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Banks Lead The 2011 Equity Charge; Futures Point Higher

|Includes: Bank of America Corporation (BAC), PVCT, STI, TD
This morning.  Equity markets are poised to add to yesterday’s strong gains, which was led by the NASDAQ’s +1.46% gain. March SPX futures at 1268.50, up +1.28 points after fair value adjustment.  All major indexes made new 2-year highs, powering through recent resistance levels on resurgent post-holiday volume. Markets are in a confirmed uptrend.  Distribution days number 2 on the SPX and NYSE and 3 for the NASDAQ.  Next SPX resistance is at 1279.50.  Next support is at 1260.95.
Major Asian equity markets were open and closed higher, with Chinese equities up for a 5th consecutive day.  The Nikkei, Hang Seng, and Shanghai closed up +1.65%m +0.99%, and +1.59%.   higher.  After a positive reversal on December 29th, the SHCOMP has confirmed a new uptrend, rising today on increased volume . The index had corrected -13.5% between November 9th and December 28th, but closed +4.38% higher in the past 4 trading days. European equity markets are all open and trading higher. The Eurostoxx50, FTSE, and DAX are higher, +0.83%, +2.32%, and +0.28%, respectively.  On the EuroStoxx, financials are the 2nd best performer, up +1.68%.
Overnight USD LIBOR was 0.24688%, compared to 0.25188% on December 31st and 0.24688% the day prior.  USD 3-month LIBOR is 0.30281%, unchanged since December 20th. In early trading, the dollar is modestly weaker against the euro and pound and slightly stronger against the yen.  The euro trades at US$1.3418, compared to US$1.3361 Monday and USD$1.3384 the prior day.  The dollar trades at ¥82.12, compared to ¥81.74 Monday and ¥81.12 the prior day.  Treasury yields are slightly higher, with 2- and 10-year maturities yielding 0.609% and 3.334%, respectively, compared to 0.593% and 3.332% Monday.  The yield curve spread narrowed to +2.725% compared to +2.739% 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 generally higher, with higher petroleum and natural gas, lower precious metals, but higher aluminum and copper, and lower agricultural prices.
U.S. news.  Economic reports are light today, limited to factory orders for November at 10:00. Yesterday’s stronger than expected ISM report helped spur markets at 10:00. The 112th Congress convenes on Wednesday.
Overseas news.  Spain achieved its 2010 budget deficit target of 9.3% of GDP.  In Spain, the number of jobless registering for benefits fell for the first time in five months.  Spanish Prime Minister Zapatero said a new round of bank stress tests will be carried out “immediately.”  In the fourth quarter, U.K corporate CFO confidence increased, according to a private survey.  In December, French consumer confidence fell unexpectedly.  
Company news/research:
·         ASBC – downgraded to market perform at KBW, price target remains at $13
·         STI – upgraded to outperform at KBW, price target raised to $33 from $30
·         TD – upgraded to outperform at KBW, price target raised to $83 from $79
Monday’s equity markets.  Last year may have ended in a whimper, but 2011 roared out of the gate.  Led by the NASDAQ, the major indexes all closed at least +0.81% higher, all at new 2-year highs. The NASDAQ added +1.46%, breaking through resistance at 2670 and ending at 2691.52, its best close since late 2007. Market breadth was positive. The SPX, NYSE composite, and DJI rose +1.13%, +1.00%, and +0.81%, all on volume that exceeded 50-day moving averages, an indication that institutional investors were again fully engaged, though trading desks reported markets became less active as the day progressed. Financials were again the outstanding performer, up +2.20%, followed by telecommunications and technology. Industrials, utilities, and consumer goods were the worst performers, but at least +0.32% higher.
Financials benefited from Bank of America’s (NYSE:BAC) disclosure that it had fully settled mortgage putback claims of Freddie Mac and most of the claims of Fannie Mae, at a cost below most street estimates. In 2010, BAC was the 2nd worst performing stock in the BKX (the worst was PVCT), down -15.0%, while the BKX added +22.4%. On the day, BAC ended at $14.19, up +6.37% and its best close since early August.
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 +368 more than 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 have moved into an overbought range. Prospective resistance levels are 1280 on the SPX, followed by 1290-94, and 1300; technical support is at 1260, followed by 1250, and 1230.
