Wednesday, December 28, 2011

Stocks Falling into Final Hour on Rising Eurozone Debt Angst, Rising Global Growth Fears, Technical Resistance, High Energy Prices

Broad Market Tone:

  • Advance/Decline Line: Substantially Lower
  • Sector Performance: Every Sector Declining
  • Volume: Light
  • Market Leading Stocks: Performing In Line
Equity Investor Angst:
  • VIX 23.36 +6.62%
  • ISE Sentiment Index 69.0 -51.06%
  • Total Put/Call .93 unch.
  • NYSE Arms 3.10 +160.68%
Credit Investor Angst:
  • North American Investment Grade CDS Index 121.56 +.80%
  • European Financial Sector CDS Index 260.58 -6.22%
  • Western Europe Sovereign Debt CDS Index 368.22 +3.0%
  • Emerging Market CDS Index 309.12 +.23%
  • 2-Year Swap Spread 51.0 +2 basis points
  • TED Spread 57.0 unch.
  • 3-Month EUR/USD Cross-Currency Basis Swap -126.0 +1.0 bp
Economic Gauges:
  • 3-Month T-Bill Yield .00% unch.
  • Yield Curve 165.0 -6 bps
  • China Import Iron Ore Spot $136.80/Metric Tonne unch.
  • Citi US Economic Surprise Index 69.50 -1.7 points
  • 10-Year TIPS Spread 1.99 -5 bps
Overseas Futures:
  • Nikkei Futures: Indicating -53 open in Japan
  • DAX Futures: Indicating +17 open in Germany
  • Slightly Lower: On losses in my Tech, Medical and Biotech sector longs
  • Disclosed Trades: Added to my (IWM)/(QQQ) hedges and added to my (EEM) short, then covered some of them.
  • Market Exposure: Moved to 50% Net Long
BOTTOM LINE: Today's overall market action is bearish, as the S&P 500 trades back below its 200-day moving average on rising Eurozone debt angst, financial sector pessimism, rising global growth fears, technical resistance and high energy prices. On the positive side, Retail, Telecom and Utility shares are holding up relatively well, falling less than -.5%. Gold is falling -2.3%, oil is declining -1.82% and Lumber is gaining +3.9%. Johnson Redbook weekly retail sales rose +3.5% this week versus a +3.2% gain the prior week. Sales have stabilized after their recent deceleration from avg. weekly gains of +4.6% during Oct. On the negative side, Coal, Alt Energy, Energy, Oil Service, Ag, Steel, Disk Drive, Networking, HMO, Construction, Homebuilding, Gaming, Airline and Education shares are under meaningful pressure, falling more than -2.0%. (XLF) has underperformed throughout the day. Cyclicals and small-caps are also relatively weak. Copper is falling -1.5% and the UBS-Bloomberg Ag Spot Index is rising +1.96%. The 10-year yield is at session lows, falling -9 bps to 1.91%. The Brazil sovereign cds is gaining +.93% to 161.66 bps. The Italian/German 10Y Yield Spread is rising +.55% to 510.44 bps(near the highest since Dec. 1995). The Western Europe Sovereign CDS Index is still approaching its all-time high. The TED spread continues to trend higher and is very near the highest since May 2009. The 2Y Euro Swap Spread is near the highest since Nov. 2008. The 3M Euribor-OIS spread is very near the highest since February 2009. The 3M EUR/USD Cross-Currency Basis Swap is rising +.89%% to -126.0 bps, which is back to late-Nov. levels. The Libor-OIS spread is now at the widest since May 2009, which is also noteworthy considering the equity surge off the recent lows. China Iron Ore Spot has plunged -28.7% since February 16th and -24.4% since Sept. 7th. The China Corporate Blended Spread Index remains close to another technical breakout. The Citi Asia Economic Surprise Index fell another -4.2 points today to -36.0, the lowest since April 2009. Asian shares continue to trade poorly. India’s Sensex fell another -.92% and is now down -23.3% ytd. Despite the decoupling this year, slowing economic growth and weak equity markets in the region are also red flags for US equity investors. Major European Indices came under pressure today, led lower by Germany(-2.01%) and Spain(-2.01%). The Bloomberg Europe Bank/Financial Services Index fell -1.7%. As well, Brazil’s Bovespa is falling -2.54% and is now down -18.4% ytd. European credit gauges are still performing very poorly given that the European debt crisis “can-kicking” solution is supposedly at hand, which remains a large red flag. Cyclicals are weighing on the major averages again today with the MS Cyclical Index dropping -2.0%. The MS Cyclical Index(CYC), which is down -15.9% ytd, has been making a series of higher lows and lower highs over the last 3 months. I suspect this pattern will resolve itself to the downside in 1Q unless the situation in Europe changes materially for the better. Given the recent improvement in US economic data and European debt crisis can-kicking, the 10Y T-Note continues to trade well, which is another red flag. The euro currency is testing its Jan. 10 low. While short euro is a crowded trade and the currency is technically oversold, I still see substantial weakness in the euro over the intermediate-term. Year-end window-dressing, short-covering, better US economic data and seasonal strength had been boosting US stocks. For a sustainable equity advance into the new year, I would expect to see meaningful European credit gauge improvement, subsiding hard-landing fears in key emerging markets, better volume, lower energy prices 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, rising global growth fears, technical resistance, profit-taking, financial sector pessimism, more shorting and high energy prices.

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