This morning. Equity markets are in a confirmed uptrend. In each of the past two days, major indexes closed mixed on lower volume. The NASDAQ closed higher, while other major indexes closed slightly higher. Distribution days number four since the uptrend commenced on August 27th (on September 7th, 17th, 21st, and 30th), one for the DJI, two for the SPX and NASDAQ, and three for the NYSE composite.
All major indexes closed above their 20-, 50-, and 100-, and 200-day moving averages. The NYSE composite index stands +11.4% above its August 26th closing low. Its 50-day moving average crossed above the 100-day moving average September 15th, but remains -0.54% below the 200-day moving average, compared to -2.35% on September 15th. Directional movement indicators are positive, and the trend is strengthening. Relative strength indices have the market in a short-term overbought range. After this morning’s September jobs report, December SPX futures are at 1155.40, up +1.40 points after fair value adjustment. Next resistance is at 1164.15; next support is at 1151.69.
Overnight USD LIBOR is 0.22500%, unchanged from the prior day. USD 3-month LIBOR is 0.28906%, unchanged from the prior day. Asian equity markets closed mixed, with the Nikkei -0.99% and the Hang Seng +0.26%. European equity markets are lower, with the Eurostoxx50 -0.38%, FTSE -0.75%, and DAX -0.23%. EuroStoxx financials are down -0.71%. Eurozone sovereign CDS spreads are slightly wider. In currency markets, the dollar and yen are slightly stronger, while the euro and pound are weaker. The euro trades at US$1.3879, compared to US$1.3926 Thursday. U.S. Treasuries are weaker compared to Thursday, with the 2- and 10-year maturities yielding 0.359% and 2.406%, respectively, compared to 0.351% and 2.383% the prior day. The yield curve spread widened to +2.047%, from +2.032% 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. Across the commodity complexes, prices are generally lower, with lower petroleum, precious metals, aluminum, copper, and agricultural products prices.
U.S. news. Overnight, Alcoa reported better than expected 3Q2010 operating EPS of $0.09, compared to consensus $0.06, on better revenues. Consumer credit fell -$3.3 billion in August, slightly better than the -$3.5 billion survey and -$4.1 billion revision for July. Today’s economic reporting focuses on the September jobs report.
Overseas news. Abu Dhabi’s Sheikh Mansour bought downside protection on his 6.3% ($1 billion) BARC stake. August German exports fell more than expected, declining -0.4% from July compared to -0.3% estimates. Moody’s may upgrade China’s sovereign debt rating in the coming months. European regulators will unveil tougher-than-expected restrictions on bankers’ compensation, according to reports.
Thursday’s equity markets. Despite positive jobless claims and retail sales news, equity markets closed mixed, holding on to most of Tuesday’s large gains, but hesitating prior to today’s employment report. Volumes were lower. Market breadth was slightly negative. Market segments closed mixed, with technology, consumer services, and utilities performing best, while financials, basic materials, and telecommunications were the worst performers.
Market sentiment remains variable, as there have been several failed uptrends in recent months. The sustainability of the current uptrend has its skeptics, but the uptrend has proved more durable than recent others. Political uncertainties ahead of the mid-term elections are the principal negative, but the September-October rally has taken all major indexes back above their early August and then September highs, to levels last seen in mid-May, before the summer’s market correction began in earnest. All indexes are at least +3.34% higher in 2010. Market strength is most evident in NASDAQ composite, which in the past week saw 450 new 52-week highs, compared to 257 new lows. The latest week’s (October 7th) AAII Investor Sentiment index stood at 49.03, up from 42.53 on September 30th, and up from 20.74 on August 26th, the low recent reading. This is probably better read as a bearish indicator. Despite the broader market’s recovery, financial stocks remain more than -18.2% below their April highs. Tax uncertainties, dollar weakness, and the flatter yield curve qualify as additional market negatives.
Technical indicators are mixed, with the major indices above their respective 20-, 50-, and 100-, and 200-day moving averages, but 200-day moving averages remain above 50-day moving averages. Directional movement indicators are positive. Short-term relative strength indicators suggest that the market has moved into the lower end of an overbought range. Market volatility is elevated. The VIX edged up +0.33% to 21.56 from 21.49 at Wednesday’s close.
