Wednesday, March 14, 2012

Stocks Slightly Lower into Final Hour on Falling Euro, Profit-Taking, Global Growth Fears, More Shorting

Broad Market Tone:

  • Advance/Decline Line: Lower
  • Sector Performance: Most Sectors Declining
  • Volume: About Average
  • Market Leading Stocks: Performing In Line
Equity Investor Angst:
  • VIX 15.75 +6.42%
  • ISE Sentiment Index 84.0 -10.64%
  • Total Put/Call .80 -5.88%
  • NYSE Arms .61 -59.19%
Credit Investor Angst:
  • North American Investment Grade CDS Index 91.63 -2.13%
  • European Financial Sector CDS Index 153.72 -4.48%
  • Western Europe Sovereign Debt CDS Index 235.0 -7.5%
  • Emerging Market CDS Index 225.96 -1.34%
  • 2-Year Swap Spread 26.25 unch.
  • TED Spread 39.25 unch.
  • 3-Month EUR/USD Cross-Currency Basis Swap -60.0 +3.75 bps
Economic Gauges:
  • 3-Month T-Bill Yield .08% unch.
  • Yield Curve 189.0 +11 bps
  • China Import Iron Ore Spot $144.30/Metric Tonne +.14%
  • Citi US Economic Surprise Index 39.90 -1.1 points
  • 10-Year TIPS Spread 2.38 +4 basis points
Overseas Futures:
  • Nikkei Futures: Indicating an unch. open in Japan
  • DAX Futures: Indicating a +3 open in Germany
  • Slightly Higher: On gains in my Retail and Tech sector longs
  • Disclosed Trades: Added to my (IWM)/(QQQ) hedges, added to my (EEM) short
  • Market Exposure: Moved to 75% Net Long
BOTTOM LINE: Today's overall market action is mildly bearish, as the S&P 500 trades near session lows despite falling energy prices, less Eurozone debt angst and another surge in market leader (AAPL). On the positive side, Defense, Computer Service, Bank, HMO and Restaurant shares are higher on the day. Oil is falling -1.03%, Lumber is rising +1.3% and Gold is down -2.0%. The 10Y Yield is rising +15 bps to 2.27%. Major Asian indices rose around +1.0% overnight with the exception of Shanghai, which fell -2.6% on comments from Wen Jiabao that home prices are still far from reasonable levels. I continue to believe that investors are overly optimistic on the prospects for a new major aggressive easing cycle out of China. I also think the hard-landing scenario still can’t be ruled out. Major European indices rose around +.5%, led by a +1.3% gain in German shares. The Bloomberg European Financial Services/Bank Index rose +1.64%. The Germany sovereign cds is down -4.6% to 71.50 bps, the France sovereign cds is down -4.4% to 171.80 bps, the Italy sovereign cds is down -4.6% to 366.42 bps and the Saudi sovereign cds is down -5.4% to 120.08 bps. Moreover, the European Investment Grade CDS Index is down -3.6% to 108.08 bps. On the negative side, Utility, Coal, Alt Energy, Oil Service, Disk Drive, Networking, Telecom, Construction, Homebuilding, Gaming, Road & Rail and Airline shares are under pressure, falling more than -1.0%. Copper is down -1.7%. The Transports remain laggards, which continues to be a broad market red flag. As well, the Philly Fed ADS Real-Time Business Conditions Index continues to trend lower from its mid-December peak, falling -14.0% over the last 5 days despite investor perceptions that the US economy is accelerating. The Portugal sovereign cds is jumping +3.8% to 1,311.41 bps. The Portugal cds is breaking out technically, but still off its Jan. record high of 1,554.04 bps. Lumber is -4.2% 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 around -50.0% ytd. China Iron Ore Spot has plunged -20.3% since Sept. 7th of last year. Shanghai Copper Inventories are up +724.% 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. The major averages are consolidating yesterday’s breakout advance in a healthy fashion. Banks are leading the averages again today. The euro and bonds are trading poorly. While these are longer-term positives, an acceleration lower in these two would likely lead to near-term equity turbulence. The ease with which my (AAPL) long still moves higher likely indicates a test of $600 is imminent. For the recent equity advance to maintain traction, I would still expect to see further European credit gauge improvement, a further subsiding of 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-lower into the close from current levels on a decline in the euro, profit-taking, rising global growth fears and more shorting.

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