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Futures Improve After ADP Surprises; Equities End Mixed on Increased Volume

Jan. 05, 2011 9:20 AM ETBAC, CMA, JPM, GS, MS, ZION, TCF, WBS, SNV, HBAN
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This morning.  Equity markets closed mixed yesterday, with small losses on the NASDAQ and NYSE composite, but sufficiently large (more than -0.25% on increased volume) to qualify as  distribution days. March SPX futures lower, but better well above the morning’s worst levels at 1261.90, down -3.75 points after fair value adjustment.  Distribution days now number 2 for the SPX, 3 for the NYSE, and 4 for the NASDAQ.  Markets remain in a confirmed uptrend. Next SPX resistance is at 1275.33.  Next support is at 1263.87.
Asian equity markets closed mixed, with Chinese equities lower for the 1st time in 6 trading days. The Nikkei, Hang Seng, and Shanghai closed -0.17%, +0.35%, and -0.49%, respectively.  Volume was lower on the SHCOMP, avoiding a distribution day. The SHCOMP is in a confirmed uptrend after a sharp -13.5% starting November 9th and ending December 28th.  European equity markets are lower, giving up yesterday’s gains. The Eurostoxx50, FTSE, and DAX are lower, -1.72%, -0.64%, and -1.68%, respectively.  On the EuroStoxx, financials are the 3rd worst performing segment, down -2.06%.
LIBOR trends are unremarkable. Overnight USD LIBOR was 0.24375%, down from 0.24688% yesterday and 025188% at year-end. USD 3-month LIBOR is 0.30281%, unchanged since December 20th.  In early trading, the dollar has strengthened against the euro, yen, and pound.  The euro trades at US$1.3220, compared to US$1.3308 Tuesday and US$1.3361 the prior day.  The dollar trades at ¥82.23, compared to ¥82.04 Tuesday and ¥81.74 the prior day.  Treasury yields are lower, with 2- and 10-year maturities yielding 0.601% and 3.302%, respectively, compared to 0.593% and 3.332% Tuesday.  The yield curve spread narrowed to +2.701% 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 repeating yesterday’s sell-off, with lower petroleum and natural gas, lower precious metals, higher aluminum but lower copper, but and lower agricultural prices.
U.S. news.  Economic reports are light today, but include ADP employment change for December (the preliminary to the Labor Department’s report Friday) and ISM non-manufacturing for December at 10:00.  The ADP report was substantially better than survey at a net +297K increase, compared to +100K survey.  Yesterday’s economic reports were strong, with factory orders beating expectations, and vehicle sales better than survey.  The 112th Congress convenes today, accompanied with the usual breathless commentary.
Overseas news.  This morning, Portugal’s €500 million auction of 6-month bills saw increased demand while yields matched expectations.  Yesterday’s hotter-than-expected Euro-zone inflation report is raising concern that the ECB will raise rates sooner than hoped.  In December, U.K. retailers reported disappointing sales and credited poor weather conditions.  In November, Spanish industrial production rose for the first time in three months. 
Company news/research:
·         GS – 4Q10 EPS estimate cut to $3.64 from $4.03 at Bernstein
·         MS – 4Q10 EPS estimate cut to $0.25 from $0.40 at Bernstein
·         HBAN – downgraded to hold at Jefferies, price target raised to $8 from $7
·         ZION – downgraded to hold at Jefferies, price target remains at $26
·         TCB – upgraded to buy at Deutsche Bank, price target raised to $18 from $16
·         WBS – upgraded to buy at Jefferies, price target raised to $23 from $19
Tuesday’s equity markets.  Markets took a breather after Monday’s exceptional gains, ending mixed but well above the day’s worst levels. The DJI ended +0.18% higher, while the SPX, NYSE composite, and NASDAQ closed off -0.13%, -0.27%, -0.38%, respectively. Post-holiday volumes improved, but were also mixed, higher on the NASDAQ and NYSE, lower on the DJI and SPX. 
Markets opened higher, but without conviction, immediately tested and failed their respective resistance levels, and drifted lower through the morning and early afternoon. Profit taking was most pronounced in those segments (e.g., financials and especially small and regional banks) that had the greatest recent gains. At its worst, the SPX finally tested resistance at 1262, and around 1:00 markets began to rally as weakness generated demand. The 2:00 release of the most recent minutes of the FOMC, which indicated that it would continue its planned QE2 Treasury purchases to completion. The news spurred markets, and they rallied into the close. Telecommunications, technology, and utilities were the best performers, up at least +0.49%. Consumer goods, oil and gas, and basic materials were the worst performers, hurt especially by a sharp sell-off in commodities.
Financials ended the day down -0.21%, middling performers, but well off of their lows.  For example, BAC traded as much as -1.54% lower to $14.02, but recovered to end at $14.24, +0.35%. JPM had a strong showing, ending +1.33% after a strong afternoon rally. Select regional banks (e.g., CMA, HBAN, RF, and SNV benefited by strong, late moves. 
Trading desks report that December’s themes have continued into the new year: 1) demand strengthens after weakness, 2) light profit taking on strength, 3) little in the way of aggressive selling and even less shorting activity. 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 versus lows were +178, compared to +368 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 moved significantly intraday, as the VIX rose as high as 18.24 at 1:00, but closed down -1.31% at 17.38, compared to 17.61 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 lower, with the XLF, BKX, and KRX ending -0.15%, -0.32%, and -1.93%, 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 -8.14% below its April highs and -35.5% 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 14.9x and 13.1x 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 1.58x tangible book value and 14.5x 2011 earnings, compared to 1.56x tangible book value and 14.7x 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 lower volume, the SPX fell -1.67 points, or -0.13%.  Volume fell -2.64% to 827.31 million shares from 849.71 million shares Monday, above the 778.93 million share 50-day moving average.  For the 53rd consecutive day, its 50-day moving average closed above its 200-day moving average (1219.06 versus 1147.32, respectively).  The SPX closed above its 200-week moving average (1184.38). 
The SPX opened slightly higher, but markets quickly tested resistance, failed, and began to slide.  The index set its intra-day high at the open.  The sell-off was characteristic of mild profit-taking, and stocks drifted lower until 12:45, reaching the intra-day low of 1262.66, down nearly -10 points.  As in  December’s rally, buyers bought the dip, and the SPX reversed and rose through the afternoon, but not quite to break-even.

