Thursday, January 26, 2012

Stocks Reversing Lower into Final Hour on Less Financial Sector Optimism, Global Growth Fears, Euro Reversal, Technical Selling

Broad Market Tone:

  • Advance/Decline Line: Lower
  • Sector Performance: Most Sectors Declining
  • Volume: Slightly Below Average
  • Market Leading Stocks: Performing In Line
Equity Investor Angst:
  • VIX 18.89 +3.17%
  • ISE Sentiment Index 84.0 -27.59%
  • Total Put/Call .95 +23.88%
  • NYSE Arms 1.86 +113.90%
Credit Investor Angst:
  • North American Investment Grade CDS Index 100.44 -3.62%
  • European Financial Sector CDS Index 180.57 -8.43%
  • Western Europe Sovereign Debt CDS Index 332.72 -1.49%
  • Emerging Market CDS Index 266.32 -3.53%
  • 2-Year Swap Spread 33.0 unch.
  • TED Spread 51.0 -1 bp
  • 3-Month EUR/USD Cross-Currency Basis Swap -69.0 +5.0 basis points
Economic Gauges:
  • 3-Month T-Bill Yield .05% +2 bps
  • Yield Curve 172.0 -10 bps
  • China Import Iron Ore Spot $139.80/Metric Tonne unch.
  • Citi US Economic Surprise Index 68.60 -1.3 points
  • 10-Year TIPS Spread 2.11 unch.
Overseas Futures:
  • Nikkei Futures: Indicating +3 open in Japan
  • DAX Futures: Indicating -25 open in Germany
  • Slightly Lower: On losses in my Technology, Biotech and Retail sector longs
  • Disclosed Trades: Added to my (IWM), (QQQ) hedges and then covered some of them
  • Market Exposure: 75% Net Long
BOTTOM LINE: Today's overall market action is bearish, as the S&P 500 trades near session lows on less financial sector optimism, more global growth fears, profit-taking, more shorting, technical selling, high energy prices, some earnings disappointments and a reversal lower in the euro. On the positive side, Oil Tanker, REIT and Airline shares are higher on the day. Copper is rising +1.5% and Lumber is gaining +1.1%. Despite today's slight gain, oil continues to trade poorly given the recent uptick in saber-rattling from Iran, escalating violence in Mid-east, better US economic data and euro bounce. Asian indices were mostly higher overnight, led by a +1.6% gain in Hong Kong shares. Major European indices were up around +1.5% with the Bloomberg European Bank/Financial Services Index rising +1.74%. The Germany sovereign cds is falling -3.83% to 86.81 bps, the Italy sovereign cds is down -4.24% to 421.83 bps and the Belgium sovereign cds is down -3.2% to 255.83 bps. The Italian/German 10Y Yield Spread is falling -2.48% to 418.07 bps. On the negative side, Coal, Energy, Semi, Disk Drive, Telecom, Bank, I-Banking, HMO and Education shares are especially weak, falling more than -1.5%. The Portugal sovereign cds is up +6.8% to 1,404.83 bps(+30% in 10 days to new record high) and the France sovereign cds is rising +.3% to 172.50 bps . Lumber has declined -11.0% since its Dec. 29th high and is still near the lower end of its recent range, near a multi-year low, despite the better US economic data, improving sentiment towards homebuilders, equity rally and decline in eurozone debt angst. Moreover, the Baltic Dry Index has plunged over -60.0% from its Oct. 14th high and is now down over -50.0% ytd. The 10Y T-Note Yield is falling -6 bps to 1.94% and remains a large concern considering the recent stock rally and improvement in US economic data. The Western Europe Sovereign CDS Index is still near its Jan. 9th all-time high. The TED spread is near the highest since May 2009. The 2Y Euro Swap Spread is near the highest since Nov. 2008. The 3M Euribor-OIS spread is near the highest since February 2009. The Libor-OIS spread is still very near the widest since May 2009, which is also noteworthy considering the equity surge off the recent lows. Overall, while improving, European credit gauges are still at stressed levels. China Iron Ore Spot has plunged -22.8% since Sept. 7th of last year. Shanghai Copper Inventories are up over 300.0% ytd to the highest level since March of last year. The AAII % Bulls rose to 48.40 this week, while the % Bears fell to 18.91(4-wk moving average of % Bears lowest in over 6 years at 19.22%). Overall, investor complacency remains fairly high given the macro backdrop. European equities continue to price in a pause in the debt crisis and a stabilization in economic growth. While the "debt crisis can" appears to have been kicked again, economic growth is likely to contract further in the region over the coming months as more austerity measures take hold. Despite the fact that US economic data have meaningfully improved, stocks have rallied, the Euro debt crisis has temporarily calmed and inflation expectations have risen, the Fed’s statement yesterday was extremely dovish and exuded weakness. In my opinion, US weak dollar policies have greatly contributed to the secular bear that stocks have been mired in for over a decade. For an intermediate-term equity advance from current levels, I would still expect to see further 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 modestly lower into the close from current levels on a reversal in the euro, less financial sector optimism, more shorting, profit-taking, rising global growth fears and technical selling.


theyenguy said...

Thanks for your informative web site.

You relate "For an intermediate-term equity advance from current levels, I would still expect to see further European credit gauge improvement, subsiding hard-landing fears in key emerging markets, a rising 10-year yield, ..."

The way I see it a rising 10 year Interest rate will cut off credit and dampen economic growth.

Perhaps you might enjoy my thoughts on this in the linked article Stocks Rise On Fed Announcement … Europe Needs A Deep Restructuring And A New Constitution, Harvard Professor Kenneth Rogoff Says

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