Tuesday, May 25, 2010

Stocks Falling into the Afternoon on North Korea Concerns, Rising Sovereign Debt Angst, Tax Hike Worries, Forced Selling

Broad Market Tone:

  • Advance/Decline Line: Substantially Lower
  • Sector Performance: Almost Every Sector Declining
  • Volume: Above Average
  • Market Leading Stocks: Underperforming
Equity Investor Angst:
  • VIX 39.53 +3.13%
  • ISE Sentiment Index 90.0 -14.29%
  • Total Put/Call 1.24 +33.33%
  • NYSE Arms 1.23 -35.84%
Credit Investor Angst:
  • North American Investment Grade CDS Index 128.78 bps +8.77%
  • European Financial Sector CDS Index 158.63 bps +7.07%
  • Western Europe Sovereign Debt CDS Index 144.50 bps +5.47%
  • Emerging Market CDS Index 315.84 bps +3.91%
  • 2-Year Swap Spread 54.0 +7 bps
  • TED Spread 38.0 +2 bps
Economic Gauges:
  • 3-Month T-Bill Yield .15% unch.
  • Yield Curve 240.0 -5 bps
  • China Import Iron Ore Spot $143.50/Metric Tonne -3.24%
  • Citi US Economic Surprise Index +25.0 +4.5 points
  • 10-Year TIPS Spread 1.89% -6 bps
Overseas Futures:
  • Nikkei Futures: Indicating -80 open in Japan
  • DAX Futures: Indicating +3 open in Germany
  • Slightly Lower: On losses in my Technology, Medical and Biotech long positions
  • Disclosed Trades: Covered some of my (IWM)/(QQQQ) hedges and some of my (EEM) short
  • Market Exposure: Moved to 75% Net Long
BOTTOM LINE: Today's overall market action is very bearish as the S&P 500 breaks to the lowest level since November of last year on good volume despite an improvement in consumer confidence. On the positive side, Gold, Airline and Retail stocks are holding up relatively well. Weekly retail sales rose +2.8% this week versus a +3.1% gain the prior week. This is also down from a +3.9% gain the week of April 6th, but up from a +2.4% increase the week of May 4th. Oil continues to trade very heavy and its decline is a large positive for the consumer heading into the summer. Investor angst gauges are surging again, which is also a big positive. On the negative side, Gaming, Coal, Alt Energy, Oil Tanker, Ag, Steel, Paper, Disk Drive, Road&Rail, Homebuilding, Construction, HMO, Medical and Energy shares are under significant pressure, falling 2.5%+. Cyclical and small-cap stocks are underperforming. Gauges of credit angst are rising significantly again. The Spain sovereign cds is soaring +17.5% to 245.9 bps, the China sovereign cds is surging +15.5% to 102.69 bps and the Russia sovereign cds is jumping +10.2% to 206.36 bps. Moreover, the Euro Investment Grade CDS Index is rising +7.6% to 126.21 bps. The Bloomberg Financial Conditions Index(BFCIUS:Index), which combines yield spreads and indices from the money markets, equity markets and bond markets into a normalized index fell to -1.26 yesterday, the lowest level since July of last year. Overseas stocks continue to fare far worse than US shares. Russia and Ukraine indices plunged over -6.0% today. The North Korean situation has added another significant uncertainty to the stock market and has the potential to spin out of control. The 10-year yield continues to fall too far, too fast, for the market's liking. As well, the euro continues to trade very heavy and while it is getting oversold again short-term, I still expect it to head substantially lower over the longer-term. Stocks have trimmed morning losses considerably. I will closely monitor broad market action in the final hour and may put some more hedges back on. I expect US stocks to trade modestly lower into the close from current levels on rising sovereign debt angst, increasing economic fear, North Korea worries, more shorting, technical selling, forced selling, tax hike worries and regulatory concerns.

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