Stocks Slightly Higher into Final Hour on US Economic Optimism, Short-Covering, Bargain-Hunting, Tech Sector Strength

Broad Market Tone:

• Advance/Decline Line: Slightly Lower
  
• Sector Performance: Mixed
  
• Volume: Below Average
  
• Market Leading Stocks: Outperforming
  

Equity Investor Angst:

• VIX 18.75 -11.18%
  
• ISE Sentiment Index 104.0 -11.86%
  
• Total Put/Call .95 -5.0%
  
• NYSE Arms 1.42 +141.37%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 119.75 +1.72%
  
• European Financial Sector CDS Index 288.30 +3.33%
  
• Western Europe Sovereign Debt CDS Index 319.40 +1.04%
  
• Emerging Market CDS Index 292.18 +2.14%
  
• 2-Year Swap Spread 25.25 -2.5 basis points
  
• TED Spread 38.75 +.5 basis point
  
• 3-Month EUR/USD Cross-Currency Basis Swap -52.75 -2.5 basis points
  

Economic Gauges:

• 3-Month T-Bill Yield .08% -1 basis point
  
• Yield Curve 129.0 -2 basis points
  
• China Import Iron Ore Spot $136.0/Metric Tonne +.74%
  
• Citi US Economic Surprise Index -59.60 +1.0 point
  
• 10-Year TIPS Spread 2.12 -1 basis point
  

Overseas Futures:

• Nikkei Futures: Indicating a -40 open in Japan
• DAX Futures: Indicating +7 open in Germany
  

Portfolio:

• Higher: On gains in my tech, medial, retail and biotech sector longs
  
• Disclosed Trades: Covered some of my (IWM)/(QQQ) hedges and some of my (EEM) short, then added them back
  
• Market Exposure: 50% Net Long

BOTTOM LINE: Today's overall market action is mildly bearish as the S&P 500 hugs the flatline, near session lows, on rising Eurozone debt angst, profit-taking, more shorting, financial sector weakness, technical selling and rising global growth fears. On the positive side, Alt Energy, Internet, Semi, Homebuilding, Road & Rail and Airline shares are especially strong, rising more than +1.0%. Transport and Technology shares have outperformed throughout the day. "Growth" shares are outperforming "value". Oil is falling -1.0%. Major Asian indices were around +1.25% higher overnight, led by a +1.9% gain in Australia. However, India fell -1.44% as the RBI didn’t cut rates as expected, their CPI came in at 10.4% y/y and Fitch cut its credit outlook on the country to negative. I still don’t believe inflation in China is subsiding as much as investors seem to perceive and that a major new easing is likely there anytime soon. The Portugal sovereign cds is falling -3.6% to 989.45 bps and the Japan sovereign cds is down -3.45%. On the negative side, Coal, Energy, Oil Service, Steel, I-Banking, Insurance and Education shares are especially weak, falling more than -1.0%. Lumber is falling -2.0% and the UBS-Bloomberg Ag Spot Index is gaining +1.8%. Major European indices are mostly lower, led down by a -3.0% decline in Spain. Spanish equities are now down -23.9% ytd, which remains a huge red flag. The Bloomberg European Bank/Financial Services Index is falling -1.94%. The Germany sovereign cds is up +.83% to 104.66 bps, the France sovereign cds is up +1.2% to 199.66 bps, the Spain sovereign cds is jumping +3.7% to 622.0 bps(all-time high), the Italy sovereign cds is gaining +1.8% to 553.83 bps and the UK sovereign cds is gaining +2.8% to 73.84 bps. The Spanish 10Y Yld is up 10.2% in 5 days to 7.16%. Moreover, the European Investment Grade CDS Index is gaining +2.4% to 179.08 bps and the Italian/German 10Y Yld spread is jumping +4.0% to 466.93 bps. Weekly retail sales have decelerated to a sluggish rate. 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 late-Aug. levels. Lumber is -9.0% 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 -60.0% from its Oct. 14th high and is now down around -50.0% ytd. China Iron Ore Spot has plunged -24.0% since Sept. 7th of last year. Shanghai Copper Inventories have risen +188.0% ytd. The CRB Commodities Index is now technically in a bear market, having declined -26.0% since May 2nd of last year. Overall, recent credit gauge deterioration remains a big worry as most key sovereign cds remain technically strong. The euro currency continues to trade poorly. Oil, lumber and copper also trade poorly given global central bank stimulus hopes and recent stock gains. As well, the 10Y continues to trade too well as the yield remains at 1.58% today. I still believe the level of complacency among US investors regarding the rapidly deteriorating situation in Europe is fairly high. The “solutions” for the European debt crisis I still hear being bandied about are only bigger kick-the-cans that will eventually lead to an even bigger catastrophe as Germany is engulfed, in my opinion. As well, some key economies in the region are likely accelerating their contractions right now. Moreover, the European debt crisis is really beginning to bite emerging market economies now, which will also further pressure exports from the region and further raise the odds of more sovereign/bank downgrades. The "US fiscal cliff "will become more and more of a focus for investors as the year progresses. Finally, the upcoming earnings season could prove more challenging than usual for big multi-nationals given US dollar strength and the precipitous declines in some key parts of the global economy during the quarter. Global central bank stimulus hopes and hopes for a Eurozone fiscal unity "solution" have been propping up stocks, but I still believe there is too much uncertainty on the horizon to conclude a durable stock market low is in place. 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, profit-taking, technical selling and more shorting.