Wednesday, August 24, 2011

Stocks Rising into Final Hour on Less Financial Sector Pessimism, Short-Covering, Bargain-Hunting, Falling Commodity Prices

Broad Market Tone:

  • Advance/Decline Line: Higher
  • Sector Performance: Mixed
  • Volume: Slightly Below Average
  • Market Leading Stocks: Performing In Line
Equity Investor Angst:
  • VIX 36.65 +1.05%
  • ISE Sentiment Index 100.0 -45.0%
  • Total Put/Call 1.128 +24.27%
  • NYSE Arms .70 -7.79%
Credit Investor Angst:
  • North American Investment Grade CDS Index 127.44 -.38%
  • European Financial Sector CDS Index 244.47 +3.55%
  • Western Europe Sovereign Debt CDS Index 297.17 +.34%
  • Emerging Market CDS Index 304.99 -.05%
  • 2-Year Swap Spread 29.0 -4 bps
  • TED Spread 31.0 unch.
Economic Gauges:
  • 3-Month T-Bill Yield .00% unch.
  • Yield Curve 204.0 +12 bps
  • China Import Iron Ore Spot $178.30/Metric Tonne +1.83%
  • Citi US Economic Surprise Index -69.70 +6.9 points
  • 10-Year TIPS Spread 2.01% +2 bps
Overseas Futures:
  • Nikkei Futures: Indicating +110 open in Japan
  • DAX Futures: Indicating +12 open in Germany
  • Higher: On gains in my Tech, Medical and Retail sector longs
  • Disclosed Trades: Covered all of my (IWM)/(QQQ) hedges and some of my (EEM) short
  • Market Exposure: Moved to 100% Net Long
BOTTOM LINE: Today's overall market action is bullish, as the S&P 500 builds on yesterday's sharp gains despite rising eurozone debt angst, mixed economic data and emerging markets inflation fears. On the positive side, Education, Gaming, Construction, HMO, I-Banking, Bank, Paper, Coal, Utility and Defense shares are especially strong, rising more than +1.5% on the day. Cyclicals are strongly outperforming. (XLF) has traded very well throughout the day. Gold is plunging another -5.5%, Silver is falling -6.05%, Copper is gaining +.24%, the UBS-Bloomberg Ag Spot Index is down -.72%, oil is falling -1.0% and Lumber is surging +4.5%. The 10-year yield is jumping +14 bps to 2.29%. The FRA/OIS spread is dropping -5.68 bps to 44.2 bps, which is also a big positive. On the negative side, Networking and Semi shares are relatively weak, falling more than -.5%. Tech shares have lagged throughout the day. Rice is still near a multi-year high, rising +27.0% in about 8 weeks. The US price for a gallon of gas is unch. today at $3.57/gallon. It is up .43/gallon in about 7 months. The Germany sovereign cds is rising +.74% to 85.44 bps, the Greece sovereign cds is rising +5.14% to 2,230.36 bps, the Portugal sovereign cds is gaining +2.15% to 1,036.67 bps, the Brazil sovereign cds is rising another +.67% to 164.76 bps, the China sovereign cds is gaining +3.33% to 119.37 bps, the Russia sovereign cds is gaining +2.68% to 212.0 bps, the Japan sovereign cds is climbing +3.23% to 112.84 bps and the Israel sovereign cds is gaining +3.76% to 167.25 bps. Moreover, the European Investment Grade CDS Index is gaining +4.48% to 151.95 bps. The TED spread is still near a multi-year high. The Eurozone Financial Sector CDS Index is surging to another new all-time high today. The European Investment Grade CDS Index is now at the highest level since April 2009. The Greece sovereign cds has soared +698 bps since July 22. The China Corporate Blended Spread Index is hitting an new multi-year high today, rising +7.0 bps to 636.0 bps. The China sovereign cds is right at a multi-year high. The China Development Bank Corp. cds has gone parabolic, rising +106 bps since Aug. 2nd to 259.0 bps. Asian equities traded poorly overnight. Hong Kong shares fell -2.06% and India equities fell -1.3%. They are now down -15.5% and -20.6%, respectively, ytd. The ongoing rise in key cds remains a large negative. As well, volume continues at an uninspiring pace during this recent equity advance. With several recent reports suggesting hedge funds are poorly positioned to take advantage of any rally, much of the stock bounce off the lows is likely related to hedge fund short-covering ahead of Bernanke's speech. However, the Total Put/Call 10-Day Moving Average remains extremely elevated. I still believe further near-term gains are likely, however key gauges of European credit angst must begin to improve very soon or equity weakness will likely resume over the coming weeks. As well, the rise in Asian cds is becoming a concern. I expect US stocks to trade modestly higher into the close from current levels on short-covering, bargain-hunting, less financial sector pessimism, buyout speculation, the decline in bonds/precious metals and lower food/energy prices.

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