Wednesday, May 16, 2012

Stocks Reversing Lower into Final Hour on Rising Global Growth Fears, Rising Eurozone Debt Angst, Less Financial/Tech Sector Optimism

Broad Market Tone:

  • Advance/Decline Line: Lower
  • Sector Performance: Most Sectors Declining
  • Volume: Below Average
  • Market Leading Stocks: Underperforming
Equity Investor Angst:
  • VIX 22.21 +1.09%
  • ISE Sentiment Index 82.0 -7.87%
  • Total Put/Call 1.26 +6.78%
  • NYSE Arms 1.03 -48.03%
Credit Investor Angst:
  • North American Investment Grade CDS Index 119.18 +1.56%
  • European Financial Sector CDS Index 290.81 +.74%
  • Western Europe Sovereign Debt CDS Index 302.35 +1.25%
  • Emerging Market CDS Index 309.69 +2.26%
  • 2-Year Swap Spread 36.5 -2.0 basis points
  • TED Spread 37.5 -.5 basis point
  • 3-Month EUR/USD Cross-Currency Basis Swap -51.25 -1.75 basis points
Economic Gauges:
  • 3-Month T-Bill Yield .09% unch.
  • Yield Curve 147.0 -2 basis points
  • China Import Iron Ore Spot $135.10/Metric Tonne -.59%
  • Citi US Economic Surprise Index -19.40 +3.6 points
  • 10-Year TIPS Spread 2.11 -4 basis points
Overseas Futures:
  • Nikkei Futures: Indicating a -40 open in Japan
  • DAX Futures: Indicating -22 open in Germany
  • Higher: On gains in my Biotech 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, less financial/tech sector optimism, technical selling and more shorting. On the positive side, Internet, Education and Restaurant shares are rising on the day. The Transports are also holding up relatively well. Oil is falling -.4% and Gold is down -.2%. The Spain sovereign cds is down -1.7% to 537.33 bps and the France sovereign cds is down -.99% to 215.0 bps. On the negative side, Coal, Alt Energy, Oil Tanker, Ag, Steel, Networking, Retail, Semi, Disk Drive and I-Banking shares are under meaningful pressure, falling more than -1.25%. Cyclical shares are underperforming. Tech and financial shares have also been heavy throughout the day. Copper is down -1.3%, Lumber is down -1.3% and the UBS-Bloomberg Ag Spot Index is gaining +1.1%. Major Asian indices fell around -2.25% overnight, led lower by a -3.2% decline in Hong Kong(-9.4% in 2 weeks). Major European indices are falling around -.5%, led lower by a -1.4% decline in Spain. Spain is now down -22.9% ytd and at the lowest level since June 2003. The Bloomberg European Bank/Financial Services Index is down -.9% and has declined -21.9% in less than 2 months. The Germany sovereign cds is gaining +.5% to 96.33 bps, the Italy sovereign cds is rising +.99% to 506.66 bps, the Portugal sovereign cds is gaining +2.9% to 1,137.85 bps, the Ireland sovereign cds is gaining +1.9% to 665.99 bps(+11.3% in 5 days), the UK sovereign cds is gaining +2.3% to 72.66 bps, the Japan sovereign cds is rising +2.5% to 107.88 bps, the China sovereign cds is gaining +2.6% to 132.33 bps(+11.6% in 5 days), the Brazil sovereign cds is gaining +3.3% to 154.15 bps and the Russia sovereign cds is gaining +.99% to 236.99 bps(+14.0% in 5 days). Moreover, the European Investment Grade CDS Index is rising +2.1% to 177.93 bps(+13.1% 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 -4.0% 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 -25.5% since Sept. 7th of last year. Shanghai Copper Inventories have risen +487.0% ytd. 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. The 10Y T-Note continues to trade too well, with the yield only 9 bps from its record low of 1.67%. Copper continues to trade poorly. Moreover, the CRB Commodities Index is now technically in a bear market, having declined -21.4% 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. I still don’t hear any viable “solutions” to the European debt crisis and it is really beginning to bite Asia 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. US stocks remain extremely resilient, especially given the carnage in Asia overnight. 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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