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Equities Post Impressive, Consecutive Yearly Gains; Futures Above Resistance

|Includes: Bank of America Corporation (BAC)
This morning.  It’s the first trading day of 2011, and equity futures are higher and above first resistance, with March SPX futures at 1263.00, up +9.86 points after fair value adjustment.  The DJI, SPX, NASDAQ, and NYSE composite stand just below their 2010 and 2-year highs and closing up for the 2nd consecutive year.  Participation levels are expected to improve as the week progresses.  Markets are in a confirmed uptrend.  Friday’s results were mixed, with the NASDAQ down -0.38% on higher but less than half normal volume. The number of distribution days is unchanged at 2 on the SPX and NYSE and 3 for the NASDAQ.  Next SPX resistance is at 1259.92.  Next support is at 1254.77.
Asian equity markets closed higher, with Chinese equities up for a 4th consecutive day.  The Nikkei and Shanghai exchanges were closed.  The Hang Seng closed +1.74% higher.  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.  The Eurostoxx50, CAC, and DAX are higher, +1.54%, +1.87%, and +1.25%, respectively.  The FTSE is closed. On the EuroStoxx, financials are middling but still strong performers, up +1.68%.
LIBOR markets are closed. Overnight USD LIBOR was 0.25188% on December 31st, compared to 0.24688% the day prior. USD 3-month LIBOR was at 0.30281% at year-end, unchanged since December 20th.  In early trading, the dollar is modestly stronger against the euro, yen, and pound.  The euro trades at US$1.3346, compared to US$1.3384 Friday and USD$1.3291 the prior day.  The dollar trades at ¥81.43, compared to ¥81.12 Thursday and ¥81.53 the prior day.  Treasury yields are higher, with 2- and 10-year maturities yielding 0.625% and 3.358%, respectively, compared to 0.593% and 3.294% Friday.  The yield curve spread widened to +2.733% compared to +2.701% 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 higher, with higher petroleum and natural gas, precious metals, aluminum,  copper, but mixed agricultural prices.
U.S. news.  Economic reports in 2011 start with ISM manufacturing and prices paid for December and construction spending for November, all at 10:00. The 112th Congress convenes on Wednesday.
Overseas news.  In December, the Euro-zone purchaser managers’ index (PMI) rose to 57.1, beating expectations.  China’s December PMI fell more than expected.   China will let firms keep more of their earnings abroad instead of forcing repatriation, slowing foreign currency reserve development.  China’s vie premier reiterated confidence in Spain’s financial system and said China will continue participating in Spanish bond auctions.  North Korea called for the confrontation with South Korea to be “defused as soon as possible.” 
Company news/research:
·         BAC – settles repurchase claims with Freddie and Fannie for $2.6 billion.  Settlement resolves claims on $117 billion of unpaid principal balance loans at Freddie and the existing $5 billion pipeline of unresolved claims at Fannie.  The company will record a $3 billion provision and a $2 billion goodwill impairment charge in 4Q10.
Friday’s equity markets.  Trading in 2010 ended with a whimper. Though volume rose, it remained slack at about half a non-holiday trading day, and the major indexes closed mixed, with the DJI and NYSE composite +0.07% and +0.15% higher, respectively, while the SPX and NASDAQ closed down -0.02% and -0.38%. Market segment results were mixed, as telecommunications, financials, and basic materials closed at least +0.15% higher; Health care, technology, and consumer services performed worst, with losses of at least -0.11%. 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.  Shortly after 10:00, the SPX tested resistance at 1255, but recovered quickly to 1259, before losing strength in the final minutes. 
