Friday, May 18, 2012

Stocks Falling into Final Hour on Rising Eurozone Debt Angst, Rising Global Growth Fears, Disappointing FB IPO, Technical Selling

Broad Market Tone:

  • Advance/Decline Line: Lower
  • Sector Performance: Almost Every Sector Declining
  • Volume: Above Average
  • Market Leading Stocks: Underperforming
Equity Investor Angst:
  • VIX 24.69 +.82%
  • ISE Sentiment Index 100.0 +12.36%
  • Total Put/Call 1.34 -6.29%
  • NYSE Arms .82 -33.20%
Credit Investor Angst:
  • North American Investment Grade CDS Index 123.62 +.38%
  • European Financial Sector CDS Index 308.41 +1.11%
  • Western Europe Sovereign Debt CDS Index 310.64 +.51%
  • Emerging Market CDS Index 314.04 -.87%
  • 2-Year Swap Spread 36.75 +1.0 basis point
  • TED Spread 39.0 +1.5 basis points
  • 3-Month EUR/USD Cross-Currency Basis Swap -52.50 -3.25 basis points
Economic Gauges:
  • 3-Month T-Bill Yield .08% -1 basis point
  • Yield Curve 141.0 +1 basis point
  • China Import Iron Ore Spot $131.30/Metric Tonne -1.72%
  • Citi US Economic Surprise Index -25.10 unch.
  • 10-Year TIPS Spread 2.13 +2 basis points
Overseas Futures:
  • Nikkei Futures: Indicating a -40 open in Japan
  • DAX Futures: Indicating -32 open in Germany
  • Slightly Lower: On losses in my Biotech, Medical and Tech sector longs
  • 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 very bearish as the S&P 500 reverses morning gains and trades near session lows as it moves rapidly towards its 200-day moving average on rising Eurozone debt angst, a "disappointing" (FB) debut, high energy prices, rising global growth fears, less financial/tech sector optimism, technical selling and more shorting. On the positive side, Retail, Utility, Drug and Tobacco shares are holding up relatively well. Oil is falling -1.6% and Lumber is up +.92%. On the negative side, Coal, Alt Energy, Oil Tanker, Internet, Software, Computer, Semi, Disk Drive, I-Banking, Biotech, Hospital, HMO, Homebuilding, Airline and Gaming shares are under significant pressure, falling more than -1.75%. Cyclical and small-cap shares are underperforming. Tech and financial shares have also been heavy throughout the day. Copper is down -1.2%, Gold is rising +1.0% and the UBS-Bloomberg Ag Spot Index is gaining +.3%. Major Asian indices fell around -2.0% overnight, led down by a -3.4% decline in South Korea. South Korea’s KOSPI is down about -13.0% in 6 weeks and is now down -2.4% ytd. Major European indices are mostly lower, led down by a -1.3% decline in the UK. Italy fell another -.3% and is down -23.8% in 2 months(-13.3% ytd). Russian shares are declining another -1.8% today and are down -24.6% in about 2 months. The Bloomberg European Bank/Financial Services Index is falling -1.2%(-8.5% for the week) and is down -24.8% in 2 months. The Portugal sovereign cds is gaining +3.8% to 1,204.96 bps(+12.1% in 5 days), the Ireland sovereign cds is rising +4.2% to 702.66 bps(+18.0% in 5 days), the Japan sovereign cds is rising +1.0% to 108.83 bps(+10.1% in 5 days), the US sovereign cds is gaining +3.5% to 44.5 bps, the Emerging Markets Sovereign CDS Index is jumping +5.2% to 335.24 bps(+13.7% in 5 days) and the China sovereign cds is gaining +2.2% to 136.09 bps(+14.7% in 5 days). Moreover, the European Investment Grade CDS Index is rising +.6% to 182.79 bps(+14.3% in 5 days). 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 -3.5% 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 -27.5% since Sept. 7th of last year. Shanghai Copper Inventories have risen +442.0% ytd. Overall, recent credit gauge deterioration is a big worry as most key sovereign cds remain technically strong. 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 4 bps from its record low of 1.67%. Copper continues to trade poorly. The CRB Commodities Index is now technically in a bear market, having declined -21.1% since May 2nd of last year. Moreover, the euro currency continues to trade poorly, notwithstanding today's bounce off its early Jan. low. I still don't expect this low to hold over the coming months and still see significant downside in the currency from current levels over the longer-term. I still don’t hear any viable “solutions” to the European debt crisis and it is really beginning to bite emerging markets now, which will further pressure exports from the region and raise the odds of more sovereign/bank downgrades. Vague talk of “growth” initiatives doesn’t mean that much given what that normally means in Europe. Some of the recent selling in market-leader Apple(AAPL) was likely related to the Facebook(FB) IPO and the stock is trading better today given tech sector weakness. However, I am not ready to add to my position again due to broad market concerns. Long AAPL. While Facebook(FB) may outperform in the short-run due to its muted opening price, I would still not be a buyer around current levels for the intermediate-term given its valuation, slowing growth metrics and too many questions surrounding the company’s ability to further monetize its business model. For this year's equity advance to regain traction, I would expect to see a resumption in European credit gauge improvement, a 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, a "disappointing" (FB) debut, more shorting, technical selling and less financial/tech sector optimism.

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