. While the broader indices are near two-year highs and have recovered their post-September 2008 losses, financial stocks have not, with the BKX closing -9.91% below its April highs and -36.8% below its best level of 82.55 in September 2008.
NYSE Indicators. Volume fell -2.32% to a meager 508.02 million shares, from only 520.09 million shares Wednesday, barely half the 991.14 million share 50-day moving average. Market breadth was slightly positive, but up volume lagged down volume. Advancing stocks led decliners by +27 (compared to +747 Wednesday), or 1.09:1. Up volume trailed down volume by 0.87:1.
Valuation. The SPX trades at 14.7x estimated 2010 earnings ($85.30) and 12.9x estimated 2011 earnings ($97.18), compared to 14.8x and 13.0x 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 +11.9%, +5.1%, and +5.7%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings by +13.9% and +28.9%, respectively.
Large-cap banks trade at a median 1.51x tangible book value and 14.4x 2011 earnings, compared to 1.53x tangible book value and 14.5x 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 +34.0% and expect 4Q2010 earnings to exceed 3Q2010 earnings by +20.6%. In 3Q2010, large-cap banks earned $13.78 (the sum of 31 banks’ operating EPS), compared to $5.32 in 3Q2009. In 3Q2010, the BKX earned $0.71 per share, compared to -$1.24 per share a year earlier.
SPX. On the year’s slowest full-trading day, the SPX fell -1.90 points, or -0.15% to 1257.88. Volume fell -6.36% to a mere 339.27 million shares from a meager 362.32 million shares Wednesday, below the 784.00 million share 50-day moving average. For the 50th consecutive day, its 50-day moving average closed above its 200-day moving average (1213.90 versus 1145.78, respectively). The SPX closed above its 200-week moving average (1185.05).
The SPX opened one point lower, turned positive by 9:40, and set an intraday high at 9:45 of 1261.09. Stocks struggled to remain above that level, and the morning’s positive economic news could not sustain momentum. The index fell into negative territory at 10:00, slid through resistance at 1059 and bottomed at 1257. A brief rally at 10:15 took the index back to 1259 by 10:45. Another sell-off ensued at 11:00, sending the index to its intra-day low of 1256.32 at noon. Equities attempted a gradual afternoon rally, rising back to 1259 by 2:30. A sudden buying spurt at 3:30 briefly pulled the index into positive territory, but it faded into the close. The SPX closed +3.62% above its 50-day moving average (1213.90), closing above that average for the 82nd consecutive day, and +9.78% above its 200-day moving average (1145.78). The SPX closed above its April-high closing level of 1217.28 for the 20th straight session. The 20-, 50-, 100-, and 200-day moving averages rose.
Technical indicators are positive. The SPX closed above its April highs for the 20th straight session. The directional momentum indicator is positive, with a stable trend. Relative strength fell to 69.54 from 71.66, the high end of a neutral range. Next resistance is at 1260.54; next support is at 1255.77.
BKX. On higher volume, the KBW bank index closed at 52.21, down -0.14 points, or -0.29%. The index closed +21.82% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -9.65% below its April 23rd closing high.
Financials underperformed the market, and large-cap banks underperformed regionals. The BKX opened flat, lost ground in the first 15 minutes, but rebounded to gains and the intra-day high of 52.39 at 9:50. Responding to the broader markets, the BKX sold off at 9:55, turned negative and fell through resistance to the intra-day low of 52.08 at 10:15. Buyers bid on weakness and sent the index almost back to break-even by 11:15. The BKX fell gradually through the rest of the morning and early afternoon before finding support at the 52.12 level around 1:45. An afternoon rally took the index back above 52.30 by 3:30, but the late market sell-off took financials lower, too. The BKX closed at 52.21, down -0.14 points or -0.29%. The index closed above 50 for the 9th consecutive day. Volume rose 2.37% to 56.21 million shares, up from 54.91 million shares Wednesday, but well below the 155.35 million share 50-day average.
Technical indicators are positive. The BKX closed above its 20-, 50-, 100-, and 200-day moving averages (50.32, 47.81, 46.98, and 49.05, respectively), closing above the 200-day average for the 16th straight session. The 20-, 50-, 100-, and 200-day averages all increased. The 50-day moving average closed (by -1.24 points) below the 200-day moving average, as it has since August 16th. The directional movement indicator is positive, with a strengthening trend. Relative strength fell to 67.85 from 69.28, the high end of a neutral range. Next resistance is 52.38; next support at 52.06.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.