Market volatility changed little, but ended -0.79% lower, with VIX at 17.61,down from 17.75 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. It’s obvious that despite positive sentiment, there are many market skeptics, too, and they have hardly capitulated.
Financial stocks closed higher, with the XLF, BKX, and KRX ending +1.13%, +0.81%, and +1.46%, respectively, in heavier 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 -7.85% below its April highs and -35.3% below its best level of 82.55 in September 2008.
NYSE Indicators.  Volume rose +179.0% to a 1.060 billion shares, from 592.43 million shares Friday and compared to a 981.06 million share 50-day moving average.  This was the 1st day since December 17th that the NYSE had traded more than a billion shares.  Market breadth was very positive, and up volume led down volume.  Advancing stocks led decliners by +1220 (compared to +249 Friday), or 2.86:1.  Up volume led down volume by 5.27:1.
Valuation.  The SPX trades at 14.9x estimated 2010 earnings ($85.30) and 13.1x estimated 2011 earnings ($97.18), compared to 14.7x and 12.9x respective 2010-11 earnings yesterday.  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 1.56x tangible book value and 14.7x 2011 earnings, compared to 1.51x 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 +34.1%.  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 rose +14.25 points, or +1.13%.  Volume rose +99.1% to 849.71 million shares from 426.62 million shares Friday, above the 774.68 million share 50-day moving average.  For the 52nd consecutive day, its 50-day moving average closed above its 200-day moving average (1217.32 versus 1146.80, respectively).  The SPX closed above its 200-week moving average (1185.04). 
The SPX gapped higher through first resistance at the open, setting its intra-day low at the opening bell.  BAC’s putback settlement with the GSEs, continued economic optimism, and risk resumption following year-end performance protection were likely catalysts.  Most of the day’s gains were achieved within the first 15 minutes of trading, when the SPX broke above 1270 at 9:45.  Markets rallied through the morning to an intra-day high of 1276.17 at 11:40.  The SPX traded sideways at the 1275 level until momentum paused at 2:00.  Content with the day’s gains, the index moved without further drama into the close and finished at 1271.87, up +14.25 points or +1.13%.  The SPX closed +4.48% above its 50-day moving average (1217.32), closing above that average for the 84th consecutive day, and +10.91% above its 200-day moving average (1146.80).  The SPX closed above its April-high closing level of 1217.28 for the 22nd 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 22nd straight session and is at the highest level since September 3rd, 2008.  The directional momentum indicator is positive, with an increasing trend.  Relative strength rose to 75.54 from 69.26, moving into an overbought range.  Next resistance is at 1279.50; next support is at 1260.95. 
BKX.  On higher volume, the KBW bank index closed at 53.40, up 1.19 points or +2.28%.  The index closed +24.24% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -7.85% below its April 23rd closing high. 
Financials were the best performing market segment and banks were the best performing market sub-sector.  Large-cap banks underperformed performed regionals.  Fueled by BAC’s putback settlement with the GSEs, which was less than most on the street expected, the BKX gapped higher and through resistance at the open.  Breaking 53.40 by 10:45, the index set an intra-day high 10 minutes later at 53.48.   The index’s momentum paused  at 11:00 while buyers weighed BKX component relative values.  BAC’s surging strength throughout the day balanced profit-taking in other banks, and the index as a whole traded sideways into the close.  The BKX finished at 53.40, up 1.19 points, or +2.28%, its best percentage gain since December 8th.  The index closed above 50 for the 11th straight day.   Volume rose +221.9% to 202.57 million shares, up from 62.93 million shares Friday, and above the 153.61 million share 50-day average.  
Technical indicators are positive.  The BKX closed above its 20-, 50-, 100-, and 200-day moving averages (50.82, 48.09, 47.09, and 49.06, respectively), closing above the 200-day average for the 18th straight session.  The 20-, 50-, 100-, and 200-day averages all increased.   The 50-day moving average closed (by -0.97 points) below the 200-day moving average, as it has since August 16th.  The directional movement indicator is positive, with an increasing trend.  Relative strength increase to 72.97 from 67.85, moving into an overbought range.  Next resistance is 53.85; next support at 52.59.

Disclosure: I am long BAC.