Thursday, December 22, 2011

Stocks Rising Into Final Hour on Less Financial/Tech Sector Pessimism, Short-Covering, Window-Dressing, Better US Economic Data

Broad Market Tone:

  • Advance/Decline Line: Higher
  • Sector Performance: Almost Every Sector Rising
  • Volume: Light
  • Market Leading Stocks: Performing In Line
Equity Investor Angst:
  • VIX 21.27 -.75%
  • ISE Sentiment Index 131.0 -22.49%
  • Total Put/Call .98 -9.26%
  • NYSE Arms .84 +23.92%
Credit Investor Angst:
  • North American Investment Grade CDS Index 122.23 -3.75%
  • European Financial Sector CDS Index 270.81 -1.30%
  • Western Europe Sovereign Debt CDS Index 371.27 -.16%
  • Emerging Market CDS Index 310.13 -1.26%
  • 2-Year Swap Spread 48.0 +1 bp
  • TED Spread 57.0 unch.
  • 3-Month EUR/USD Cross-Currency Basis Swap -129.0 -1.5 bps
Economic Gauges:
  • 3-Month T-Bill Yield .00% unch.
  • Yield Curve 168.0 -2 bps
  • China Import Iron Ore Spot $135.20/Metric Tonne +.30%
  • Citi US Economic Surprise Index 69.40 -1.1 points
  • 10-Year TIPS Spread 2.03 -2 bps
Overseas Futures:
  • Nikkei Futures: Indicating +90 open in Japan
  • DAX Futures: Indicating +30 open in Germany
  • Higher: On gains in my Tech, Medical and Retail sector longs
  • Disclosed Trades: Covered all of my (IWM)/(QQQ) hedges and some of my (EEM) short, then added them back
  • Market Exposure: 75% Net Long
BOTTOM LINE: Today's overall market action is mildly bullish, as the S&P 500 moves back near its 200-day moving average and trades to session highs, despite Eurozone debt angst, rising global growth fears, higher energy prices and US tax hike concerns. On the positive side, Coal, Alt Energy, Oil Tanker, Steel, Semi, Networking, Bank, Construction and Educaiton shares are especially strong, rising more than +2.0%. (XLF) and (XLK) have outperformed throughout the day. Copper is gaining +.82% and Gold is falling -.73%. The Germany sovereign cds is falling -.95% to 104.17 bps and the Brazil sovereign cds is falling -2.73% to 162.64 bps. Moreover, the Europe Investment Grade CDS Index is falling -1.8% to 168.38 bps. On the negative side, Homebuilding, Restaurant and Airline shares are lower on the day. The UBS-Bloomberg Ag Spot Index is up +.4%, Oil is up +.63% and Lumber is falling -.56%. The Spain sovereign cds is rising +67% to 400.67 bps, the Italy sovereign cds is climbing +2.9% to 505.0 bps and the US sovereign cds is climbing +1.9% to 51.29 bps. The Italian/German 10Y Yield Spread is rising +2.5% to 497.3 bps. The Western Europe Sovereign CDS Index is still very near its all-time high. The TED spread continues to trend higher and is now at 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 falling -1.22% to -129.05 bps, which is back to late-Nov. levels. The Libor-OIS spread is rising to the widest since May 2009, which is also noteworthy considering the equity surge off the recent lows. China Iron Ore Spot has plunged -29.5% since February 16th and -25.3% since Sept. 7th. The China Corporate Blended Spread Index remains very close to another technical breakout. The Citi Asia Economic Surprise Index is fell another -.3 point today to -28.10, the lowest since April 2009. Asian indices were mixed overnight. The Shanghai Composite tried to reverse sharp morning losses, but couldn’t completely, finishing down -.22%. This index is down -22.1% 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. Despite the recent improvement in US economic data, the 10-year yield is still at early Nov. levels, which is another red flag. The AAII % Bulls fell to 33.7 this week, while the % Bears fell to 28.2%. Overall, I still think investor sentiment is too bullish given the magnitude of the headwinds emanating from overseas and that the average stock(VGY Index) is down about -18.0% from April’s peak. Year-end window-dressing, short-covering, better US economic data and seasonal strength continue to help out short-term. The S&P 500 is once again approaching significant technical resistance. 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 and higher-quality leadership. I expect US stocks to trade mixed-to-higher into the close from current levels on better US economic data, short-covering, less financial/tech sector pessimism, year-end window dressing and seasonal strength.

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