Tuesday, January 03, 2012

Stocks Rising into Final Hour on Euro Bounce, Better Economic Data, Short-Covering, Fund Inflows

Broad Market Tone:

  • Advance/Decline Line: Substantially Higher
  • Sector Performance: Most Sectors Rising
  • Volume: Below Average
  • Market Leading Stocks: Underperforming
Equity Investor Angst:
  • VIX 22.82 -2.48%
  • ISE Sentiment Index 91.0 -36.36%
  • Total Put/Call .79 -7.06%
  • NYSE Arms .87 -36.39%
Credit Investor Angst:
  • North American Investment Grade CDS Index 118.01 -1.64%
  • European Financial Sector CDS Index 250.42 -10.22%
  • Western Europe Sovereign Debt CDS Index 374.17 +5.22%
  • Emerging Market CDS Index 295.65 -3.69%
  • 2-Year Swap Spread 48.0 +1 bp
  • TED Spread 58.0 unch.
  • 3-Month EUR/USD Cross-Currency Basis Swap -103.0 +15.5 bps
Economic Gauges:
  • 3-Month T-Bill Yield .00% unch.
  • Yield Curve 170.0 +7 bps
  • China Import Iron Ore Spot $138.30/Metric Tonne -.1%
  • Citi US Economic Surprise Index 65.0 -4.4 points
  • 10-Year TIPS Spread 2.00 +4 bps
Overseas Futures:
  • Nikkei Futures: Indicating +132 open in Japan
  • DAX Futures: Indicating -6 open in Germany
  • Higher: On gains in my Tech, Medical, Retail and Biotech 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 bullish, as the S&P 500 breaks convincingly above its 200-day moving average as it approaches the high-end of its recent range, despite Eurozone debt angst, global growth fears, technical resistance and high energy prices. On the positive side, Coal, Alt Energy, Oil Service, Steel, Networking, Homebuilding, I-Banking and Bank shares are especially strong, rising more than +3.0%. Cyclical shares are relatively strong and (XLF) has traded well throughout the day. Copper is rising +2.79% and Lumber is gaining +.84%. Major Asian indices are up 1-3% in the new year already, while European shares have risen 2-4% so far. The Bloomberg European Bank/Financial Services Index rose +1.9% today. The euro is surging today as year-end bets against the currency hit a new record. The rise comes despite a think tank’s warning that a Eurozone collapse will commence this year.The Germany sovereign cds is falling -1.8% to 101.83 bps, the Italy sovereign cds is falling -2.26% to 491.83 bps and the China sovereign cds is falling -4.5% to 142.08 bps. Moreover, the European Investment Grade CDS Index is falling -2.89% to 163.49 bps. On the negative side, Utility, Hospital, Restaurant, Telecom, Disk Drive and Education shares are lower-to-flat on the day. Oil is surging +4.2%, the UBS-Bloomberg Ag Spot Index is rising +.88% and Gold is jumping +2.7%. The 10-year yield is rising +8 bps to 1.96%. The Spain sovereign cds is gaining +1.86% to 400.83 bps, the US sovereign cds is jumping +4.57% to 51.18 bps, the UK sovereign cds is gaining +1.72% to 99.17 bps and the France sovereign cds is rising +.02% to 218.33 bps. The Italian/German 10Y Yield Spread is rising +.22% to 502.13 bps(still 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 +9.2% to -103.50 bps, which is back to early-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. Overall, 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. China Iron Ore Spot has plunged -23.6% since Sept. 7th of last year. Today’s gains are paced by many of last year’s worst performers(coal, steel, homebuilders and Banks) and there are few high-volume big-gainers for a 200+ DJIA day. Overall, today’s rally looks like many of the big headfakes over the last few months. For a sustainable equity advance into the new year, I would still 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. One of my longs, (GOOG), is breaking out technically to a multi-year high on volume. While the stock is extended short-term, I see substantial outperformance for the shares over the intermediate-term. I expect US stocks to trade mixed-to-lower into the close from current levels on Eurozone debt angst, global growth fears, rising energy prices, technical resistance, profit-taking and more shorting.

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