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Futures Lower, But Strengthening as Markets Resume Fundamental Focus

|Includes: Zions Bancorporation (ZION)
This morning.  Equity futures are lower, but improving despite weakness in European markets and disappointment that the political situation in Egypt remains unresolved. In Europe, sovereign debt spreads have widened considerably in the past week, in the last week’s deferral of agreement as to how to deal with the Eurozone’s weakest credits. The SPX opens at 1321.87, after reversing a weak open to close with a fractional gain. March SPX futures are at 1315.00, down -4.27 points after fair value adjustment.  Next SPX resistance is at 1325.85.  Next support is at 1314.81.  Markets are in a confirmed uptrend.
Thursday, U.S. equity markets staged a positive reversal, opening significantly lower, but ending with fractional gains and losses in the major exchanges, but without any new distribution days.  The SPX and Nasdaq gained +0.07% and +0.05%, respectively, but were off as much as much as -0.96% in the trading day’s first 30 minutes. Notably, volume was higher on the all the major exchanges. Distribution days number 4 on the NYSE, 3 on the Nasdaq, 2 on the SPX, and one on the DJI.  Market breadth was negative.  Market volatility rose slightly.  On the SPX, the next key resistance point is 1333, double the March 2008 low.  Distribution days track index declines of more than -0.25% on increased volume, in the past 25 trading days. 
In world equity markets, Asian equity markets closed mixed, Nikkei, Hang Seng, and Shanghai composite ending -0.11%, +0.53%, and +0.33%, respectively.  The SHCOMP gained for the 2nd consecutive day and after a weaker open, rallied on heavier volume through the afternoon and into the close, appearing to have confirmed the prior day’s positive reversal and a new uptrend. The SHCOMP ended up +1.01% higher on the lunar new year shortened week, but remains in correction, down -10.5% since its November 8th high.  In Europe, the Eurostoxx50, FTSE, and DAX are lower, -0.86%, -0.24%, and -0.21%, respectively.  On the EuroStoxx, financials are the 8th worst performing market segment, down -1.09%. 
LIBOR trends remain unremarkable.  Overnight USD LIBOR was unchanged at 0.23400% and compares to 0.25188% at year-end.  USD 3-month LIBOR was unchanged at 0.31200%, and compares to 0.30281% at year-end.  In early trading, the dollar is better against the euro, yen, and pound.  The euro trades at US$1.3524, compared to US$1.3603 Thursday and US$1.3733 the prior day.  For the first time since January 21st, the euro closed below its 100-day moving average, though it remains above its 50- and 200-day moving averages.  The dollar trades at ¥83.63, up from ¥83.23 Thursday and ¥82.36 the prior day.  Treasury yields are lower, with 2- and 10-year maturities yielding 0.810% and 3.661%, respectively, compared to 0.833% and 3.693% Thursday.  The yield curve spread narrowed slightly to +2.851% compared to +2.860% 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 +2.89% on February 17, 2010.  Commodities are mixed, with slightly higher petroleum and lower natural gas, lower precious metals, lower aluminum and higher copper, and mixed agricultural prices.
U.S. news and economic reporting.  Economic reporting is light, with release of the December trade balance at 8:30, followed by the University of Michigan confidence for February. Also at 8:30, the administration releases a “white paper” of its proposed legislative solutions for the Frannies. Notably, it will recommend against the nationalization of these housing finance entities. 
Overseas news.  Today, Egyptian protesters plan a massive rally in response to President Mubarak’s unconciliatory address last night.  In January, U.K. factory-gate inflation hit an eight-month high while output rose more than expected.  In the fourth quarter, Spain’s GDP grew +6.6% over the prior year, beating expectations of +4.7%.  Today, South Korea’s central bank left rates unchanged, as expected, but issued a hawkish statement that signaled a rate hike could come at the next meeting. 
Company news/research:
·         ZION – announced a $200 million common equity distribution agreement (4.5% increase in shares outstanding at yesterday’s closing stock price) to take place over the next several quarters.  It made no statement with regard to repaying the TARP.
4Q2010 Earnings.  The fourth quarter’s earnings results have exceeded EPS and revenue expectations.  Of the 345 S&P500 companies that reported earnings to date, 74% (254 of the 345) beat operating EPS estimates, versus the historical average of 62%.  Companies beat by an average of +6.9% (versus a historical average of +2%).  EPS is up +36.6% over the prior year.  Though challenged in the current operating environment, 269 companies (78%) reported increased revenues and 241 companies (70%) beat revenue estimates. 
With all 24 BKX members reporting, 75% (18 out of 24) beat operating EPS estimates.  Bank revenues disappointed slightly, missing estimates by -0.59% on average.  Fifteen banks (63%) reported increased revenues over the prior year’s quarter and 17 banks (71%) beat revenue estimates.
Thursday’s equity markets.  Just as it appeared that the markets were ready for a drubbing, equity markets reversed, wiped out early losses of nearly -1% and ended fractionally mixed. The SPX and Nasdaq closed up +0.07% and +0.05%, respectively. The NYSE composite and DJI declined -0.08% and -0.09%. Most of the major themes remain intact:  1) fundamentals trump macro concerns, 2) buyers respond to pullbacks, 3) short-sellers are reluctant to establish new positions, 4) profit taking is minimal, 5) earnings news is positive, and 6) U.S. economic news continues to point toward sustainable expansion.
