This morning. After fair value adjustment, equity futures are slightly lower. Markets have resumed their confirmed uptrend, but begin the day near key resistance points. March SPX futures are at 1302.70, down -1.59 points after fair value adjustment. Next SPX resistance is at 1314.59. Next support is at 1294.87.
Tuesday, equity markets extended Monday’s gains and more than recovered Friday’s losses. The SPX and DJI ended above their respective 1,300 and 12,000 milestones and at new multi-year highs. On the day, the Nasdaq and NYSE composite posted the best returns, rising +1.89% and +1.85%, respectively. The SPX and DJI ended +1.67% and 1.25% higher. For the 2nd consecutive day, volumes were lower on all the major exchanges, but well above 50-day moving averages. Trading desks report that the greater activity was in futures and ETFs rather than individual issues. Volatility declined markedly, ending well below 18, from just under 20 at Monday’s close. Key resistance points are 1307 (equal to yesterday’s close) and 1313 (the August 2008 pre-Lehman high). The number of distribution days was unchanged, with 4 on the NASDAQ and NYSE, and one on the DJI and SPX in the past 25 trading days.
Overnight, the Nikkei and Hang Seng closed higher, up +1.78% and +1.81%, respectively. Chinese markets are closed for the lunar New Year. The Nikkei’s strength was attributed to strong earnings reports from several of its largest industrials and an improving U.S. economic outlook. In Europe, the Eurostoxx50, FTSE, and DAX are mixed, +0.15%, +0.69%, and -0.02%, respectively. Egypt-related concerns are diminishing. On the EuroStoxx, financials are the 3rd best performer, up +1.12%. Eurozone sovereign debt tightened significantly today.
LIBOR trends remain unremarkable. Overnight USD LIBOR declined slightly to 0.23500% from 0.23600% Tuesday, but down from 0.25188% at year-end. USD 3-month LIBOR was unchanged at 0.31050%, and down compared to 0.30281% at year-end. In early trading, the dollar is slightly better against the euro and yen, but weaker against the pound. The euro trades at US$1.3809, compared to US$1.3829 Tuesday and US$1.3694 the prior day. For the 9th consecutive day, the euro closed above its 50-, 100-, and 200-day moving averages and appears overbought at these levels. The dollar trades at ¥81.47, compared to ¥81.35 Tuesday and ¥82.04 the prior day. Treasury yields are higher, with 2- and 10-year maturities yielding 0.609% and 3.414%, respectively, compared to 0.601% and 3.439% Tuesday. The yield curve spread narrowed to +2.805% compared to +2.838% 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 lower petroleum and higher natural gas, slightly lower precious metals, higher aluminum and copper, and higher agricultural prices.
U.S. news and economic reporting. This morning’s focus is the January ADP employment report at 8:15. The ADP reported the addition of 187K jobs, better than survey’s 140K jobs. December was revised lower to 247K, from 297K.
Overseas news. Bank of England officials made hawkish remarks on the need to increase interest rates now to avoid larger increases later. In January, unemployment in Spain increased more than expected. Ireland’s Fine Gael and Labour parties want to renegotiate the terms of the country’s bailout agreement and provide less protection to senior bondholders.
Company news/research:
- GNW - reports 4Q10 EPS loss of -$0.28 compared to consensus estimates of a +$0.16 profit
- LAZ – reports 4Q10 operating EPS of $0.76 compared to consensus estimates of $0.63
- NDAQ – reports 4Q10 EPS of $0.69 compared to estimates of $0.51
- The Morgan Stanley Financial Services Conference continues today with presentations by BK, CIM, WBS, BMO, TCBI, BBT, NLY, NTRS, NYB, HBAN, C, BPFH, NTRS, and COF.
4Q2010 Earnings. The quarter’s first earnings results have so far exceeded EPS and revenue expectations. Of the 217 S&P500 companies that reported earnings to date, 72% (157 of the 217) beat operating EPS estimates, versus the historical average of 62%. Companies beat by an average of +6.7% (versus a historical average of +2%). EPS is up +43.6% over the prior year. Though challenged in the current operating environment, 150 companies (79%) reported increased revenues and 155 companies (71%) 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 lower but moderate volume, all of the major indexes closed higher with the DJI closing at 12,040.16, its first close in excess of 12,000 in 2½ years. The SPX closed at 1301.50, its first close above 1300 since August of 2008. Investors found multiple reasons to buy stocks, with positive earnings reports from Pfizer (PFE), UPS, and Archer Daniels Midland (ADM), as well as better than expected January ISM report, which showed manufacturing activity at its fastest pace in nearly seven years. The VIX declined once again on Tuesday to 17.63, down -9.73% from 19.96. Traders reported strong order volume with some aggressive short covering as the expected by many technicians did not materialize and equity markets sustained Monday’s upward trend.
