Friday, October 21, 2011

Stocks Surging into Final Hour on Less Eurozone Debt Angst, Dovish Fed Commentary, Short-Covering, Less Financial Sector Pessimism


Broad Market Tone:

  • Advance/Decline Line: Higher
  • Sector Performance: Almost Every Sector Rising
  • Volume: Slightly Below Average
  • Market Leading Stocks: Performing In Line
Equity Investor Angst:
  • VIX 31.94 -8.17%
  • ISE Sentiment Index 104.0 +4.0%
  • Total Put/Call .89 -35.97%
  • NYSE Arms .90 +15.78%
Credit Investor Angst:
  • North American Investment Grade CDS Index 131.55 -3.02%
  • European Financial Sector CDS Index 220.29 -8.16%
  • Western Europe Sovereign Debt CDS Index 334.0 -1.96%
  • Emerging Market CDS Index 312.76 -1.93%
  • 2-Year Swap Spread 38.0 +1 bp
  • TED Spread 41.0 unch.
Economic Gauges:
  • 3-Month T-Bill Yield .01% unch.
  • Yield Curve 194.0 +3 bps
  • China Import Iron Ore Spot $153.40/Metric Tonne -2.19%
  • Citi US Economic Surprise Index 14.80 +.4 point
  • 10-Year TIPS Spread 2.00 +2 bps
Overseas Futures:
  • Nikkei Futures: Indicating +58 open in Japan
  • DAX Futures: Indicating -3 open in Germany
Portfolio:
  • Higher: On gains in my Medical, Retail and Tech sector longs
  • Disclosed Trades: Covered all of my (IWM)/(QQQ) hedges and then added them back
  • Market Exposure: 75% Net Long
BOTTOM LINE: Today's overall market action is bullish, as the S&P 500 trades right near the top of its 2-month trading range, despite global debt angst, rising energy prices, emerging markets inflation worries and global growth fears. On the positive side, Steel, Computer, Semi, Disk Drive, Homebuilding, REIT, Restaurant and Education shares are especially strong, rising more than +2.5%. Cyclicals are outperforming. (XLF) has traded well throughout the day. Copper is jumping +5.4% and Lumber is rising +2.35%. Major European equity indices rose 2-3% today. The Germany sovereign cds is down -3.05% to 90.0 bps, the Spain sovereign cds is down -3.77% to 374.50 bps, the Italy sovereign cds is down -3.15% to 445.33 bps, the Portugal sovereign cds is down -3.36% to 1,088.02 bps, the Ireland sovereign cds is down -3.97% to 766.67 bps and the UK sovereign cds is down -4.18% to 84.0 bps. On the negative side, Alt Energy, Airline, Gaming, Wireless, Telecom and Oil Service shares are lower-to-flat on the day. Oil is rising +1.41% and Gold is +1.1% higher. Despite the recent rally in equities, the 10-year yield is lower over the last five days, which is also a negative. Rice is still close to its multi-year high, rising +30.0% in about 14 weeks. The China sovereign cds is jumping another +5.1% to 151.65 bps and the Japan sovereign cds is rising +1.24% to 1.24%. The TED spread is now at the highest since June 2010. The 2-Year Euro Swap, the LIBOR-OIS spread and 2-Year swap spreads are still very close to their recent highs, which is also noteworthy considering the recent strong equity advance. The Western Europe Sovereign CDS Index, the European Financial Sector CDS Index and the Asia-Pacific Sovereign CDS Index are still near their records and trending higher. The Shanghai Composite fell another -.6%, hitting the lowest since March 2009 and is now down -17.5% ytd. China Iron Ore Spot continues to pick up downside steam, falling -25.7% since February 16th and -21.2% since Sept. 7th. Traders appear to be pricing in a leveraged EFSF "solution" out of Europe next week and QE3 in the US. While these actions would likely further boost stocks into year-end, the odds of a full blown global recession next year would increase dramatically in this scenario as inflation accelerates and debt angst soars, in my opinion. I expect US stocks to trade mixed-to-higher into the close from current levels on less Eurozone debt angst, options expiration, dovish Fed commentary, short-covering, less financial sector pessimism and technical buying.

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