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Equity Futures Higher, Despite Employment Report Disappointment

|Includes: Bank of America Corporation (BAC), CMA, PNC
This morning. Equity markets ended mixed, on increased volume, as the NASDAQ rose +0.28% on semiconductor stock strength, while the DJI, SPX, and NYSE composite fell -0.22%, -0.21%, and -0.49%, respectively. The NASDAQ closed at its highest level since late 2007.  Markets are in a confirmed uptrend, though the NYSE’s loss (more than -0.25% on increased volume) was significant enough to qualify as a distribution day, its 2nd this week. Distribution days, which indicate institutional selling, number 4 for the NASDAQ and NYSE, and 2 for the SPX in the past 20 trading days. Despite a disappointing December employment report, March SPX futures are slightly higher, up +1.15 points after fair value adjustment at 1271.20.  Next SPX resistance is at 1277.87.  Next support is at 1270.13.
Asian equity markets closed mixed, with Chinese equities rebounding after 2 consecutive losses.  The Nikkei, Hang Seng, and Shanghai closed +0.21%, -0.42%, and +0.52%, respectively.  Volume was higher on the SHCOMP, and financials were the best performing segment, rising +2.17%.  The SHCOMP is in a confirmed uptrend after a sharp -13.5% decline starting November 9th and ending December 28th.  European equity markets are lower. The Eurostoxx50, FTSE, and DAX are down -0.44%, -0.43% and -0.01%, respectively.  On the EuroStoxx, financials are down -0.81%.
LIBOR trends are unremarkable.  Overnight USD LIBOR is 0.24125%, down from 0.24375% Thursday, and 0.25188% at year-end.  USD 3-month LIBOR is 0.30313%, unchanged from yesterday, and compared to 0.30281% at year-end. In early trading, the dollar is stronger against the euro, yen, and pound.  The euro trades at US$1.2959, compared to US$1.3003 Thursday and US$1.3149 the prior day.  Technically, the euro is breaking down, falling through support at its 200-day moving average US$1.3078, but this has happened before, as recently as late November. The dollar trades at ¥83.55, compared to ¥83.33 Thursday and ¥83.25 the prior day.  Treasury yields are higher, with 2- and 10-year maturities yielding 0.681% and 3.435%, respectively, compared to 0.665% yesterday and 3.393% Wednesday.  The yield curve spread widened to +2.754% compared to +2.7628% 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 extending their sell-off, though petroleum is higher, but natural gas is lower. Precious metals are lower, aluminum is higher, copper is lower, and agricultural prices are lower.
U.S. news.  This morning at 9:30,Bernanke testifies before Senate Budget Committee on fiscal policy and the economic outlook. The focus of today’s economic reporting is the December jobs report, with the expected change in non-farm and private payrolls +150K and +178K, respectively. The report disappointed with a 103K and 113K change in nonfarm and private payrolls, respectively, though November was revised to 71K and 79K, from 39K and 50K, respectively.
Overseas news.    North Korea lowered its military alert status, prompting a similar move from South Korea and indicating an easing of peninsular tensions.  In November, Euro-zone unemployment held at 10.1%, matching expectations but still at a 12.5 year high.  The Euro-zone’s final revision to third quarter GDP showed a +0.3% increase over the prior quarter, missing estimates for a +0.4% increase.  In November, German industrial production fell more than expected over the prior month.  In the fourth quarter, Chinese business confidence rose. 
Company news/research:
·         U.S. Regional Banks – resumed at neutral at Goldman
·         BAC – Jim Cramer gives 10 reasons to buy the stock
Thursday’s equity markets.  Outside technology and health care, risk appetites noticeably diminished, as several negatives cropped up to sap some of the ebullient good feeling that has recently dominated equity markets. Several retail reports disappointed, as December’s consumer spending came in below expectations. In Washington, the Treasury Secretary’s letter to the new House Republican leadership initiated the debate that will end with an increase in the debt ceiling. Geithner warned that the ceiling may be reached in late-March, about a month earlier than most expected. Also, Bernanke testifies today on fiscal policy and the economic outlook. Almost certainly, he will repeat Geithner on the need to raise the debt ceiling. Finally, the euro continues to trend lower, testing late-November levels that are (once again) below the currency’s 200-day moving average.
The NASDAQ ended +0.28% higher on semi-conductor strength. The DJI and SPX closed lower, but less than -0.25%. The NYSE composite lost -0.49% on increased volume, adding a distribution day, its 4th in the past 20 trading days. The strongest market segments were technology, health care, and utilities; the weakest were consumer services, basic materials, and telecommunications, which ended down -2.72%. Outside of telecommunications, declines were shallow, with initial support levels holding on all the major equity indexes. Trading desks reported that the largest difference from recent days was the buyers hesitated on weakness, but there remains little selling pressure overall and not much building of short positions.
