Stocks Modestly Lower into Final Hour on Fed Rate Hike Fears, European/Emerging Markets Debt Angst, Yen Strength, Transport/Defense Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Modestly Lower
  

• Sector Performance: Most Sectors Declining
  

• Volume: Below Average

• Market Leading Stocks: Underperforming

Equity Investor Angst:

• Volatility(VIX) 13.77 -.58%

• Euro/Yen Carry Return Index 140.52 +.52%

• Emerging Markets Currency Volatility(VXY) 10.01 -1.38%

• S&P 500 Implied Correlation 64.54 -1.16%

• ISE Sentiment Index 91.0 +.40%

• Total Put/Call 1.0 +81.82%

• NYSE Arms .98 -3.90% 

Credit Investor Angst:

• North American Investment Grade CDS Index 64.98 +.01%

• America Energy Sector High-Yield CDS Index 1,072.0 -.39%

• European Financial Sector CDS Index 74.34 +2.0%

• Western Europe Sovereign Debt CDS Index 22.78 +.82%

• Asia Pacific Sovereign Debt CDS Index 59.82 +1.19%

• Emerging Market CDS Index 296.0 +.64%
  

• iBoxx Offshore RMB China Corporates High Yield Index 118.53 +.20%

• 2-Year Swap Spread 27.25 +.5 basis point

• TED Spread 27.0 -.5 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -20.25 +.5 basis point

Economic Gauges:

• 3-Month T-Bill Yield .01% unch.

• Yield Curve 166.0 unch.

• China Import Iron Ore Spot $62.88/Metric Tonne -.22%

• Citi US Economic Surprise Index -59.50 +1.5 points

• Citi Eurozone Economic Surprise Index 9.1 -1.4 points

• Citi Emerging Markets Economic Surprise Index -16.7 -.9 point

• 10-Year TIPS Spread 1.89 +1.0 basis point

Overseas Futures:

• Nikkei 225 Futures: Indicating -75 open in Japan 
• China A50 Futures: Indicating -225 open in China

• DAX Futures: Indicating +14 open in Germany

Portfolio: 

• Slightly Higher: On gains in my index hedges and emerging market shorts

• Disclosed Trades: Covered some of my (IWM)/(QQQ) hedges

• Market Exposure: Moved to 50% Net Long

Bear Radar

Style Underperformer:

• Small-Cap Growth -.83%

Sector Underperformers:

• 1) Hospitals -2.36% 2) Defense -1.75% 3) I-Banks -1.31%

Stocks Falling on Unusual Volume:

• WAGE, RAX, BBSI, CBPX, NLNK, DEPO, APEI, MTZ, NNI, OME, EGL, ASH, VIPS, DPLO, IBP, LDOS, CVTI, GPS, IPXL, ATRO, WLKP, KNDI, JOBS, DTSI, SNI, HTZ, SUNE, IFF, ACM, ZEN, CAR, POST, PAH, FMC, LBIO, SCAI, TWOU, CVTI and FMI

Stocks With Unusual Put Option Activity:

• 1) SO 2) SE 3) HTZ 4) HUM 5) GPS
  

Stocks With Most Negative News Mentions:

• 1) LPSN 2) GPS 3) GM 4) DOW 5) UNP
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Large-Cap Value -.32%

Sector Outperformers:

• 1) Oil Service +1.15% 2) Gold & Silver +.87% 3) HMOs +.48%
  

Stocks Rising on Unusual Volume:

• AOL, PLL, CMCM, FBR, RARE, EVDY, HI and DF

Stocks With Unusual Call Option Activity:

• 1) AOL 2) RAX 3) UUP 4) LOCO 5) HUM
  

Stocks With Most Positive News Mentions:

• 1) PSA 2) PRE 3) PLL 4) CLX 5) DF
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Morning Market Internals

NYSE Composite Index:

• Volume Running 1.2% Above 100-day average
• 1 Sector Rising, 9 Sectors Declining
• 26.1% of Issues Advancing, 71.5% Declining
• 13 New 52-Week Highs, 69 New Lows
• 53.5% of Issues Above 200-day Moving Average
• Average 14-Day RSI 42.6
• Vix 14.73
• Total Put/Call 1.13
• TRIN/Arms .67

Tuesday Watch

Evening Headlines 
Bloomberg: 

• Aussie Debt Rising Faster Than Euro Region Threatens Country's AAA Rating. Australia's debt already rising faster than the euro zone's will keep ballooning as Prime Minister Tony Abbott opts to support growth and his own political fortunes rather than balance the nation's finances. 

