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U.S. Equities Rebound, Close Mixed; Futures Strong Today

|Includes: BAC, BBX, BLK, C, CB, CMA, COF, E*TRADE Financial Corporation (ETFC), FITB, KEY, MTB, RF, STI, STT, WFC
This morning.  U.S. equity futures are higher, in train with a strong rebound in world equity prices. Asian equity markets closed generally higher on mixed volume.  Led by financials, European equity markets are all higher.  The SPX opens at 1306.10, after yesterday’s -0.10% loss.  March SPX futures are at 1311.10, up +6.50 points after fair value adjustment.  Next SPX resistance is at 1313.25.  Next support is at 1296.60.  The market uptrend is under pressure.
Yesterday, world equity markets continued the week’s sell-off, but U.S. equity markets ended mixed, as the Nasdaq rose +0.55%, up for the 1st time this week. The other major indexes fared less well, but all staged an afternoon rally to close near their best levels of the day and well above their intraday lows. Volumes decreased. Notably, the SPX again found support at 1300.  Trading desks report steady market action was steady, buying on the dip, and profit taking in late afternoon when the SPX approached 1310.  Other recent themes remained in evidence:  profit taking was modest, and short positioning was limited.  Market breadth was positive, and volatility rose intraday, but ended lower. The SPX ended below the 20-day moving average (1315.81), but above the 50-day moving average (1287.56). 
The distribution day count was unchanged at 6 on the NYSE and 5 on the SPX and Nasdaq, and two 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.  On the SPX, the most recent distributions were on February 23rd, 15th, and 9th.  The January 28th distribution grows stale in another 7 trading days.  The current market uptrend has persisted since last September, but came under pressure January 21st and 28th, and November 16th through December 3rd.
World equity markets have rallied, though generally on lower volume. In Asia, the Nikkei and Hang Seng closed up 0.71% and +1.82% respectively, led by consumer services and industrials. The Shanghai composite ended down -0.04%, ending two consecutive daily gains. Technology and financials performed well, but health care and especially oil and gas stocks slid, perhaps reflecting easing market fears that petroleum prices would spike to the sky. Volume declined -8.87% on the SHCOMP.  The SHCOMP and other Asian markets experienced a steep correction after November 8th, and recent previous uptrends have failed.  Asian markets have yet to establish a clear and sustainable uptrend.  In Europe, the Eurostoxx50, FTSE, and DAX are higher +1.23%, +0.87%, and +0.54%.  On the EuroStoxx, financials are up +1.58%.  Sovereign debt spreads continue a widening trend.  Reports have Portugal seeking assistance as early as next week.
LIBOR trends remain unremarkable.  Overnight USD LIBOR was unchanged at 0.22550% and compares to 0.25188% at year-end.  USD 3-month LIBOR is unchanged at 0.31050% and compares to 0.30281% at year-end.  In early trading, the dollar is stronger against the euro and pound, but weaker against the yen.   The euro trades at US$1.3767, compared to US$1.3800 Thursday and US$1.3749 the prior day.  The euro trades above its 50-, 100-, and 200-day moving averages.  The dollar trades at ¥81.77, compared to ¥81.89 Thursday and ¥82.51 the prior day.  Treasury yields are lower, with 2- and 10-year maturities yielding 0.743% and 3.461%, respectively, compared to 0.735% and 3.448% Thursday.  The yield curve spread widened to +2.718% compared to +2.713% 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 +2.91% on February 3, 2011.  Commodities prices are mixed, with lower petroleum and natural gas, higher precious metals, aluminum and copper, and mixed agricultural prices.
U.S. news and economic reporting.  Today’s economic reporting focuses on 4Q2010 GDP revisions and University of Michigan Confidence for February.
Overseas news.  Today, Saudi Arabia boosted crude oil production to a total of 9 million barrels per day, up from 8.3 million barrels.  In January, Spain producer prices rose more than expected, increasing at a +2.4% annual rate over the prior month’s rate, compared to estimates for a increase of +1.3% annualized rate.  In the fourth quarter, U.K. GDP contracted more than expected over the prior quarter. 
