Wednesday, January 25, 2012

Stocks Rising into Final Hour on Euro Bounce, Dovish Fed Commentary, Earnings Optimism, Short-Covering

Broad Market Tone:

  • Advance/Decline Line: Higher
  • Sector Performance: Mixed
  • Volume: Below Average
  • Market Leading Stocks: Outperforming
Equity Investor Angst:
  • VIX 18.35 +2.96%
  • ISE Sentiment Index 123.0 +108.47%
  • Total Put/Call .75 -27.88%
  • NYSE Arms .99 -7.06%
Credit Investor Angst:
  • North American Investment Grade CDS Index 104.21 unch.
  • European Financial Sector CDS Index 196.87 +1.48%
  • Western Europe Sovereign Debt CDS Index 337.50 +.43%
  • Emerging Market CDS Index 276.86 -1.97%
  • 2-Year Swap Spread 33.0 -2 bps
  • TED Spread 52.0 -1 bp
  • 3-Month EUR/USD Cross-Currency Basis Swap -74.0 +2 basis points
Economic Gauges:
  • 3-Month T-Bill Yield .03% -1 bp
  • Yield Curve 182.0 unch.
  • China Import Iron Ore Spot $139.80/Metric Tonne unch.
  • Citi US Economic Surprise Index 69.90 -.7 point
  • 10-Year TIPS Spread 2.11 +4 bps
Overseas Futures:
  • Nikkei Futures: Indicating -9 open in Japan
  • DAX Futures: Indicating +34 open in Germany
  • Higher: On gains in my Technology, Biotech and Medical sector longs
  • Disclosed Trades: Covered all of my (IWM), (QQQ) hedges, then added some back
  • Market Exposure: 75% Net Long
BOTTOM LINE: Today's overall market action is bullish, as the S&P 500 trades near session highs, building on recent gains, despite rising eurozone debt angst, rising energy prices, uninspiring Fed commentary and profit-taking. On the positive side, Coal, Ag, Medical, Biotech, Construction, Homebuilding, Gaming, Road & Rail and Airline shares are especially strong, rising more than +1.5%. "Growth" stocks are substantially outperforming "value" shares. Copper is rising +.98%, the UBS-Bloomberg Ag Spot Index is down -.28% and Lumber is gaining +1.74%. Despite today's +.55% gain, oil continues to trade poorly given the recent uptick in saber-rattling from Iran, escalating violence in Nigeria, better US economic data and euro bounce. The Ireland sovereign cds is falling - 3.72% to 634.0 bps. On the negative side, Paper, Internet, HMO, I-Banking, Networking and Defense shares are lower on the day. Gold is soaring +2.75%. The Portugal sovereign cds is up +2.0% to 1,313.33 bps(+25% in 9 days to new record high) and the Italy sovereign cds is rising +1.62% to 440.83 bps . The Italian/German 10Y Yield Spread is rising +2.67% to 428.64 bps. The weekly MBA Purchase Applications Index fell -5.4% this week and is still in the same range as it has been trapped in since May 2010. Lumber has declined -12.3% 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, stock 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 -7 bps to 1.99%, which 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. European shares were about -.50% lower on the day with the Bloomberg European Bank/Financial Services Index falling -.16%. 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. Investors are cheering the Fed's dovish commentary today as they continue to exude weakness in the face of a meaningful improvement in US economic data. While weak dollar policies are usually short-term bullish for stocks/commodities, I continue to believe that they are extremely destructive to the long-term health of the US economy/stock market. The S&P 500's technical condition should lead to further gains after a brief pause. For a sustainable 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. One of my longs, (AAPL), is surging +6.2% to an all-time high after blow-out earnings and an unusual guidance raise. The shares are very extended short-term. However, I still expect significant market outperformance in the stock over the intermediate-term. As I said when it was initially released, the iPad is Apple’s Trojan horse into the enterprise. I still think the analyst community underestimates the implications of this massive opportunity over the longer-term. I expect US stocks to trade modestly higher into the close from current levels on a bounce in the euro, earnings optimism, dovish Fed commentary and short-covering.

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