This morning. Yesterday’s mixed trade on light volume may have been unimpressive, but the SPX and NASDAQ closed at new 2010 and fresh 2-year highs, and tracked above important recent resistance, confirming resumption of the market uptrend after last week’s consolidation. Equity futures are higher this morning, with March SPX futures at 1246.30, up +4.22 points after fair value adjustment. Distribution days number 2 on the SPX and NYSE and 3 for the NASDAQ. Next SPX resistance is at 1251.02. Next support is at 1242.33.
Asian equity markets closed higher. The Nikkei, Hang Seng, and Shanghai indexes closed +1.51%, +1.57%, and +1.79%, respectively, relieved with the abatement of the Koreas’ tensions and a slowing rate of property price increases. European equity markets are higher, with the Eurostoxx50 +0.70%, FTSE +0.78%, and DAX +0.61%. On the EuroStoxx, financials are the 2nd best performing segment, up +0.86%.
LIBOR trends remain unremarkable. Overnight USD LIBOR is 0.24125%, unchanged from Monday. USD 3-month LIBOR is 0.30281%, also unchanged from the prior day. In early trading, the dollar is slightly weaker against the euro, yen, and pound. The euro trades at US$1.3152, compared to US$1.3131 the prior day and USD$1.3188 the day before. The dollar trades at ¥83.67, compared to ¥83.77 Monday and ¥83.98 the prior day. U.S. Treasury yields are lower, with 2- and 10-year maturities yielding 0.589% and 3.301%, respectively, compared to 0.597% and 3.336% Monday. The yield curve spread narrowed to +2.712% from +2.739% Monday. 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 mixed, with lower petroleum and natural gas, mixed precious metals, higher aluminum and copper, and agricultural prices.
U.S. news. The lame duck session of the 111th Congress continues to grind forward, but will likely have to reconvene after Christmas. Economic reports include the release of the U.S. 2010 census and consumer confidence after the close.
Overseas news. Moody’s placed Portugal’s A1 long term and Prime-1 short term government bond ratings on review for possible downgrades. In December, U.K. consumer confidence fell to a 4-month low, but beat expectations. The U.K.’s November budget deficit rose to a record £22.8 billion, compared to expectations of £16.8 billion. This evening, China is expected to hike fuel prices despite rising inflation fears. The Bank of Japan concluded its December meeting, leaving its interest rate targets and credit program unchanged while announcing it will “steadily” provide liquidity to support demand.
Company news/research:
- WBS – announced a 6.3 million common share secondary offering to repay TARP, (issuance equals 60% of $200 million TARP outstanding; Tier 1 common pro-forma goes to 9.2%).
- GS – 4Q EPS lowered to $3.73 from $4.77 at BofA/ML, reiterates buy
- JPM – 4Q EPS lowered to $0.98 from $1.02 at BofA/ML, reiterates buy
- MS – 4Q core EPS lowered to $0.17 at BofA/ML
- BBT – senior debt credit rating lowered to A2 from A1 by Moody’s, outlook is stable.
- MI – downgraded to market perform at Sanford Bernstein, price target cut to $7.50 from $9
- PNC – focusing on “in-market deals,” which rules out an RF takeover, according to a JPM analyst’s meeting with management
- TD Bank – acquiring Chrysler Financial for $6.3 billion.
- WFC – settles with CA over WB’s pick-a-pay origination practices; pledges up to $2.4 billion in loan modifications on top of the $2 billion of debt already forgiven.
Monday’s equity markets. Volume was unimpressive, market breadth was negative, and the DJI closed fractionally lower, but the SPX and NASDAQ closed at their 3rd consecutive daily new 2010 highs, and moved through tough resistance points. After a week’s consolidation of early December gains, equity markets have reconfirmed the uptrend that commenced at the beginning of September. Oil and gas, basic materials, and telecommunications were the best performers. Consumer goods, health care, and industrials were the worst performing segments. In December, the NASDAQ leads the other major indexes, up +6.31%, compared to the SPX, DJI, and NYSE, up +5.64%, +4.29%, and +5.60%, respectively.
Equity futures were higher after positive remarks from James Bullard, St. Louis Fed President, that QE2 was “modestly” successful and that monetary easing had helped 2011 economic prospects. Markets gapped higher to 1248 on the SPX, but by 10:00 weakened as the dollar strengthened and resistance seemed to hold. Just after 11:00, markets found support (at 1242 on the SPX), and rallied back to an intraday highs just after 2:00. While the SPX and NASDAQ closed well off their intraday highs, both managed to close at new yearly highs .
Technical indicators are generally positive. Major indexes are at least +9.21% higher in 2010, with the NASDAQ and SPX at new yearly highs, and the DJI and NYSE fractionally below their yearly highs. 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. Directional movement indicators are positive, and the trend is strengthening. The principal negative is that short-term relative strength indicators have moved into the upper end of a neutral range. Investors remain complacent. Market volatility rose slightly, but remains at low levels. fell to its lowest reading since April 21st. The VIX closed up +1.86% to 16.41 from 16.11 at Friday’s close.
Market sentiment is positive. The latest week’s (December 16th) AAII Investor Bullish Sentiment index remains quite elevated, but fell -5.32% to 50.23 from 53.05 on December 9th. Sentiment indicators are highly variable, but this reading is probably best read as bearish.
