Thursday, December 29, 2011

Stocks Rising into Final Hour on Euro Bounce, Better US Economic Data, Short-Covering, Window-Dressing

Broad Market Tone:

  • Advance/Decline Line: Higher
  • Sector Performance: Almost Every Sector Rising
  • Volume: Light
  • Market Leading Stocks: Underperforming
Equity Investor Angst:
  • VIX 22.90 -2.64%
  • ISE Sentiment Index 151.0 +106.85%
  • Total Put/Call 1.07 +15.05%
  • NYSE Arms .49 -89.59%
Credit Investor Angst:
  • North American Investment Grade CDS Index 121.30 -.21%
  • European Financial Sector CDS Index 279.81 +7.05%
  • Western Europe Sovereign Debt CDS Index 369.06 +.22%
  • Emerging Market CDS Index 307.48 -.53%
  • 2-Year Swap Spread 49.0 -2 basis points
  • TED Spread 58.0 +1 bp
  • 3-Month EUR/USD Cross-Currency Basis Swap -118.50 +7.5 bps
Economic Gauges:
  • 3-Month T-Bill Yield .00% unch.
  • Yield Curve 163.0 -2 bps
  • China Import Iron Ore Spot $138.40/Metric Tonne +1.17%
  • Citi US Economic Surprise Index 69.40 -.1 point
  • 10-Year TIPS Spread 1.96 -3 bps
Overseas Futures:
  • Nikkei Futures: Indicating +47 open in Japan
  • DAX Futures: Indicating +13 open in Germany
  • Slightly Higher: On gains in my Tech, Medical and Biotech sector longs
  • Disclosed Trades: Covered some of my (IWM)/(QQQ) hedges and some of my (EEM) short
  • Market Exposure: Moved to 75% Net Long
BOTTOM LINE: Today's overall market action is bullish, as the S&P 500 trades slightly above its 200-day moving average despite rising Eurozone debt angst, rising global growth fears, technical resistance and high energy prices. On the positive side, Homebuilding, I-Banking, Bank Disk Drive and Steel shares are especially strong, rising more than 1.5%. Small-cap and cyclical shares are relatively strong and (XLF) has traded well throughout the day. Gold is falling -.46% and Copper is rising +.34%. On the negative side, Coal shares are under pressure, falling more than -.75%. Lumber is falling -1.74%. The 10-year yield is at session lows, falling -2 bps to 1.89%. The Germany sovereign cds is rising +.77% to 103.38 bps, the Italy sovereign cds is jumping +4.18% to 499.67 bps, the Ireland sovereign cds is rising +.89% to 723.04 bps, the Japan sovereign cds is gaining +2.4% to 143.87 bps and the UK sovereign cds is rising +1.2% to 97.67 bps. The Italian/German 10Y Yield Spread is rising +1.54% to 518.28 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 +5.96% to -118.50 bps, which is back to mid-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 -27.90% since February 16th and -23.53% since Sept. 7th. The China Corporate Blended Spread Index remains close to another technical breakout. The Citi Asia Economic Surprise Index fell another -1.9 points today to -37.90, the lowest since April 2009. Asian equities were mixed overnight, however India’s Sensex fell another -1.2% and is down -24.2% 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 were modestly higher with the Bloomberg European Bank/Financial Services Index rising +1.01% today. 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. Given the recent improvement in US economic data, stock rally off the lows and European debt crisis can-kicking, the 10Y T-Note continues to trade well, which is another red flag. The AAII % Bulls jumped to 40.60 this week, while the % Bears rose to 30.83. Overall, I still believe that bullish sentiment is too high given the average stock, as measured by the Value Line Geometric Growth Index(VGY), is down -17.7% from its April peak(-11.2% ytd) and the still-developing significant headwinds emanating from overseas. The reversal in the euro, gains in European equities and better US housing data are helping to boost US equities today. The quality of today’s rally is lacking, however, as many of this year’s worst-performers are leading as this year’s leaders lag and volume remains anemic. 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, a rising 10-year yield, better volume, stable-to-lower energy prices and higher-quality stock market leadership. I expect US stocks to trade mixed-to-higher into the close from current levels on a bounce in the euro, short-covering, better US economic data, technical buying, seasonal strength and window-dressing.

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