Stocks Slightly Lower into Final Hour on Surging Eurozone Debt Angst, Rising Global Growth Fears, Financial Sector Weakness, Earnings Worries

Broad Market Tone:

• Advance/Decline Line: Lower
  
• Sector Performance: Most Sectors Declining
  
• Volume: Light
  
• Market Leading Stocks: Outperforming
  

Equity Investor Angst:

• VIX 17.20 +3.24%
  
• ISE Sentiment Index 89.0 +3.49%
  
• Total Put/Call .86 -5.49%
  
• NYSE Arms 1.28 +10.66%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 108.62 +1.95%
  
• European Financial Sector CDS Index 268.37 +5.2%
  
• Western Europe Sovereign Debt CDS Index 279.25 +3.32%
  
• Emerging Market CDS Index 267.62 +2.04%
  
• 2-Year Swap Spread 24.25 +.5 basis point
  
• TED Spread 38.75 +.75 basis point
  
• 3-Month EUR/USD Cross-Currency Basis Swap -69.25 -7.5 basis points
  

Economic Gauges:

• 3-Month T-Bill Yield .07% -1 basis point
  
• Yield Curve 130.0 -2 basis points
  
• China Import Iron Ore Spot $134.80/Metric Tonne -.22%
  
• Citi US Economic Surprise Index -60.20 +3.0 points
  
• 10-Year TIPS Spread 2.10 unch.
  

Overseas Futures:

• Nikkei Futures: Indicating +7 open in Japan
• DAX Futures: Indicating +6 open in Germany
  

Portfolio:

• Slightly Higher: On gains in my tech and retail sector longs
  
• Disclosed Trades: Added to my (IWM)/(QQQ) hedges and to my (EEM) short, then covered some of them
  
• Market Exposure: 50% Net Long

BOTTOM LINE: Today's overall market action is just mildly bearish as the S&P 500 rebounds from morning lows despite surging eurozone debt angst, financial sector weakness, a plunging euro currency, Obamacare/US "fiscal cliff" worries, mixed US economic data, earnings concerns and rising global growth fears. On the positive side, Steel, Homebuilding, Retail and Restaurant shares are especially strong, rising more than +.75%. Cyclicals are outperforming. "Growth" stocks are meaningfully outperforming "value" shares, as well. Oil is falling -.9%, Lumber is jumping +3.7% and Gold is down -.9%. Major Asian indices were mixed as a +.5% gain in Hong Kong was offset by a -1.2% loss in Shanghai. Chinese stocks are flat over the last week despite the global equity rally and stimulus optimism. The large surge in food prices over the last couple of months makes aggressive easing action less likely. On the negative side, Energy, Oil Service, Semi, Bank, I-Banking and Education shares are under pressure, falling more than -1.0%. The UBS-Bloomberg Ag Spot Index is rising another +2.7% and Copper is down -1.3%. The 10Y Yld is falling -4 bps to 1.49%. Major European indices fell today, led lower by a -3.0% decline in Spanish shares. Italian equities also fell -2.0%. The Bloomberg European Bank/Financial Sector Index is falling -1.25%. The Citi Latin America Economic Surprise Index is picking up downside steam, falling another -1.3 points today to -17.2, which is the weakest since mid-August of last year. The Germany sovereign cds is rising +1.9% to 97.53 bps, the France sovereign cds is gaining +4.5% to 183.83 bps, the Italy sovereign cds is gaining +6.7% to 495.71 bps, the Spain sovereign cds is jumping +7.3% to 552.28 bps, the UK sovereign cds is gaining +3.5% to 72.14 bps and the Portugal sovereign cds is up +4.3% to 810.18 bps. The The Spain 10y Yld is rising +5.7% to 6.78% and the Italian/German 10Y Yld Spread is jumping +6.5% to 459.65 bps. Moreover, the 3M Euribor/OIS Spread is jumping +18.4% to 50.6 bps and the European Investment Grade CDS Index is gaining +3.9% to 164.99 bps. US weekly retail sales have decelerated to a sluggish rate at +2.2%, which is the slowest since the week of April 5th of last year. US Rail/Trucking 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 -5.0% since its March 1st 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 -25.0% since Sept. 7th of last year. Shanghai Copper Inventories have risen +133.0% ytd. The CRB Commodities Index is now technically in a bear market, having declined -20.3% since May 2nd of last year. Spanish and Italian yields are back in the danger zone. The euro currency, oil, copper and lumber remain in intermediate-term downtrends. As well, the 10Y continues to trade too well. I still believe the level of complacency among US investors regarding the rapidly deteriorating situation in Europe is fairly high. The AAII % Bulls jumped to 32.6 this week, while the % Bears fell to 33.3. I said last week that while Europe appeared to have kicked-the-can again, investor euphoria would likely be fairly short-lived. The breakdown in the 3M EUR/USD Cross-Currency Basis Swap is a large red flag. As well, other key gauges of credit angst are breaking out technically again. The Citi Eurozone Economic Surprise Index is at -79.0 points, which is the lowest since mid-Sept. of last year. Massive tax hikes and spending cuts are still yet to hit in several key eurozone countries that are already in recession. Lack of competitiveness remains unaddressed. I still believe it is very unclear whether or not Germany has really agreed to anything that changes the situation substantially. Moreover, the “solutions” for the European debt crisis I still hear being bandied about are only bigger kick-the-cans that if implemented will eventually lead to an even bigger catastrophe as Germany is engulfed, in my opinion. The European debt crisis is also really beginning to bite emerging market economies now, which will further pressure exports from the region and further raise the odds of more sovereign/bank downgrades. Uncertainty surrounding the effects on business of Obamacare, the "US fiscal cliff " and election outcome uncertainty will likely 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. A handful of market-leading growth stocks are leading the major averages off their morning lows today, however breadth and volume are poor. 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 mixed-to-lower into the close from current levels on rising eurozone debt angst, Obamacare/US "fiscal cliff" concerns, profit-taking, rising global growth fears, mixed US economic data, financial sector weakness, earnings concerns and more shorting.