• WisdomTree Hedged European ETF Hit by First Outflows Since 2013. The most popular U.S. exchange-traded fund with investors this year was hit by the first weekly outflow since August 2013 after a rally in the euro encouraged investors to be less defensive. 

• Korea Won, Bonds Drop as Global Debt Selloff Deters Risk-Taking. South Korea’s won fell to a four-week low and government bonds dropped as investors sought the safety of the dollar amid a global debt selloff.

• Bonds Extend Drop as Asian Stocks Slide With Emerging Currencies. Asian bonds tracked a selloff in U.S. and European debt, and the euro weakened a fourth day amid wrangling over whether Greece will qualify for further aid. Asian stocks slipped and emerging currencies dropped versus the dollar. Yields on 10-year government notes in Japan and Australia climbed at least five basis points by 11:16 a.m. in Tokyo, while benchmark Treasury rates held near their highest this year. The MSCI Asia Pacific Index lost 0.6 percent as Chinese shares in Hong Kong fell. Standard & Poor’s 500 Index futures were little changed. The euro slid 0.1 percent and a gauge of Asian developing-nation currencies fell to a four-week low. Overblown expectations for the European Central Bank’s quantitative easing plan pushed global debt valuations to extreme levels, triggering a “large and vicious” selloff in European bonds that’s infected other markets, according to Goldman Sachs Group Inc. 

• A Slow Squeeze on Indebted Oil Firms Has CFOs Looking to October. Mid-Con Energy Partners LP Chief Financial Officer Mike Peterson is trying to avoid the slow squeeze that’s snared many of his peers in the U.S. oil industry. Banks last month cut the amount that the Texas producer can borrow on its credit line by 8 percent to $220 million, leaving it with just a $17 million cushion. With oil still down 45 percent from last June’s peak, it’s looking to acquire assets or raise money to avoid another cut later this year. The financing isn’t cheap, with Peterson seeing most investors looking for a 10 percent to 12 percent return. A wave of credit-line reductions the past two months has left producers scrambling to raise cash to keep drilling, or in some cases, to pay down overdrawn loans. For producers that survived that test, the clock is ticking on more reductions when banks recalculate borrowing bases -- which are tied to the value of oil -- again in October. 

• Nickel Slides Second Day as Copper Holds Losses Near Week-Low. Nickel dropped a second day while copper held losses as investors await data forecast to show industrial production growth in China rebounded from a six-year low. Nickel fell as much as 0.6 percent while copper was little changed near the weakest since April 30.

• Almost $100 Million of VIX Options Traded Hands in a Split Second Today. Almost $100 million worth of options pegged to volatility in U.S. equities changed hands in a split second today in Chicago, transactions that together would represent more than half a normal day’s volume. About 40 different trades went off at 12:16:04 p.m., encompassing contracts that gain in value should the Chicago Board Options Exchange Volatility Index rise over the next few months, according to options data compiled by Bloomberg. The four biggest were each more than 130,000 contracts. While divining the motive of a single trader who may be operating in more than one market is impossible, buying a call on the VIX is a bet the equity market turbulence will rise, which usually happens when stocks fall. To Jamie Tyrrell, a VIX specialist on the CBOE floor, the trades had characteristics of someone hedging stocks. “I’m not sure if it’s the biggest trade ever, but it’s certainly one of them,” said Tyrrell, who works for Group One Trading LP, the primary market maker for VIX options. “Someone is interested in owning a lot of protection, but not in the near-term.”

