Wednesday, October 26, 2011

Stocks Surging into Final Hour on Less Financial Sector Pessimism, Short-Covering, Diminishing Global Growth Worries, Falling Food/Energy Prices

Broad Market Tone:

  • Advance/Decline Line: Higher
  • Sector Performance: Most Sectors Rising
  • Volume: Slightly Below Average
  • Market Leading Stocks: Underperforming
Equity Investor Angst:
  • VIX 30.56 -5.15%
  • ISE Sentiment Index 84.0 +18.31%
  • Total Put/Call 1.0 -2.91%
  • NYSE Arms .90 -59.68%
Credit Investor Angst:
  • North American Investment Grade CDS Index 128.59 -.29%
  • European Financial Sector CDS Index 222.96 -1.13%
  • Western Europe Sovereign Debt CDS Index 340.50 -.69%
  • Emerging Market CDS Index 298.41 -4.0%
  • 2-Year Swap Spread 37.0 -1 bp
  • TED Spread 41.0 -1 bp
Economic Gauges:
  • 3-Month T-Bill Yield .01% +1 bp
  • Yield Curve 192.0 +6 bps
  • China Import Iron Ore Spot $127.40/Metric Tonne -3.26%
  • Citi US Economic Surprise Index 14.90 +3.0 points
  • 10-Year TIPS Spread 2.09 +6 bps
Overseas Futures:
  • Nikkei Futures: Indicating +17 open in Japan
  • DAX Futures: Indicating +47 open in Germany
  • Slightly Higher: On gains in my Biotech and Medical sector longs
  • Disclosed Trades: Covered all of my (IWM)/(QQQ) hedges and some of my (EEM) short and then added some back
  • Market Exposure: Moved to 75% Net Long
BOTTOM LINE: Today's overall market action is bullish, as the S&P 500 reverses morning losses on less financial sector pessimism, diminishing global growth worries, short-covering and falling energy prices. On the positive side, Coal, Energy, Oil Service, Steel, Computer, Disk Drive, Bank, Biotech, HMO, Insurance and Homebuilding shares are especially strong, rising more than 2.0%. Small-cap and cyclical shares are substantially outperforming. (XLF) has traded well throughout the day. Oil is dropping -2.23%, lumber is up +2.09%, copper is gaining +2.54% and the UBS-Bloomberg Ag Spot Index is down -1.45%. The 10-year yield is rising +10 bps to 2.20%. The US sovereign cds is falling -2.59% to 42.04 bps. On the negative side, Defense, Internet, Software, Semi, Wireless, Retail and Education shares are lower on the day. Tech shares have traded poorly throughout the day. Despite the recent rally in equities, better economic data and rising inflation expectations, the 10-year yield is lower over the last 10 days, which is also a negative. Rice is still close to its multi-year high, rising +33.0% in about 15 weeks. The China sovereign cds is surging +9.54% to 148.94 bps, the Italy sovereign cds is gaining +.65% to 457.33 bps and the Portugal sovereign cds is gaining +.29% to 1,115.59 bps. The TED spread is still very near the highest since June 2010. The Libor-OIS spread is still very near the widest since July 2010. The 2-Year Euro Swap 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. China Iron Ore Spot continues to pick up downside steam, plunging -33.6% since February 16th and -29.6% since Sept. 7th. Gauges of Eurozone credit angst are mixed-to-higher, which is a large negative given investor perceptions that the crisis is finally on its way to being "solved". While these perceptions may persist for awhile longer, I continue to believe leveraging the EFSF will prove a massive mistake over the intermediate-term. I expect US stocks to trade mixed-to-higher into the close from current levels on less financial sector pessimism, diminishing global growth worries, short-covering, falling food/energy prices and technical buying.

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