Friday, May 11, 2012

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


Broad Market Tone:

  • Advance/Decline Line: Lower
  • Sector Performance: Mixed
  • Volume: Below Average
  • Market Leading Stocks: Underperforming
Equity Investor Angst:
  • VIX 19.46 +3.46%
  • ISE Sentiment Index 116.0 +1.87%
  • Total Put/Call 1.34 +38.14%
  • NYSE Arms 1.12 +11.08%
Credit Investor Angst:
  • North American Investment Grade CDS Index 107.47 +3.23%
  • European Financial Sector CDS Index 265.08 +.35%
  • Western Europe Sovereign Debt CDS Index 285.67 +.86%
  • Emerging Market CDS Index 269.65 +3.25%
  • 2-Year Swap Spread 34.0 +2.25 basis points
  • TED Spread 37.50 unch.
  • 3-Month EUR/USD Cross-Currency Basis Swap -45.0 -1.0 basis point
Economic Gauges:
  • 3-Month T-Bill Yield .09% unch.
  • Yield Curve 158.0 -4 basis points
  • China Import Iron Ore Spot $137.60/Metric Tonne -1.22%
  • Citi US Economic Surprise Index -24.30 +1.3 points
  • 10-Year TIPS Spread 2.14 -3 basis points
Overseas Futures:
  • Nikkei Futures: Indicating a +14 open in Japan
  • DAX Futures: Indicating -34 open in Germany
Portfolio:
  • Slightly Higher: On gains in my Tech and Biotech sector longs
  • Disclosed Trades: Covered some of my (IWM)/(QQQ) hedges, then added them back
  • Market Exposure: 50% Net Long
BOTTOM LINE: Today's overall market action is just mildly bearish as the S&P 500 trades slightly lower on the day, despite rising Eurozone debt angst, weakness in some key market leaders, less financial sector optimism, high energy prices, rising global growth fears, technical selling and more shorting. On the positive side, Software, Semi, Biotech and Homebuilding shares are especially strong, rising more than +1.0%. Tech/Homebuilding shares have held up well throughout the day. Oil is falling -.93%, the UBS-Bloomberg Ag Spot Index is down -1.6%, Lumber is gaining +1.9% and Gold is down -.8%. The Portugal sovereign cds is falling -1.6% to 1,074.57 bps. On the negative side, Coal, Steel, Bank, I-Banking and Education shares are under pressure, falling more than -1.0%. Financial shares have lagged throughout the day. Copper is down -1.7%. Major Asian indices fell around -1.0% overnight, led down by a -1.4% decline in South Korea after more poor economic data was reported from the region. The Citi Asia Pacific Economic Surprise Index is plunging -39.3 points today to -57.8 points, which is the worst since April 2009. After crashing in the 4th quarter of last year, China Iron Ore Spot Prices had been recovering until recently. In less than a month, they are now down -7.9%. Major European indices are mixed with a +.95% gain in Germany offset by a -.71% decline in Spain. The Bloomberg European Bank/Financial Services Index is dropping -.77%. The France sovereign cds is rising .4% to 207.02 bps, the Spain sovereign cds is rising +1.2% to 517.59 bps(testing all-time high), the Italy sovereign cds is rising +.5% to 459.03 bps, the Hungary sovereign cds is gaining +1.2% to 525.11 bps and the China sovereign cds is gaining +1.1% to 118.73 bps. Moreover, the European Investment Grade CDS Index is rising +.9% to 158.07 bps and the Italian/German 10Y Yld Spread is gaining +.3% to 399.23 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 -35.0% ytd. China Iron Ore Spot has plunged -24.0% since Sept. 7th of last year. Shanghai Copper Inventories have risen +523.0% 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 a number of key sovereign cds breaking out technically. There are rumors out of the FT of an impending European LTRO 3. I continue to believe that LTRO 2 will eventually be viewed in a very negative light and I doubt the validity of this rumor. I also still believe the level of complacency among US investors regarding the rapidly deteriorating situation in Europe is fairly high. US stocks remain extremely resilient as aggressive dip-buying materialized again off an opening swoon. However, the rally is of poor quality. Breadth is negative, the financials and some key market leaders aren’t participating, volume is below average, there are few high-volume big-gainers, copper trades poorly, the 10Y T-Note trades too well, the euro can’t sustain a bounce after its technical breakdown and gauges of credit angst are mostly higher. I have been cautioning for a few weeks that the outperformance the financial sector had enjoyed for several months was likely coming to an end. Recent events make me even more cautious on the sector. 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, less US economic optimism, rising global growth fears, more shorting, technical selling, market leader weakness and less financial sector optimism.

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