The SPX closed at a key resistance level 1307. The next key resistance level is 1313 (the August 2008 pre-Lehman high). If the SPX can pierce that level, subsequent resistance is at 1321 and 1341, which were June 2008 intermediate levels. Alternatively, a retracement to the 50-day moving average (1252.16) would be a -4.24% decline, hardly a correction. Technical indicators are generally positive. All 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 respective 200-day moving averages. New 52-week net highs declined to +96, below its 136.7 10-day moving average. The relative strength indicator closed at 66.31, up from Monday’s close of 57.88, approaching the top of a neutral range.
All market segments closed higher, with basic materials, financials, and oil and gas the best performers, up at least +1.88%. Telecommunications, utilities, and consumer goods, were the weakest segments.
Financials were among the leaders, though the large cap names continued to outperform the regional KRX. The XLF, BKX, and KRX advanced +2.07%, +2.58%, and +1.90%, respectively. While the broader indices are have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -6.18% below its April 2010 highs and -34.1% below its best level of 82.55 in September 2008.
NYSE Indicators. Volume fell for the 2nd consecutive day, falling -9.13% to 1.095 billion shares, from 1.199 billion shares Monday, and compares to a 996.4 million share 50-day moving average. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by +1962 (compared to +1155 Monday), or 4.50:1. Up volume led down volume by 7.43:1.
Valuation. The SPX trades at 13.6x estimated 2011 earnings (increased to $96.02 from $95.59) and 12.0x estimated 2012 earnings (increased to $108.92 from $108.40), compared to 13.5x and 11.9x 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 +4.6%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($82.88) by +15.8% and +31.4%, respectively.
Large-cap banks trade at a median 1.56x tangible book value and 14.2x 2011 consensus earnings, compared to 1.54 tangible book value and 13.7x 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 +30.5%. 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 lower volume, the SPX rose +21.47 points, or +1.67%, to 1307.59. Volume fell -11.4% to 825.82 million shares, down from 932.36 million shares Monday, above the 781.02 million share 50-day moving average. For the 72nd consecutive day, its 50-day moving average closed above its 200-day moving average (1252.16 versus 1156.84, respectively). The SPX closed above its 200-week moving average (1181.75).
The SPX gapped higher through resistance at the open. The index breached 1295 within trading’s first five minutes and moved higher continuously through the morning in an aggressive short-covering rally. The SPX broke above 1300 by 10:25, above 1305 by 12:15, and topped out at 1308 at 1:00. The index traded sideways through the close, as buyers supported the index’s early gains. The intra-day high of 1308.86 came at 3:51 and the index closed just below that level. The index closed +4.61% above its 50-day moving average, closing above that average for the 103rd consecutive day, and +13.08% above its 200-day moving average. The 20-, 50-, 100-, and 200-day moving averages rose.
Technical indicators are positive. The SPX closed at its highest level since June 25, 2008, closed above 1300 for the first time since August 28, 2008, closed above its April highs for the 42nd straight session, and remained above its 20-day moving average. The directional momentum indicator is positive, with a stable trend. Relative strength rose to 66.27 from 57.43, the high end of a neutral range. Next resistance is at 1314.59; next support is at 1294.87.
BKX. On lower volume, the KBW bank index closed at 54.37, up +1.37 points or +2.58%. The index closed +26.50% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -6.18% below its April 23rd closing high.
Financials outperformed the market, and large-cap banks outperformed regionals. The BKX’s morning rally alternated between steep and gradual ascents. Most of the day’s gains occurred within two 30-minute windows. The index gapped higher through resistance at the open and continued a sharp rally through 10:00, reaching 53.80 (a +1.51% move from the prior day’s close). The index traded sideways to the 53.90 level through 11:25, when another sharp rally took hold, sending the index another +0.83% higher. The index breached 54.00 by 11:30 and 54.20 by 11:40. Reaching an intra-day high of 54.42 by 1:00, the BKX traded sideways through the rest of the afternoon and into the close. The index closed above 50 for the 30th straight day. Volume fell -0.03% to 128.41 million shares, down from 128.45 million shares Monday, and below the 160.76 million share 50-day average.
Technical indicators are positive. The BKX closed above its 20-, 50-, 100-, and 200-day moving averages (53.31, 50.79, 48.75, and 49.00, respectively), closing above the 200-day average for the 37th straight session. The 20-, 50-, and 100-day averages increased while the 200-day decreased. The 50-day moving average closed (by +1.78 points) above the 200-day moving average, closing above it for the 14th straight day. The 100-day moving average closed (by -0.26 points) below the 200-day moving average, signaling a cross late this week or early next week. The directional movement indicator is positive, and trend strength stabilized. Relative strength rose to 61.16 from 53.80, moving to the higher end of a neutral range. Next resistance is 54.86; next support at 53.45.
Disclosure: I am long GNW, CIM, WBS, NLY, C, COF.
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