In December, the NYSE led the other major indexes, ending up +7.17%, compared to the SPX, DJI, and NASDAQ, up +6.53%, +5.19%, and +6.19%, respectively.  In 2010, the major indexes closed higher for their 2nd consecutive year, led by the NASDAQ, +16.9%, followed by the SPX, DJI, and NYSE composite, ending +12.8%, +11.0% and 10.8%, 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 +114 over new lows, compared to +143 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, but ended +1.31% higher, with VIX at 17.75, up from 17.52 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 mixed, with the XLF, BKX, and KRX ending +0.13%, +0.00%, and -1.38%, 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 rose +16.6% to a 592.43 million shares, from 508.02 million shares Thursday, compared to a 906.42 million share 50-day moving average.  The NYSE hasn’t traded a billion shares since options expiration on December 17th. Market breadth was positive, and up volume led down volume.  Advancing stocks led decliners by +249 (compared to +27 Thursday), or 1.19:1.  Up volume trailed down volume by 1.11:1.
Valuation.  The SPX trades at 14.7x estimated 2010 earnings ($85.30) and 12.9x estimated 2011 earnings ($97.18), compared to 14.7x and 12.9x respective 2010-11 earnings Friday.  The 10-year average median Price/Earnings multiple is 20.0x.  Since the beginning of 2010, analysts increased 2010, 2011, and 2012 earnings estimates by +11.9%, +5.1%, and +5.6%, 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 14.5x 2011 earnings, compared to 1.51x tangible book value and 14.4x 2011 earnings Friday.  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%.  Analysts’ estimates for bank 4Q2010 earnings are 20.6% higher than were estimates for 3Q2010 earnings.  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 higher volume, the SPX fell -0.24 points on the year’s final trading day, or -0.02%, and closed out 2010 at 1257.64, up +12.8% for the year.  The day’s volume rose +25.8% to 426.62 million shares from 339.27 million shares Thursday, below the 774.34 million share 50-day moving average.  For the 51st consecutive day, its 50-day moving average closed above its 200-day moving average (1215.48 versus 1146.24, respectively).  The SPX closed above its 200-week moving average (1185.04).
The SPX opened one point lower and drifted down in early trading.  Finding support at 1254.50 at 10:15, the index rallied back to break-even by 11:00 and breached 1259 by 12:30.  That level proved difficult resistance, as stocks staged multiple failed tests at 1259 in the afternoon.  A sharp sell-off at 3:45 sent the index 3 points lower to 1256, but equities recovered to flat before the bell.  The SPX closed with a marginal loss, down -0.24 points, or -0.02%.  The SPX closed +3.47% above its 50-day moving average (1215.48), closing above that average for the 83rd consecutive day, and +9.72% above its 200-day moving average (1146.24).  The SPX closed above its April-high closing level of 1217.28 for the 21st 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 21st straight session.  The directional momentum indicator is positive, with a stable trend.  Relative strength fell to 69.26 from 69.54, the high end of a neutral range.  Next resistance is at 1259.92; next support is at 1254.77.
BKX.  On higher volume, the KBW bank index closed at 52.21, unchanged from the prior day.  The index closed +21.5% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -9.91% below its April 23rd closing high.
Financials outperformed the market, and large-cap banks outperformed regionals.  The BKX opened lower with the broader markets, but rebounded to gains by 9:50.  The index rallied through the morning, setting an intra-day high of 52.37 at 11:48.  Falling back to 52.25 at 12:30, the index traded sideways until the late session sell-off pushed the BKX to a temporary loss at 52.15.  Recovering, the index closed unchanged at 52.21.  The index closed above 50 for the 10th straight day.   Volume rose +12.0% to 62.93 million shares, up from 56.21 million shares Thursday, and below the 152.50 million share 50-day average.  
Technical indicators are positive.  The BKX closed above its 20-, 50-, 100-, and 200-day moving averages (50.55, 47.94, 47.02, and 49.05, respectively), closing above the 200-day average for the 17th straight session.  The 20-, 50-, 100-, and 200-day averages all increased.   The 50-day moving average closed (by -1.11 points) below the 200-day moving average, as it has since August 16th.  The directional movement indicator is positive, with a stable trend.  Relative strength remained at 67.85, the high end of a neutral range.  Next resistance is 52.37; next support at 52.06

Disclosure: I am long BAC.