Tuesday, May 15, 2012

Stocks Falling into Final Hour on Rising Eurozone Debt Angst, Rising Global Growth Fears, Less Financial Sector Optimism, Technical Selling


Broad Market Tone:

  • Advance/Decline Line: Slightly Higher
  • Sector Performance: Mixed
  • Volume: Below Average
  • Market Leading Stocks: Performing In Line
Equity Investor Angst:
  • VIX 21.63 -1.10%
  • ISE Sentiment Index 96.0 +24.68%
  • Total Put/Call 1.12 -10.40%
  • NYSE Arms 1.57 +18.64%
Credit Investor Angst:
  • North American Investment Grade CDS Index 116.95 +1.86%
  • European Financial Sector CDS Index 288.29 +2.79%
  • Western Europe Sovereign Debt CDS Index 298.42 +1.64%
  • Emerging Market CDS Index 301.63 +4.72%
  • 2-Year Swap Spread 38.5 +.5 basis point
  • TED Spread 38.0 unch.
  • 3-Month EUR/USD Cross-Currency Basis Swap -49.50 -1.5 basis points
Economic Gauges:
  • 3-Month T-Bill Yield .09% unch.
  • Yield Curve 149.0 -3 basis points
  • China Import Iron Ore Spot $135.90/Metric Tonne -.59%
  • Citi US Economic Surprise Index -23.0 +.4 point
  • 10-Year TIPS Spread 2.15 +1 basis point
Overseas Futures:
  • Nikkei Futures: Indicating a -40 open in Japan
  • DAX Futures: Indicating -23 open in Germany
Portfolio:
  • Slightly Higher: On gains in my Tech/Retail sector longs and index hedges
  • Disclosed Trades: Added to my (IWM)/(QQQ) hedges, then covered some of them
  • Market Exposure: 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 as it tests its early-March lows on rising Eurozone debt angst, high energy prices, rising global growth fears, technical selling and more shorting. On the positive side, Internet, Oil Tanker and Road & Rail shares are rising on the day. The Transports have outperformed throughout the day. Oil is falling -.93% and Gold is down -.8%. Weekly retail sales rose +3.1% this week versus a +2.6% gain the prior week, but they remain sluggish for a recovery. On the negative side, Coal, Energy, Alt Energy, Ag, Semi, Drug, Oil Service, Steel, Construction and Airline shares are under meaningful pressure, falling more than -1.25%. Cyclical shares are underperforming. Copper is down -1.6% and the UBS-Bloomberg Ag Spot Index is gaining +1.1%. Major Asian indices were mostly lower, led down by a -.81% decline in Japan. Major European indices are falling around -1.5%, led lower by a -2.6% decline in Italy. Italy is now down -11.8% ytd and down -22.2% in less than 2 months. As well, Spain is down another -1.6% today. Spain's IBEX is down -21.8% ytd and took out its March 2009 low today. The Bloomberg European Bank/Financial Services Index is down -2.0% today and down -22.0% in less than 2 months. The Germany sovereign cds is gaining +1.77% to 95.50 bps, the France sovereign cds is rising .62% to 216.17 bps, the Spain sovereign cds is rising +1.81% to 545.34 bps(all-time high), the Italy sovereign cds is rising +3.78% to 502.66 bps, the Ireland sovereign cds is gaining +4.0% to 655.17 bps, the Brazil sovereign cds is surging +2.4% to 144.01 bps, the Russia sovereign cds is gaining 3.8% to 234.14 bps and the China sovereign cds is gaining +6.4% to 129.83 bps. Moreover, the European Investment Grade CDS Index is rising +3.3% to 174.32 bps and the Italian/German 10Y Yld Spread is gaining +3.6% to 439.43 bps. US Rail Traffic continues to soften. The Philly Fed ADS Real-Time Business Conditions Index continues to trend lower from its late-December peak. Moreover, the Citi US Economic Surprise Index has fallen back to early-Oct. levels. Lumber is -3.0% since its Dec. 29th high despite improving sentiment towards homebuilders and the broad equity rally ytd. Moreover, the weekly MBA Home Purchase Applications Index has been around the same level since May 2010 despite expectations for a strong spring home selling season. The Baltic Dry Index has plunged around -50.0% from its Oct. 14th high and is now down around -30.0% ytd. China Iron Ore Spot has plunged -25.0% since Sept. 7th of last year. Shanghai Copper Inventories have risen +488.0% ytd. The recent intensification of the downturn in Eurozone economies raises the odds of further sovereign/bank downgrades. Overall, recent credit gauge deterioration is a big worry with most key sovereign cds breaking out technically. I still believe the level of complacency among US investors regarding the rapidly deteriorating situation in Europe is fairly high. Moreover, the 10Y T-Note continues to trade too well, with the yield only 10 bps from its record low of 1.67%. Copper continues to trade poorly and is breaking down from the range it has been trapped in since Jan. The CRB Commodities Index is now technically in a bear market, having declined -21.5% since May 2nd of last year. Moreover, the euro currency continues to trade poorly and is accelerating its move towards its Jan. low. I do not expect this low to hold over the coming months. It is looking increasingly likely that another intense escalation phase of the European debt crisis has already begun. I currently do not hear any “solutions” to the crisis that will prove anything other than very painful for the region’s economies and thus the global economy over the intermediate-term. While news out of the Eurozone was the main catalyst for today's stock reversal lower, I suspect that recent data out of China played a larger role than perceived. For the recent equity advance to regain traction, I would 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, a US "fiscal cliff" solution 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 global growth fears, more shorting, technical selling and less financial sector optimism.

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