Company news/research:
·         BLK – increases quarterly dividend to $1.375 from $1.00
·         FITB – upgraded to buy at FBR, price target raised to $17 from $14
·         BAC – potentially the largest stress-test beneficiary and may boost its dividend following Fed review of capital plan, according to FBR
·         WFC – upgraded to buy at Goldman Sachs
·         C – downgraded to neutral at Goldman Sachs
·         BBX – ordered by regulators to boost capital
4Q2010 Earnings.  The latest quarterly earnings results have so far exceeded EPS and revenue expectations.  Of the 450 S&P500 companies that reported earnings to date, 71% (319 of the 450) beat operating EPS estimates, versus the historical average of 62%.  Companies beat by an average of +5.7% (versus a historical average of +2%).  EPS is up +36.8% over the prior year.  Though challenged in the current operating environment, 346 companies (77%) reported increased revenues and 300 companies (67%) beat revenue estimates.  In the fourth quarter of 2010, the SPX earned $22.47 per share, a +4.9% and +28.3% increase over 3Q10 and 4Q09 EPS of $21.42 and $17.51, respectively.
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.  In the fourth quarter of 2010, the BKX earned $0.93 per share, a +31.0% increase over 3Q10 EPS of $0.71, and compared to 4Q09 EPS of -$0.52.    
Thursday’s equity markets. On lighter volume, the major indexes closed mixed, with the Nasdaq closing up +0.55%, while the DJI, SPX, and NYSE fell -0.31%, -0.10%, and -0.20%.  Markets  were highly reactive to news/rumor/speculation on/from Libya as reflected, too, in movements in oil prices, which hit an intraday high of $103, but closed at $97.28.  Rumors were rampant about the fate of Libya (e.g., in the morning, will Muammar use chemical weapons? Or later in the day, Had he been shot? And still later the Saudi government’s willingness to correct shortfalls in oil supplies.)  After the IEA (International Energy Agency) confirmed it stands ready to release emergency stockpiles, oil prices sank, and equity indexes recovered from their lows of the day. Economic news released on Thursday (Initial Jobless Claim +391k, Continuing Claims 3790k, Durable Goods +2.7%) was relatively in line.
Technical indicators are mixed. The SPX broke through its sentimental support level of 1300 and reached an intraday low of 1294 before rebounding smartly and closing at 1306.10, down a mere -0.10%.  Key support remains at 1287, the 50-day moving average.  Intraday, the Nasdaq, for the second consecutive day, broke through its 50-day moving average (2723), only to recover in the afternoon and close higher at 2737.  All the major indexes closed above their respective 200-week and 50-, 100-, and 200-day moving averages.  New 52-week highs were +20.00, much lower than the 10-day moving average of 225.50.  NYSE relative strength ended at 50.27, in a neutral range and down from 51.59 Wednesday, and an overbought 73.40 at Friday’s close.
The most recent AAII bullish sentiment index fell again to 36.63 (February 24th) from its last reading of 46.58 on February 17th and below the December high of 63.60.  Sentiment indexes are highly variable and often best regarded from a contrarian perspective.
Market segments closed mixed.  Industrials, health care and consumer services were the best performers, closing up at least +0.31%.  Oil and gas, basic materials, and utilities were the worst performers.
Financials were lower, with names like ETFC and ACE leading to the downside, off -4.80% and -2.57% respectively. Among regional banks, CMA, COF, RF and STT enjoyed an up day. STI, MTB, and KEY were off -2.22%, -1.64%, and -1.63% respectively, to lead the laggards.  The XLF, BKX, and KRX  were down -0.24%, -0.53%, and -0.82%, respectively, and all rallied nicely off their 2 p.m. lows.  While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -8.85% below its April 2010 highs and -36% below its best level of 82.55 in September 2008.
NYSE Indicators.  Volume declined -8.20% to 1.221 billion shares, from 1.330 billion shares Wednesday, 1.23x the 50-day moving average.  For the 1st trading day this week, market breadth was positive, though up volume trailed down volume.  Advancing stocks led decliners by +143 (compared to -909 Wednesday), or 1.10:1.  Up volume trailed down volume by 0.73:1.