The SPX closed +4.19% above its 50-day moving average (1219.06), closing above that average for the 85th consecutive day, and +10.71% above its 200-day moving average (1147.32).  The SPX closed above its April-high closing level of 1217.28 for the 23rd 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 23rd straight session and above 1270 for the second consecutive day.  The directional momentum indicator is positive, with a strengthening trend.  Relative strength fell to 73.63 from 75.54, well into an overbought range.  Next resistance is at 1275.33; next support is at 1263.87. 
BKX.  On lower volume, the KBW bank index closed at 53.23, down -0.17 points or -0.32%.  The index closed +23.85% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -8.14% below its April 23rd closing high. 
Financials underperformed the market, and large-cap banks outperformed regionals.  Trading mirrored the SPX.  The BKX opened higher and set the intra-day high of 53.64 at 9:33.  Falling into negative territory by 9:45, the index found some support at 53.10.  Trading sideways through the morning as the broader market declined, the BKX resumed its descent after noon,  It reached the intra-day low of 52.67 at 12:45, but reversed and rallied through the afternoon.  Like the SPX, the BKX failed to reach break-even. 

The index closed above 50 for the 12th straight day.   Volume fell -26.0% to 149.94 million shares, down from 202.57 million shares Monday, and above the 154.43 million share 50-day average.  
Technical indicators are positive.  The BKX closed above its 20-, 50-, 100-, and 200-day moving averages (51.08, 48.23, 47.16, and 49.07, respectively), closing above the 200-day average for the 19th straight session.  The 20-, 50-, 100-, and 200-day averages all increased.   The 50-day moving average closed (by -0.83 points) below the 200-day moving average, as it has since August 16th, although the spread continues to tighten.  The directional movement indicator is positive, at the highest level since mid-April, with an increasing trend.  Relative strength fell to 71.23 from 72.97, an overbought range.  Next resistance is 53.70; next support at 52.72.

Disclosure: I am long BAC, CMA, JPM, GS, MS, HBAN, WBS.

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