Tuesday, February 21, 2012

Stocks Reversing Lower into Final Hour on Rising Energy Prices, Rising Eurozone Debt Angst, Profit-Taking, Technical Selling

Broad Market Tone:

  • Advance/Decline Line: Lower
  • Sector Performance: Most Sectors Declining
  • Volume: Below Average
  • Market Leading Stocks: Performing In Line
Equity Investor Angst:
  • VIX 18.31 +2.98%
  • ISE Sentiment Index 102.0 -27.14%
  • Total Put/Call .76 -10.59%
  • NYSE Arms .89 -16.33%
Credit Investor Angst:
  • North American Investment Grade CDS Index 97.14 -.13%
  • European Financial Sector CDS Index 178.23 -.39%
  • Western Europe Sovereign Debt CDS Index 342.02 +2.02%
  • Emerging Market CDS Index 253.57 -.52%
  • 2-Year Swap Spread 29.50 -1 bp
  • TED Spread 42.0 +.25 bp
  • 3-Month EUR/USD Cross-Currency Basis Swap -68.50 +1.75 bps
Economic Gauges:
  • 3-Month T-Bill Yield .07% -1 bp
  • Yield Curve 174.0 +2 bps
  • China Import Iron Ore Spot $135.40/Metric Tonne +.22%
  • Citi US Economic Surprise Index 61.80 -3.1 points
  • 10-Year TIPS Spread 2.29 +3 bps
Overseas Futures:
  • Nikkei Futures: Indicating -5 open in Japan
  • DAX Futures: Indicating -31 open in Germany
  • Slightly Lower: On losses in my Biotech and Tech sector longs
  • Disclosed Trades: Added to my (IWM)/(QQQ) hedges and to my (EEM) short
  • Market Exposure: Moved to 50% Net Long
BOTTOM LINE: Today's overall market action is bearish, as the S&P 500 reverses morning gains and trades near session lows on rising Eurozone debt angst, rising energy prices, profit-taking, technical selling and more shorting. On the positive side, Coal shares are especially strong, rising more than +.75%. Copper is rising +3.0%. The 10Y Yield is rising +5 bps to 2.5%. The Russia sovereign cds is falling -3.2% to 203.0 bps and the Hungary sovereign cds is falling -3.9% to 531.0 bps. Moreover, the European Investment Grade CDS Index is falling -4.0% to 117.49 bps. On the negative side, Oil Tanker, Semi, Disk Drive, Medical, Biotech, Hospital, Homebuilding, REIT, Retail, Education and Airline shares are under meaningful pressure, falling more than -1.0%. Tech shares are underperforming today and the Transports continue to trade poorly. The Transportation Index is now down -4.0% since Feb. 3 versus a +1.3% gain for the S&P 500. Oil is gaining +2.2%, Gold is surging +2.0% and Lumber is falling -1.1%. Oil has broken out from its recent range, which is a large negative. Retail sales have already decelerated to below average rates and this will provide another headwind. Lumber is -5.2% since its Dec. 29th high despite the better US economic data, more dovish Fed commentary, improving sentiment towards homebuilders, equity rally and decline in eurozone debt angst. Moreover, the weekly MBA Purchase Applications Index has been around the same level since May 2010. The Baltic Dry Index has plunged over -60.0% from its Oct. 14th high and is now down over -50.0% ytd. The 10Y T-Note Yield remains a concern considering the recent stock rally, falling Eurozone debt angst and improvement in US economic data. The Philly Fed’s ADS Real-Time Business Conditions Index has stalled over the last month after showing meaningful improvement from mid-Nov. through year-end. The Western Europe Sovereign CDS Index is still fairly close to its Jan. 9th all-time high. Overall, credit gauges have deteriorated recently despite the Greece debt deal and remain at stressed levels. China Iron Ore Spot has plunged -25.5% since Sept. 7th of last year. Shanghai Copper Inventories are up +676.0% ytd and are still very near their recent all-time high. I still think this is more of a red flag for falling demand rather than the intentional hoarding, which many suggest. Major Asian indices were mostly higher overnight, led by a +.75% gain in Shanghai. Asian indices did not trade as well as I would have expected given the recent RRR cut in China and Greece debt deal announcement overnight. As well, major European indices were mostly lower today, led by a -.65% decline in Spanish shares. The Bloomberg European Financial Services/Bank Index is falling -.69%. The Greece debt deal may buy politicians some more time, however I still believe the European debt crisis will flare up again in even more intense fashion down the road. US stocks are technically extended short-term and are right at intermediate-term resistance with bullish sentiment elevated and quite a bit of good news likely priced in. One of my longs, (AAPL), is helping once again to mask broad market weakness today. For an intermediate-term equity advance from current levels, I would still expect to see further European credit gauge improvement, subsiding hard-landing fears in key emerging markets, a rising 10-year yield, better volume, stable-to-lower energy prices and higher-quality stock market leadership. I expect US stocks to trade modestly lower into the close from current levels on rising Eurozone debt angst, rising energy prices, profit-taking, technical selling and more shorting.

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