Tuesday, December 27, 2011

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

Broad Market Tone:

  • Advance/Decline Line: About Even
  • Sector Performance: Mixed
  • Volume: Light
  • Market Leading Stocks: Outperforming
Equity Investor Angst:
  • VIX 21.89 +5.60%
  • ISE Sentiment Index 140.0 +35.92%
  • Total Put/Call .90 +4.65%
  • NYSE Arms 1.10 +73.07%
Credit Investor Angst:
  • North American Investment Grade CDS Index 120.60 -.65%
  • European Financial Sector CDS Index 277.85 +6.06%
  • Western Europe Sovereign Debt CDS Index 357.85 -1.43%
  • Emerging Market CDS Index 308.58 -.26%
  • 2-Year Swap Spread 49.0 +1 bp
  • TED Spread 57.0 unch.
  • 3-Month EUR/USD Cross-Currency Basis Swap -127.0 +2.0 bps
Economic Gauges:
  • 3-Month T-Bill Yield .00% unch.
  • Yield Curve 171.0 +3 bps
  • China Import Iron Ore Spot $135.20/Metric Tonne n/a
  • Citi US Economic Surprise Index 71.20 n/a
  • 10-Year TIPS Spread 2.04 +1 bps
Overseas Futures:
  • Nikkei Futures: Indicating +35 open in Japan
  • DAX Futures: Indicating +9 open in Germany
  • Higher: On gains in my Tech, Medical and Biotech sector longs
  • Disclosed Trades: None
  • Market Exposure: 75% Net Long
BOTTOM LINE: Today's overall market action is mildly bullish, as the S&P 500 trades right above its 200-day moving average, despite Eurozone debt angst, financial sector pessimism, rising global growth fears, technical resistance and rising energy prices. On the positive side, Utility, Biotech, Gaming and Education shares are especially strong, rising more than +.75%. "Growth" stocks are outperforming "value" shares. Small-caps are also relatively strong. Gold is falling -.88% and Lumber is gaining +2.64%. On the negative side, Coal, Disk Drive, Computer Service, Bank, I-Bank and Airline shares are under pressure, falling more than -.75%. (XLF) has underperformed throughout the day. Cyclicals are also relatively weak. Oil is up +1.38% and Copper is falling -1.6%. The Italian/German 10Y Yield Spread is rising +1.12% to 507.66 bps. The Western Europe Sovereign CDS Index is still very near 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 falling +1.09% to -127.0 bps, which is back to late-Nov. levels. The Libor-OIS spread is very near 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 close to another technical breakout. The Citi Asia Economic Surprise Index is fell another -.1 point today to -31.80, the lowest since April 2009. Asian shares continue to trade poorly. The Shanghai Composite fell another -1.09% overnight and is hovering right off multi-year lows, falling -22.86% ytd. As well, India’s Sensex fell -.61% and is down -22.6% ytd. Despite the decoupling this year, slowing economic growth and weak equity markets in the region are also red flags for US equity investors. European shares are mildly weaker today, led lower by Italian equities’ -1.04% decline. 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 today with the MS Cyclical Index dropping -1.36%. This index is down -14.0% ytd and I expect it to continue to underpeform next year. Year-end window-dressing, short-covering, better US economic data and seasonal strength continue to help out US stocks short-term. The S&P 500 has entered 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, a bounce in the euro, year-end window dressing and seasonal strength.

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