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Futures Turn Higher on Improved January Housing Starts

|Includes: JPM, KEY, MMC, NYSE Euronext (NYX), PRU, STI
This morning.  Equity futures are about +0.5% higher.  Asian markets closed higher, and European markets are moderately higher.  The SPX opens at 1328.01, after pulling back in yesterday’s better, but still quiet trade.  March SPX futures are at 1327.80, up +4.84 points after fair value adjustment.  Next SPX resistance is at 1330.76.  Next support is at 1324.94.  Markets are in a confirmed uptrend.
Tuesday, U.S. equity markets seemed unable to engage, held back by sluggish retail sales reports, uncertainty stemming from the Eurozone’s inability to reach some grand sovereign debt compromise, and an unsettled Middle East.  All the major indices closed at least -0.26% lower.  Volume rose on all but the DJI, but activity was unimpressive, falling short of 50-day moving averages.  Market breadth was negative.  For the 2nd consecutive day, volatility edged up
The distribution day count rose to 4 on the NYSE and Nasdaq and 3 on the SPX, but was unchanged with one on the DJI.  Distribution days infer institutional selling by tracking declines of more than -0.25% on increased volume, in the past 25 trading days.  Market uptrends come under pressure as the frequency of distribution days increases.  There were two in the past 5 trading days, though both were mild losses on unimpressive volume.  Additional distribution days could threaten the uptrend, which has extended since last September.
In Asia, equity markets closed higher on improved economic growth forecasts for Japan and company upgrades.  The Nikkei, Hang Seng, and Shanghai composite ended up +0.57%, +1.12%, and +0.85%, respectively.  On the SHCOMP, volume declined -16.0%, but +38.8% above the 50-day moving average.  In Europe, the Eurostoxx50, FTSE, and DAX are also higher, up +0.76%, +0.62%, and +0.14%, respectively.  Traders cite valuation and earnings.  Sovereign debt spreads are stable today.  On the EuroStoxx, financials are the 2nd best performing market segment, up +1.94%, after SocGen beat earnings forecasts.   
LIBOR trends remain unremarkable.  Overnight USD LIBOR was unchanged at 0.23350% and compares to 0.25188% at year-end.  USD 3-month LIBOR was unchanged at 0.31350% and compares to 0.30281% at year-end.  In early trading, the dollar is lower against the euro, but better against the yen and pound.  The euro trades at US$1.3506, compared to US$1.3487 Tuesday, and US$1.3489 the prior day.  For the 3rd consecutive day, the euro closed below its 100-day moving average, though it remains above its 50- and 200-day moving averages.  The dollar trades at ¥83.81, compared to ¥83.77 Tuesday and ¥83.32 the prior day.  Treasury yields are lower, with 2- and 10-year maturities yielding 0.819% and 3.599%, respectively, compared to 0.819% and 3.604% Tuesday.  The yield curve spread narrowed to +2.780% compared to +2.785% 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, higher precious metals, but lower aluminum and copper, and mixed agricultural prices.
U.S. news and economic reporting.  Economic reporting focuses on empire manufacturing, import prices, retail sales, and inventories.
Overseas news.  Jens Wiedmann, German Chancellor Merkel’s economic adviser, will replace Axel Weber as Bundesbank president.  In the fourth quarter, Spain’s GDP grew at a +0.9% annual rate over the prior quarter, beating estimates and similar to the entire Euro-zone’s +1.2% rate.  At today’s debt auction, Portugal’s 12-month borrowing costs rose less than expected, increasing to 3.987% from 3.710% prior and compared to estimates of over 4.3%.    In January, U.K. consumer confidence fell more than expected.   Anti-government protests and clashes have erupted in Yemen, Bahrain, and Libya.  Iran threatened to execute opposition leaders who called for this week’s demonstrations. 
Company news/research:
·         NYX – downgraded to hold at Stifel, price target unchanged at $38.
4Q2010 Earnings.  The fourth quarter’s earnings results have so far exceeded EPS and revenue expectations.  Of the 363 S&P500 companies that reported earnings to date, 73% (265 of the 363) beat operating EPS estimates, versus the historical average of 62%.  Companies beat by an average of +6.8% (versus a historical average of +2%).  EPS is up +36.4% over the prior year.  Though challenged in the current operating environment, 281 companies (77%) reported increased revenues and 255 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.
Tuesday’s equity markets. On mixed but generally higher volume, the major indexes took a small step backwards.  The NYSE composite, SPX, DJI, and Nasdaq were down -0.26%, -0.32%, -0.34%, and -0.46% respectively.  All but the DJI recorded a distribution day.  Soft economic numbers (U.S. retail sales rose +0.3% versus +0.05% survey) and Chinese bank loans were below estimates.  Also, buying on pullbacks was not as aggressive as in recent sessions.  Though markets closed lower, trading desks report little change in overall themes, with little profit taking on the long side and sellers reluctant to add to short exposures.  Activity was particularly light throughout President Obama’s unscheduled, but hour-long press conference at mid-day.
On the SPX, the downside support level seems to  be 1316, though technicians regard yesterday’s intraday low of 1325 as key support, followed by 1316, and 1311.  Key upside resistance remains 1333, double the 666 March 2009 low. 

