Tuesday, December 20, 2011

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


Broad Market Tone:

  • Advance/Decline Line: Substantially Higher
  • Sector Performance: Every Sector Rising
  • Volume: Light
  • Market Leading Stocks: Performing In Line
Equity Investor Angst:
  • VIX 23.01 -7.65%
  • ISE Sentiment Index 106.0 +8.16%
  • Total Put/Call .78 -9.30%
  • NYSE Arms .19 -92.97%
Credit Investor Angst:
  • North American Investment Grade CDS Index 126.61 -3.34%
  • European Financial Sector CDS Index 291.71 -1.03%
  • Western Europe Sovereign Debt CDS Index 365.50 -3.45%
  • Emerging Market CDS Index 313.07 -1.99%
  • 2-Year Swap Spread 48.0 -2 bps
  • TED Spread 56.0 -1 bp
  • 3-Month EUR/USD Cross-Currency Basis Swap -116.50 +1.25 bps
Economic Gauges:
  • 3-Month T-Bill Yield .00% unch.
  • Yield Curve 167.0 +9 bps
  • China Import Iron Ore Spot $132.0/Metric Tonne +.53%
  • Citi US Economic Surprise Index 73.90 +.5 point
  • 10-Year TIPS Spread 2.04 +11 bps
Overseas Futures:
  • Nikkei Futures: Indicating +139 open in Japan
  • DAX Futures: Indicating +32 open in Germany
Portfolio:
  • Higher: On gains in my Tech, Medical, Biotech and Retail sector longs
  • Disclosed Trades: Covered all of my (IWM)/(QQQ) hedges and some of my (EEM) short, 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 moves back above its 50-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 Service, Steel, Semi, Networking, Bank, I-Bank, Construction and Homebuilding shares are especially strong, rising more than +4.0%. Small-cap and cyclical shares are outperforming. (XLF) has outperformed throughout the day. Lumber is up +2.2% and Copper is gaining +2.1%. The 10-year yield is surging +12 bps to 1.93%. Weekly retail sales rose +3.2% this week versus a +3.0% gain the prior week. While this is still decent, it is a notable deceleration from Oct.’s 4.6% avg. weekly gain. Major European equity indices rose 1-3.0% today. The Bloomberg Europe Bank/Financial Services Index rose 3.3%. The Spain sovereign cds is down -3.39% to 397.5 bps, the Germany sovereign cds is falling -1.95% to 104.67 bps, the France sovereign cds is declining -2.6% to 223.33 bps, the Italy sovereign cds is falling -4.34% to 512.50 bps and the Belgium sovereign cds is down -3.4% to 315.17 bps. Moreover, the Europe Investment Grade CDS Index is down -4.3% to 174.79 bps. On the negative side, Drug and Telecom shares are underperforming, rising less than +2.0%. The UBS-Bloomberg Ag Spot Index is up +1.0%, Oil is jumping +3.8% and Gold is rising +1.3%. The China sovereign cds is jumping +3.85% to 154.79 bps(+9.5% in 5 days), the Japan sovereign cds is surging +3.98% to 142.50 bps, the Russia sovereign cds is gaining +.4% to 276.0 bps and the UK sovereign cds is rising +2.66% to 98.0 bps. Moreover, the Asia-Pacific Sovereign CDS Index is rising +.53% to 157.89 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 -.96% to -115.40 bps, which is back to mid-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 -31.2% since February 16th and -27.1% since Sept. 7th. The China Corporate Blended Spread Index remains very close to another technical breakout. The Citi Asia-Pacific Economic Surprise Index is falling another -.1 point today to -27.80, which is the lowest level since April 2009. Asian equity indices were mostly lower overnight. India’s Sensex fell another -1.33% to the lowest since Aug. 2009. This index is now down -26.0% ytd. Fears over the possibility of hard landings in some key emerging market economies appear to be intensifying again. Moreover, 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. While year-end performance-chasing, short-covering, better US economic data and seasonal strength should lead to further short-term gains, I am not yet seeing signs that a sustainable advance has begun. Credit gauges are still at highly stressed levels(and in many cases worsening), today’s advance is led by many of this year’s worst-performing stocks, concerns over Asia are intensifying and volume remains light. I expect US stocks to trade modestly higher into the close from current levels on a bounce in the euro, better US economic data, short-covering, bargain-hunting, year-end window dressing, seasonal strength and technical buying.

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