• Gap(GPS) Sales Trail Analysts’ Estimates as Flagship Brand Slumps. (video) Gap Inc., the biggest U.S. apparel-focused retailer, posted same-store sales for April that trailed analysts’ estimates amid continued lackluster demand for the company’s flagship brand. Comparable sales for the Gap chain plunged 15 percent last month, the San Francisco-based company said in a statement Monday. Analysts projected a drop of 11 percent, according to Retail Metrics.

Wall Street Journal:

• FDIC Chief Martin Gruenberg: Big Bank Failure Won’t Imperil System. If major financial firm runs into trouble, it will be allowed to fail. Nearly seven years after the financial crisis, Federal Deposit Insurance Corp. Chairman Martin Gruenberg said U.S. regulators can safely guide a major financial firm to failure without taxpayer bailouts or catastrophic consequences for the financial system. Mr. Gruenberg, in a speech on Tuesday, plans to say the disruptive collapse of a firm like Lehman Brothers Holdings Inc. is less likely to happen again given...

• Sen. Shelby to Unveil Legislation Heightening Fed Scrutiny. Bill would also revamp numerous rules faced by small- and medium-size banks. Senate Banking Chairman Richard Shelby plans to unveil on Tuesday a wide-ranging bill that would heighten congressional scrutiny of the Federal Reserve and revamp numerous rules faced by small- and medium-size banks, according to Republican committee aides.

• Obama Loses the Sunni Arabs. They reject his attempts to reassure them over the Iran nuclear deal. The promise of a successful nuclear deal with Iran is that it will stop nuclear proliferation, moderate Tehran’s behavior, make the Middle East a safer place, and perhaps allow the U.S. to play a less active role in a troublesome region. Try telling that to the Arab leaders who were supposed to visit the White House and Camp David this week, but are now finding a reason not to show up. President Obama announced the visit when he unveiled the Iran “framework” last month. The goal is to reassure the king of Saudi...

Fox News:

• Ex-CIA leader Morell critical of Obama administration colleagues. Former CIA Deputy Director Mike Morell criticized former colleagues in the Obama administration Monday over everything from the 2012 Benghazi attack to their description of the Al Qaeda threat, during an exclusive interview with Fox News’ “Special Report.”

MarketWatch.com:

• High-yield bonds aren’t ‘junk’ anymore — and that’s troubling. Two of the first three episodes of the newly reprised “Wall Street Week” television show have featured famous investors sounding alarms on high yield or “junk” bonds.

Zero Hedge: 

• Almost Half Of US States Are Officially Broke.

• China's Banks Obscure Credit Risk, Face "Insolvency" In Property Downturn, Fitch Says. (graph)

• Chinese Saturation Reached: World's Largest Smartphone Market Suffers First Drop In 6 Years. (graph)

• The Last Time This Happened, Chinese Stocks Crashed. (graph)

• The Dangerfield Recovery Or A Skousen Reality. (graph)

• Bond-ocalypse Sparks Stock Selling Scramble. (graph)

• Seymour Hersh: Obama's Entire Account Of bin Laden's Death Is One Big Lie; This Is What Really Happened.

Business Insider:

• This Picasso just became the most expensive piece of art sold at auction. A vibrant, multi-hued painting from Pablo Picasso set a world record for artwork at auction, selling for $179 million on Monday night.

• Tech investors are paying massive premiums for the 'Nasdaq's nursery'. The tech investing scene has never been more youth obsessed. Publicly traded tech companies that are less than four years old are trading at nearly nine times sales—a 40-year high—while the premium to their older counterparts has exploded (Display).

• More and more Americans are finding it impossible to afford a down payment on a house.

• Greece is running out of time.

• Pentagon report: Chinese ballistic missiles can target nearly the entirety of the US.

Reuters:

• Web hosting company Rackspace forecasts revenue below Street. Rackspace Hosting Inc, a web hosting company, forecast revenue for the current quarter below market estimates and said a strong dollar hurt its revenue growth in the first quarter. Shares of the company, which faces tough competition from Amazon.com Inc, Google Inc and Microsoft Corp were down 13 percent in extended trading on Monday.