Technical indicators remain positive.  All of the major indexes closed above their respective 200-week and 20-, 50-, 100- and 200-day moving averages. New NYSE 52-week highs rose to +329, well above its 10-day moving average of 246.40.  The relative strength indicator closed at 66.71, down from Monday’s close of 69.40, but still near the top of the neutral range.
Three market segments closed higher, with utilities, consumer services and healthcare the best performers.  Technology, oil and gas, and basic materials were the day’s worst performers.
Financials declined modestly.  Led by MMC and PRU, insurers were the best performing names, up +4.71% and +1.01% , respectively, on MMC’s strong earnings and guidance.  Large cap banks such as JPM, KEY, and STI were the best performers on the BKX, while smaller regional banks struggled.  The XLF, BKX, and KRX all closed down slightly, ending -0.13%, -0.32%, and -0.94% respectively.  While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -4.3% below its April 2010 highs and -32.8% below its best level of 82.55 in September 2008.
NYSE Indicators.  Volume rose +13.6% to 928.23 million shares, compared to 817.23 million shares Monday, but just 94.3% of the 984.6 million share 50-day moving average.  Market breadth was negative, and up volume trailed down volume.  Advancing stocks lagged decliners by -693 (compared to +321 Monday), or 0.62:1.  Up volume lagged down volume by 0.72:1.
Valuation.  The SPX trades at 13.8x estimated 2011 earnings ($96.07) and 12.2x estimated 2012 earnings ($109.00), compared to 13.9x and 12.2x 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 +3.9%, and +4.7%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($83.81) by +14.6% and +30.1%, respectively.
Large-cap banks trade at a median 1.63x tangible book value and 14.6x 2011 consensus earnings, compared to 1.63 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 operating earnings by +29.6%.  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 fell -4.31 points, or -0.32%, to 1328.01.  Volume rose +7.9% to 719.96 million shares, up from 667.07 million shares Monday, but below the 770.89 million share 50-day moving average.  For the 82nd consecutive day, its 50-day moving average closed above its 200-day moving average (1276.38 versus 1162.72, respectively).  The SPX closed above its 200-week moving average (1180.37). 
The SPX gapped lower at the open and set its intra-day high of 1330.43 at the bell.  Led lower by disappointing retail sales figures, the SPX fell through 1328-level resistance in trading’s first five minutes and bottoming at 1327 by 9:40.  A sharp rebound lifted the index back to the 1330 level at 10:00, but momentum reversed promptly.  The index fell 5 points in 30 minutes to the 1324 level at 10:30.  Buyers refused to bow to selling pressure, and lifted the index back to 1329 by 11:30.  A small sell-off and a larger rebound took the index up to 1329.50 by 12:45.  Another steep sell-off at 1:50 dropped the index back to the 1324-level at 2:30, setting the intra-day low of 1324.61.  The day closed with a small rebound to 1328.  The index closed +4.04% above its 50-day moving average, closing above that average for the 113th consecutive day, and +14.22% 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 11th consecutive day, and closed above its April highs for the 52nd straight session.  The directional momentum indicator is positive, with a stable trend.  Relative strength fell to 68.58 from 72.42, the higher end of a neutral range.  Next resistance is at 1330.76; next support is at 1324.94. 
BKX.  On higher volume, the KBW bank index closed at 55.45, down -0.18 points or -0.32%.  The index closed +29.43% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -4.00% below its April 23rd closing high. 
Financials outperformed the market, and large-cap banks outperformed regionals.  The BKX opened lower but with positive momentum.  The index rallied from 55.50 at 9:30 to positive territory and to 55.84 within ten minutes, setting the intra-day high of 55.88 at 10:00.  The BKX fell back to break-even by 10:45 and made two rally attempts to 55.80-level resistance in the late morning and just after noon.  A gradual sell-off from 55:80 at 1:00 pulled the index back to break-even by 2:00.  The sell-off intensified and dropped the index through resistance at 55.40 by 2:30.  The BKX rallied to 55.50 at 3:00 but retraced gains and set the intra-day low of 55.34 at 3:55.  Volume rose +11.8% to 118.19 million shares, up from 105.72 million shares Monday, but below the 156.38 million share 50-day average.
Technical indicators are positive.  The index closed above 50 for the 40th straight day.  The BKX closed above its 20-, 50-, 100-, and 200-day moving averages (53.97, 52.62, 49.53, and 48.92, respectively), closing above the 200-day average for the 47th straight session.  The 20-, 50-, and 100-day moving averages increased, while the 200-day moving average declined.  The 50-day moving average closed (by +3.69 points) above the 200-day moving average, closing above it for the 24th straight day.  The 100-day moving average closed (by +0.61 points) above the 200-day moving average, closing above it for the seventh straight day.  The directional movement indicator is positive with an increasing trend.  Relative strength fell to 62.82 from 64.52, the high end of a neutral range.  Next resistance is 55.77; next support at 55.23.

Disclosure: I am long JPM, STI.