Financial stocks closed higher, with the XLF, BKX, and KRX ending +0.06%, +0.52%, and +0.62%, respectively. While the broader indices are at or near two-year highs and have recovered their post-September 2008 losses, financial stocks have not, with the BKX closing -13.1% below its April highs and -39.0% below its best level 82.55 in September 2008.
NYSE Indicators. Volume was light, down -58.9% to 829.8 million shares, from option-expiration spurred 2.019 billion shares Friday, above the 1.062 billion share 50-day moving average. Market breadth was negative, though up volume exceeded down volume. Advancing stocks lagged decliners by -45 (compared to +346 Friday), or 0.97:1. Up volume led down volume by 1.72:1.
3Q2010 Earnings. Earnings have generally exceeded EPS and revenue expectations. Of the 485 S&P500 companies that reported earnings to date, 76% (367 of 485) beat operating EPS estimates, versus the historical average of 62%. Companies beat by an average of +6.4% (versus a historical average of +2%). EPS is up +31.2% over the prior year. Though challenged in the current operating environment, 388 companies (80%) reported increased revenues and 296 companies (61%) beat revenue estimates. With all 24 BKX members reporting, 79% (19 out of 24) beat operating EPS estimates, with a +25.3% average operating EPS surprise. Bank revenues disappointed slightly, missing expectations by -0.30% on average.
Valuation. The SPX trades at 14.6x estimated 2010 earnings (reduced to $85.33 from $85.49) and 12.8x estimated 2011 earnings ($97.24), compared to 14.6x and 12.8x 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 +12.9%, +5.1%, and +5.6%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings by +14.0% and +28.9%, respectively.
Large-cap banks trade at a median 1.45x tangible book value and 13.9x 2011 earnings, compared to 1.44x tangible book value and 13.4x 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 +34.2% and expect 4Q2010 earnings to exceed 3Q2010 earnings by +22.2%. In 3Q2009, large-cap banks earned a combined $5.91 per share while the BKX Index earned -$1.24 per share. In 3Q2010, large-cap banks earned $13.78 and the BKX earned $0.71 per share.
SPX. On lower volume following Friday’s options expiration, the SPX rose +3.17 points, or +0.25% to 1247.08, its 7th increase in eight sessions, its 3rd consecutive closing 2010 high, and a new two-year closing high. Volume fell -62.4% to 639.80 million shares from 1.70 billion shares Friday, below the 852.11 million share 50-day moving average. For the 43rd consecutive day, its 50-day moving average closed above its 200-day moving average (1202.09 versus 1142.07, respectively). The SPX closed above its 200-week moving average (1185.64).
The SPX opened higher following St. Louis Fed President Bullard’s bullish pre-market interview and positive holiday sales projections. Again testing and failing resistance at 1248, stocks broke lower back to break-even at 10:30. As the dollar strengthened through the morning, the index briefly visited negative territory, hitting an intra-day low of 1241.51 just after 11:00. As it has throughout the last two weeks, the index remains resilient, and found a bid on weakness. A rally quickly took hold, pushing the index straight through the 1248 resistance level and briefly above 1250 after 2:00. Selling in the financial space after the California/WFC settlement announcement at 2:30 weighed on the broader rally’s momentum, and the SPX traded slightly lower into the close, finishing up +3.17 points at 1247.08. The SPX closed +3.74% above its 50-day moving average (1202.09), closing above that average for the 75th consecutive day, and +9.19% above its 200-day moving average (1142.07). The SPX closed above its April-high closing level of 1217.28 for the 13th straight session. The 20-, 50-, 100-, and 200-day moving averages rose.
Technical indicators are positive. The SPX closed above its April highs for the thirteenth straight session and set the fifth two-year closing high in six sessions. The directional momentum indicator is positive, with an increasing trend. Relative strength rose to 68.01 from 66.77, the high end of a neutral range. Next resistance is at 1251.02; next support is at 1242.33.
BKX. On higher volume, the KBW bank index closed at 50.34, up +0.26 points or +0.52%. The index closed +17.12% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -13.13% below its April 23rd closing high.
Financial stocks outperformed the SPX, and regionals outperformed large-caps. The BKX gapped higher at the open. Early selling reduced gains but never turned the index negative. The 11:00 broader market rally lifted the BKX as well, sending it to an intra-day high of 50.53 by 2:30. The California/WFC settlement announcement weighed on optimism, and the BKX traded lower into the close, finishing up 0.52% at 50.34, its second close above 50.0 since last Monday. Volume fell -65.60% to 106.50 million shares, down from 309.60 million shares Friday, and below the 173.36 million share 50-day average.
Technical indicators are positive. The BKX closed above its 20-, 50-, 100-, and 200-day moving averages (47.84, 47.06, 46.78, and 49.00, respectively), closing above the 200-day average for the ninth straight session. The 20-, 50-, 100-, and 200-day averages all increased. The 50-day moving average closed (by -1.94 points) below the 200-day moving average, as it has since August 16th. The directional movement indicator is positive, with an increasing trend. Relative strength rose to 64.35 from 63.15, the higher end of a neutral range. Next resistance is 50.55; next support at 50.10.
Disclosure: I am long WBS, GS, JPM, MS, MI, PNC, WFC.
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