The XLF, BKX, and KRX closed lower, -0.41%, -0.61%, and -0.50%, respectively.
NYSE Indicators. Volume fell -7.10% to 910.39 million shares, from 943.71 million shares Wednesday and below the 1.014 billion share 50-day moving average. Market breadth was negative, and up volume lagged down volume. Advancing stocks trailed decliners by –240 (compared to -187 Wednesday), or 0.85:1. Up volume lagged down volume by 0.71:1.
SPX. On lower volume, the SPX fell -1.91 points, or -0.16% to close at 1158.06, +2.68% above its August 9th close of 1127.79, the highest close prior to that month’s correction) and +0.90% above last month’s closing high of 1147.70 on September 28th. The SPX closed +3.49% above its 200-day moving average (1119.00), which trended higher on the day, and +4.43% above its 50-day moving average (1108.98), closing above that average for the 25th consecutive day. The SPX closed +8.78% above the 1064.59 close on the August 27th positive reversal, and +7.20% above the September 1st follow-through close of 1080.29. The SPX closed -4.86% below its April 23rd closing high of 1217.28. The 20-, 50-, 100-, and 200-day moving averages rose.
Technical indicators are mixed but improving, as the SPX closed above the 200-day moving average for the 19th consecutive day, above its monthly August 7th and September 28th highs, but below 1160 for the 2nd consecutive day, the latest market resistance point. The directional momentum indicator is positive, but the trend is stable. Relative strength fell to 63.76 from 64.87, in the lower end of an overbought range. Next resistance is at 1164.15; next support at 1151.69.
BKX. In light trading, financial stocks ended lower. The BKX traded within a 1.10 point range, opening higher to an intraday high of 48.19, but trending lower to its intraday low of 47.10 at 12:39, before improving to close at 47.45, down -0.29 points or -0.61%. The index closed +10.4% above its August 30 closing low of 42.98, the trough of the recent correction.
Volume was lower, falling -11.5% to 112.24 million shares, compared to 126.8 million shares Wednesday and the 124.4 million share 50-day average. The BKX closed -18.1% below its 57.95 April 23rd closing high.
Technical indicators are improving, though mixed. The BKX closed above its 20-, 50-, and 100-day moving averages (46.90, 46.52, and 47.58, respectively), with the 20-day moving average above the 50-day moving average for the 4th consecutive day and above its 100-day moving average for the 3rd consecutive day. It closed below its 200-day moving average (48.72). The 20- and 200-day moving average moved higher. The 50- and 100-day moving averages trended lower. The 50-day moving average closed (by -2.20 points) below the 200-day moving average for the 37th consecutive day. The directional movement indicator is positive, with a stable trend. Relative strength fell again to 54.96 from 56.90, in a neutral range. Next resistance is 48.06; next support at 46.97.
Valuation. The SPX trades at 13.8x estimated 2010 earnings ($83.88) and 12.1x estimated 2011 earnings ($95.95), compared to 13.8x and 12.2x respective 2010-11 earnings yesterday. The 10-year average median Price/Earnings multiple is 20.0x. Since the beginning of the year, analysts increased 2010, 2011, and 2012 earnings estimates by +10.0%, +3.7%, and +4.9%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings by +14.4% and +30.2%, respectively.
Large-cap banks trade at a median 1.45x tangible book value and 12.8x 2011 earnings, compared to 1.45x tangible book value and 13.2x 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 +40.7%. In 3Q2009, large-cap banks earned a combined $5.91 per share while the BKX Index earned -$1.24 per share. In 3Q2010, earnings estimates call for $13.73 and $0.58 per share, respectively.
Company news & research:
· CS – downgraded to underperform at Barclays
· PNC – joins Ally, BAC, and JPM in halting foreclosures, announcing a 30 day suspension.
· JPM – bought remaining RBS Sempra assets for $220 million.
· Barclays increases 3Q10 EPS estimates for: STI to $0.01 from -$0.15; USB to $0.42 from $0.38, CMA to $0.44 from $0.42, FITB to $0.18 from $0.16, and KEY to $0.07 from $0.06. EPS estimates were lowered for: BBT to $0.25 from $0.33, FIBK to $0.15 from $0.16, and CYN to $0.55 from $0.56.
Disclosure: Long PNC, JPM, USB, CMA, BBT