Valuation.  The SPX trades at 13.6x estimated 2011 earnings ($96.28) and 12.0x estimated 2012 earnings ($109.27), compared to 13.6x and 12.0x respective 2011-12 earnings Friday.  The 10-year average median Price/Earnings multiple is 20.0x.  Since the beginning of 2010, analysts increased 2011 and 2012 earnings estimates by +4.1%, and +5.0%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($83.87) by +14.8% and +30.3%, respectively.
Large-cap banks trade at a median 1.56x tangible book value and 13.3x 2011 consensus earnings, compared to 1.57 tangible book value and 13.4x 2011 earnings Friday.  These compare to the 10-year average median multiples of 3.08x tangible book value and 15.9x earnings.  Analysts expect 2011 and 2012 BKX earnings to exceed 2010 operating earnings by +27.1% and 70.6%, respectively. 
SPX.  On lower volume, the SPX fell -1.30 points, or -0.10%, to 1306.10.  Volume fell -10.5% to 919.51 million shares, down from 1,027.40 million shares Wednesday, and above the 777.10 million share 50-day moving average.  For the 88th consecutive day, its 50-day moving average closed above its 200-day moving average (1287.58 versus 1167.99, respectively).  The SPX closed above its 200-week moving average (1179.50). 
The SPX opened flat and fluctuated between small losses and gains through 10:30.  The intra-day high of 1310.91 came at 10:21.  The index retraced from there to break-even at 10:30 and began a stair-step decent through the morning to the 1300-level by 12:15.  The SPX traded between 1300 and 1302 through 1:45 and continuously tested 1300-level support.  A sharper sell-off at 1:45 sent the index definitively below 1300 to the intra-day low of 1294.26 at 1:55.  Buyers rallied the index as sharply as it had fallen, and the SPX retook 1300 by 2:15 and climbed back to break-even by 3:20.  The SPX failed to move above 1310 and retreated into the close, finishing with a marginal loss.  The index closed +1.44% above its 50-day moving average, closing above that average for the 119th consecutive day, and +11.82% above its 200-day moving average.  The SPX closed below its 20-day moving average (1315.81) for the second consecutive day.  The 20-, 50-, 100-, and 200-day moving averages rose.
Technical indicators are mixed.  The SPX closed above 1300 for the 17th consecutive day (after dipping below that level intra-day for the second straight day), and above its April highs for the 58th straight session.  The directional momentum indicator switched to negative, and the trend is decreasing.  Relative strength fell to 48.77 from 49.45, a neutral range.  Next resistance is at 1313.25; next support is at 1296.60. 
BKX.  On lower volume, the KBW bank index closed at 52.82, down -0.28 points or -0.53%.  Volume fell -20.7% to 152.54 million shares, down from 192.33 million shares Wednesday, but above the 139.89 million share 50-day average.  The index closed +22.89% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -8.85% below its April 23rd closing high. 
Financials underperformed the market, and regionals underperformed large-cap banks.  The BKX opened lower to 52.80.  Financials made two rallies back to break-even at 9:45 and 10:30, with the intra-day high of 53.18 set during the first move.  Like the broader markets, financials steadily declined through the morning and into the early afternoon, breaching first resistance at 1:40 and reaching an intra-day low of 52.23 at 1:55.  The BKX rallied sharply from the low, but unlike the SPX, fell well short of its break-even and closed with a larger loss. 
Technical indicators are mixed.  The index closed above 50 for the 46th straight day.  The BKX closed above its 100- and 200-day moving averages (50.09, and 48.93, respectively), closing above the 200-day average for the 53rd straight session.  The index closed below its 20- and 50-day moving averages of 54.42 and 53.29, closing below them for the 3rd and 2nd straight day, respectively.  The 200-day moving average fell.  The positive divergence of the 50- and 100-day moving averages to the 200-day moving average continues to expand.  The 50-day moving average closed (by +4.36 points) above the 200-day moving average for the 29th straight day.  The 100-day moving average closed (by +1.16 points) above the 200-day moving average for the 12th straight day.  The directional movement indicator is negative and the trend is decreasing.  Relative strength fell to 40.59 from 42.40, a neutral range.  Next resistance is 53.27; next support at 52.29.

Disclosure: I am long CMA, STT, BLK, C, WFC, BAC.