Telegraph:

• Big banks flag dangers of financial bubble in oil and commodities. Barclays warns that the latest commodity boomlet has charged ahead of economic reality across the world: 'Watch out: this rally may not last'.

Evening Recommendations 

• None of note

Night Trading

• Asian equity indices are -.50% to +.50% on average.

• Asia Ex-Japan Investment Grade CDS Index 108.5 +3.5 basis points.

• Asia Pacific Sovereign CDS Index 59.0 -.25 basis point.

• S&P 500 futures -.05%.

• NASDAQ 100 futures -.08%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (ECA)/-.10

• (MCK)/2.75

• (Z)/-.11
  

Economic Releases 
9:00 am EST

• The NFIB Small Business Optimism Index for April is estimated to rise to 96.0 versus 95.2 in March.

10:00 am EST

• JOLTS Job Openings for March are estimated to fall to 5108 versus 5133 in February..

2:00 pm EST

• The Monthly Budget Statement for April is estimated at $155.0B versus $106.9B in March.
  

Upcoming Splits

• None of note

Other Potential Market Movers

• The Fed's Williams speaking, UK industrial production report, $24B 3Y T-Note auction, Wasde Crop report, weekly US retail sales reports, Jefferies Tech/Media/Telecom conference, Morgan Stanely E&P/Oil Services conference, BofA Merrill Metals/Mining/Steel conference, Citi Energy/Utilities conference, (CTRX) analyst meeting, (BRCM) annual meeting, (BA) investor conference and the (STM) analysts day could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, boosted by technology and industrial shares in the region. I expect US stocks to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 25% net long heading into the day.

Stocks Reversing Lower into Final Hour on Rising Long-Term Rates, European/Emerging Markets/US High-Yield Debt Angst, Global Growth Fears, Energy/Homebuilding Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: About Even
  

• Sector Performance: Mixed
  

• Volume: Below Average

• Market Leading Stocks: Performing In Line

Equity Investor Angst:

• Volatility(VIX) 13.49 +4.90%

• Euro/Yen Carry Return Index 139.81 -.35%

• Emerging Markets Currency Volatility(VXY) 10.10 +.30%

• S&P 500 Implied Correlation 64.18 -.12%

• ISE Sentiment Index 69.0 -24.18%

• Total Put/Call .46 -45.88%

• NYSE Arms 1.05 +44.54% 

Credit Investor Angst:

• North American Investment Grade CDS Index 64.76 +2.73%

• America Energy Sector High-Yield CDS Index 1,073.0 -.19%

• European Financial Sector CDS Index 72.88 +1.50%

• Western Europe Sovereign Debt CDS Index 22.59 -1.29%

• Asia Pacific Sovereign Debt CDS Index 58.80 -.84%

• Emerging Market CDS Index 294.16 +.93%
  

• iBoxx Offshore RMB China Corporates High Yield Index 118.29 +.25%

• 2-Year Swap Spread 26.75 +.25 basis point

• TED Spread 27.5 +1.0 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -20.75 +.25 basis point

Economic Gauges:

• 3-Month T-Bill Yield .01% unch.

• Yield Curve 166.0 +9.0 basis points

• China Import Iron Ore Spot $63.02/Metric Tonne +2.64%

• Citi US Economic Surprise Index -61.0 +3.3 points

• Citi Eurozone Economic Surprise Index 10.5 -3.7 points

• Citi Emerging Markets Economic Surprise Index -15.8 +1.3 points

• 10-Year TIPS Spread 1.88 unch.

Overseas Futures:

• Nikkei Futures: Indicating -1 open in Japan

• DAX Futures: Indicating -53 open in Germany

Portfolio: 

• Slightly Higher: On gains in my biotech/retail sector longs and emerging market shorts

• Disclosed Trades: Added to my (IWM)/(QQQ) hedges

• Market Exposure: Moved to 25% Net Long