Thursday, February 16, 2012

Stocks Surging into Final Hour on Euro Bounce, Better US Economic Data, More Tech/Financial Sector Optimism, Short-Covering

Broad Market Tone:

  • Advance/Decline Line: Substantially Higher
  • Sector Performance: Almost Every Sector Rising
  • Volume: Slightly Below Average
  • Market Leading Stocks: Underperforming
Equity Investor Angst:
  • VIX 19.34 -8.51%
  • ISE Sentiment Index 109.0 +73.02%
  • Total Put/Call .87 -20.18%
  • NYSE Arms .53 -60.62%
Credit Investor Angst:
  • North American Investment Grade CDS Index 100.14 +.55%
  • European Financial Sector CDS Index 191.95 -4.16%
  • Western Europe Sovereign Debt CDS Index 348.21 -.46%
  • Emerging Market CDS Index 259.67 -2.03%
  • 2-Year Swap Spread 29.25 +.75 bp
  • TED Spread 39.50 +.75 bp
  • 3-Month EUR/USD Cross-Currency Basis Swap -72.0 +.25 bp
Economic Gauges:
  • 3-Month T-Bill Yield .09% -2 bps
  • Yield Curve 170.0 +5 bps
  • China Import Iron Ore Spot $136.80/Metric Tonne -.44%
  • Citi US Economic Surprise Index 65.50 +2.2 points
  • 10-Year TIPS Spread 2.25 +4 bps
Overseas Futures:
  • Nikkei Futures: Indicating +130 open in Japan
  • DAX Futures: Indicating +48 open in Germany
  • Higher: On gains in my Biotech, Retail, Medical and Tech sector longs
  • Disclosed Trades: Covered some of my (IWM)/(QQQ) hedges and some of my (EEM) short
  • Market Exposure: Moved to 75% Net Long
BOTTOM LINE: Today's overall market action is bullish, as the S&P 500 trades near session highs on a bounce in the euro, better US economic data, short-covering, a reversal higher in (AAPL), more financial/tech sector optimism and investor performance angst. On the positive side, Alt Energy, Software, Computer, Semi, Disk Drive, Airline, Bank and Oil Tanker shares are especially strong, rising more than +2.0%. Small-cap and Cyclical shares are relatively strong. Tech and Financial shares are also outperforming. Oil and Gold are flat. The 10Y Yield is rising +6 bps to 1.98%. The Germany sovereign cds is falling -1.23% to 87.67 bps. On the negative side, Ag, Drug, Homebuilding, Education and Road & Rail shares are lower-to-flat on the day. Copper and Lumber are flat with the UBS-Bloomberg Ag Spot Index rising +.5%. The Spain sovereign cds is up +2.45% to 401.0 bps, the Italy sovereign cds is up +1.2% to 420.0 bps, the Belgium sovereign cds is gaining +2.4% to 240.50 bps and the Saudi sovereign cds is gaining +3.2% to 135.68 bps. Moreover, the Emerging Markets Sovereign CDS Index is jumping +7.2% to 267.33 bps. Lumber is -6.0% 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 meaningfully deteriorated over the last week and remain at stressed levels. China Iron Ore Spot has plunged -24.6% since Sept. 7th of last year. Shanghai Copper Inventories are up +728.0% ytd to another new all-time high. I still think this is more of a red flag for falling demand rather than the intentional hoarding, which many suggest. The AAII % Bulls fell to 42.7% this week, while the % Bears rose to 26.6. Overall, investor complacency is still fairly high, but performance angst is likely kicking in again with the S&P 500 breaking out from its recent range. Stocks are strengthening on a bounce in the euro off the lows and better US economic data. While I do think the US economy is still improving, I do not think it is improving as much as perceived. As well, the recent deterioration in credit gauges is more noteworthy than the bounce in the euro off the lows. However, today's convincing break above S&P 500 1,350 should lead to further near-term gains. 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 mixed-to-higher into the close from current levels on a bounce in the euro, better US economic data, short-covering, a reversal higher in (AAPL), more financial/tech sector optimism, technical buying and investor performance angst.

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