Technical indicators are generally positive. All of the major indexes closed above their respective 200-week, and 20-,50-100- and 200-day moving averages. Markets are in a bullish configuration, with the 50-day moving averages above their respective 200-day moving averages. New 52-week highs were +170, below its 10-day moving average of 214.40. The relative strength indicator closed at 65.46, down slightly from Wednesday’s close of 65.64, and still near the top of the neutral range.
Volatility edged up, as the VIX closed at 16.09, up from the prior day’s 15.87 close. Market sentiment is positive and elevated. The most recent AAII bullish sentiment index (February 10th) fell slightly to 49.40, from 51.54 on February 3rd,  and below the December 23rd high of 63.60.  Sentiment indexes are highly variable and often best regarded from a contrarian perspective.
Most market segments ended higher, led by oil & gas, telecommunications, and industrials. Financials, technology, and consumer goods were the day’s worst performers.

For the 2nd consecutive day, financials trailed the broader markets. The XLF, BKX, and KRX all closed lower, ending down -0.01%, -0.37%, and -1.15%, respectively, but well above intraday lows.  BAC closed off -0.16%. WFC closed down another -0.66%, following Tuesday’s surprising and abrupt resignation of its long-time CFO. While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -5.50% below its April 2010 highs and -33.7% below its best level of 82.55 in September 2008.
NYSE Indicators.  Volume rose +8.41% to 1.027 billion shares, from 947.16 million shares Wednesday, well below the 993.1 million share 50-day moving average.  Market breadth was slightly positive, though up volume lagged down volume.  Advancing stocks led decliners by +93 (compared to -721 Wednesday), or 1.06:1.  Up volume lagged down volume by 0.90:1.
Valuation.  The SPX trades at 13.8x estimated 2011 earnings ($95.99) and 12.1x estimated 2012 earnings ($109.04), compared to 13.8x and 12.1x 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 +3.8%, and +4.8%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($83.80) by +14.5% and +30.1%, respectively.
Large-cap banks trade at a median 1.58x tangible book value and 14.3x 2011 consensus earnings, compared to 1.58 tangible book value and 14.3x 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 operating earnings by +29.7%.  In 4Q2010, large-cap banks earned $17.92 (the sum of 31 banks’ operating EPS), compared to $16.21 in 3Q2010.  In 4Q2010, the BKX earned $2.99 per share, compared to $1.42 per share in 3Q2010. 
SPX.  On higher volume, the SPX rose +0.99 points, or +0.07%, to 1321.87, and staged a positive reversal.  Volume rose +23.3% to 91.13 million shares, up from 738.93 million shares Wednesday, and above the 777.06 million share 50-day moving average.  For the 79th consecutive day, its 50-day moving average closed above its 200-day moving average (1269.64 versus 1160.75, respectively).  The SPX closed above its 200-week moving average (1181.11). 
The SPX gapped lower at the open.  Crossing first resistance of 1315 immediately, the index sank to its intra-day low of 1311.74 at 10:00.  Again, buyers bought the dip, and index climbed back to 1318 by 10:20, still in negative territory.  Trading sideways through 11:20, a rally took the index to break-even by 11:35.  Momentum faded, and the SPX traded lower gradually through 1:45, retracing to the 1318 level.  Activity in Egypt dominated the day’s final 30 minutes.  The index climbed sharply to an intra-day high of 1322.78 at 3:50, into positive territory.  A quick sell-off and another sharp rebound snapped the index between losses and gains in trading’s final minutes.  The index closed with small gains after the final rebound.  The index closed +4.11% above its 50-day moving average, closing above that average for the 110th consecutive day, and +13.88% above its 200-day moving average.  The 20-, 50-, 100-, and 200-day moving averages rose.
Technical indicators are positive.  The SPX closed above 1300 for the eighth consecutive day and closed above its April highs for the 49th straight session.  The directional momentum indicator is positive, with a stable trend.  Relative strength rose to 68.66 from 68.29, the higher end of a neutral range.  Next resistance is at 1325.85; next support is at 1314.81. 
BKX.  On higher volume, the KBW bank index closed at 54.56, down -0.20 points or -0.37%.  The index closed +26.94% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -5.85% below its April 23rd closing high. 
Financials underperformed the market, and regionals underperformed large-cap banks.  The BKX opened lower to the 54.60 level.  A sharp and short-lived rally brought financials back to break-even (and their intra-day high of 54.76) by 9:40.  An equally sudden but more severe sell-off pushed the index to an intra-day low of 54.29 by 10:00, above first resistance.  Financials made a rally attempt through 10:35, rising to 54.65, but momentum faded.  Trading was choppy through the day’s remainder.  The index traded between 54.30 and 54.60 before closing in the higher end of that range.  Volume rose +7.3% to 118.93 million shares, up from 110.83 million shares Wednesday, but below the 158.68 million share 50-day average.
Technical indicators are positive.  The index closed above 50 for the 37th straight day.  The BKX closed above its 20-, 50-, 100-, and 200-day moving averages (53.75, 52.12, 49.26, and 48.94, respectively), closing above the 200-day average for the 44th straight session.  All moving averages increased.  The 50-day moving average closed (by +3.18 points) above the 200-day moving average, closing above it for the 21st straight day.  The 100-day moving average closed (by +0.32 points) above the 200-day moving average, closing above it for the fourth straight day.  The directional movement indicator is positive, and with a stable trend.  Relative strength fell to 58.78 from 60.47, a neutral range.  Next resistance is 54.79; next support at 54.31.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.