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 rose to +187 from +159 the prior day.  The new HILO trend is upward, with a 10-day moving average 165.30, above the respective 20- and 50-day moving averages (160.05 and 156.30).  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 rose, as the VIX increased +2.23% to 17.40 from 17.02the prior day.  Market sentiment is positive, probably excessively so, though off recent highs.  The latest week’s (January 6th) AAII Investor Bullish Sentiment index rose to 55.88, up +8.27% from 51.61 on December 30th, but below the 63.30 reading of December 23rd.  Sentiment indicators are highly variable and are often best read as contrarian in their aspect.  Despite positive sentiment, there are many market skeptics, too, and they have hardly capitulated, based on endless business network interviews and research that passes this desk.
Financial stocks closed lower, but were middling performers, with the XLF, BKX, and KRX ending -0.66%, -1.06%, and -1.17%, respectively, in heavier trading.  Money center and super-regional banks performed better than the investment banks, and smaller regional and community banks were the worst performers in the space. PNC was the day’s standout, up +0.78% after an sell-side initiation with a buy recommendation. Comerica fell -4.33% after a sell-side downgrade to sell. While the broader indices are near two-year highs and have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -7.89% below its April highs and -35.3% below its best level of 82.55 in September 2008.
NYSE Indicators.  Volume rose +4.83% to 1.093 billion shares, from 1.043 billion shares Wednesday, and compares to a 990.65 million share 50-day moving average.  Market breadth was negative, and up volume lagged down volume.  Advancing stocks lagged decliners by 9657 (compared to +626 Wednesday), or 0.64:1.  Up volume lagged down volume by 0.49:1.
Valuation.  The SPX trades at 13.4x estimated 2011 earnings (revised up to $94.83 from $94.61) and 11.9x estimated 2012 earnings ($107.24), compared to 13.5x and 11.9x respective 2011-12 earnings yesterday.  The 10-year average median Price/Earnings multiple is 20.0x.  Since the beginning of 2010, analysts increased 2011 and 2012 earnings estimates by +2.5, and +3.0%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings by +18.3% and +33.8%, respectively.
Large-cap banks trade at a median 1.58x tangible book value and 14.6x 2011 earnings, compared to 1.58x 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 +34.4%.  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 -2.71 points, or -0.21% to end at 1273.85.  Volume rose +8.35% to 864.56 million shares from 797.91 million shares Wednesday, above the 780.17 million share 50-day moving average.  For the 55th consecutive day, its 50-day moving average closed above its 200-day moving average (1222.64 versus 1148.36, respectively).  The SPX closed above its 200-week moving average (1184.40).
The SPX opened flat and fluctuated between losses and gains as the market digested the in-line weekly jobless claims report.  Setting an intra-day high of 1278.17 at 10:40, the SPX sold off sharply to the 1270.50 level by 11:10, setting its intra-day low.  The sell-off occurred on no apparent news, although reports of both parties in Congress playing political football with the debt ceiling weakened investor resolve.   The index attempted a few mini-rallies through the afternoon, the strongest of them at 1:30 that took the index back above 1275.  That rally faded too, and the SPX closed at 1273.85.  The SPX closed +4.19% above its 50-day moving average (1222.64), closing above that average for the 87th consecutive day, and +10.93% above its 200-day moving average (1148.36).  The 20-, 50-, 100-, and 200-day moving averages rose.
Technical indicators are positive.  The SPX closed above its April highs for the 25th straight session and above 1270 for the fourth consecutive day.  The directional momentum indicator is positive, with an increasing trend.  Relative strength fell to 72.97 from 76.10, an overbought range.  Next resistance is at 1277.87; next support is at 1270.13. 
BKX.  On higher volume, the KBW Bank Index closed at 53.38, down -0.57 points or -1.06%.  The index closed +24.20% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -7.89% below its April 23rd closing high. 
Bank stocks underperformed the market, and regionals underperformed large-cap banks.  A plethora of pre-market analyst rating changes prompted intra-sector reallocations through the day.  Like the broader markets, the BKX opened flat and fluctuated between early gains and losses.  Promptly upon reaching an intra-day high of 54.23 at 10:40, the index sold off with other equities.  Financials traded sideways post-sell-off at the 53.70 level until 1:00, taking another leg down then to the 53.60 level.  Fading further after 2:00, the BKX set an intra-day low at 53.32 with 15 minutes left in the day’s session and finished marginally above that low.  The index closed above 50 for the 14th straight day.   Volume rose +26.02% to 196.80 million shares, up from 156.17 million shares Wednesday, and above the 155.36 million share 50-day average.  
Technical indicators are positive.  The BKX closed above its 20-, 50-, 100-, and 200-day moving averages (51.60, 48.56, 47.32, and 49.08, respectively), closing above the 200-day average for the 21st straight session.  The 20-, 50-, 100-, and 200-day averages all increased.   The 50-day moving average closed (by -0.52 points) below the 200-day moving average, as it has since August 16th, although the spread continues to tighten and signals a “golden” cross next week.  The directional movement indicator is positive, at the widest level since mid-April, with an increasing trend.  Relative strength fell to 68.33 from 74.06, moving from overbought to the high end of a neutral range.  Next resistance is 53.97; next support at 53.05.

Disclosure: I am long BAC, PNC, CMA.