Tuesday, January 10, 2012

Stocks Rising into Final Hour on Less Eurozone Debt Angst, Less Financial Sector Pessimism, Short-Covering, Earnings Optimism

Broad Market Tone:

  • Advance/Decline Line: Higher
  • Sector Performance: Almost Every Sector Rising
  • Volume: Below Average
  • Market Leading Stocks: Underperforming
Equity Investor Angst:
  • VIX 20.55 -2.47%
  • ISE Sentiment Index 165.0 +1.85%
  • Total Put/Call .80 -12.09%
  • NYSE Arms .74 -18.59%
Credit Investor Angst:
  • North American Investment Grade CDS Index 117.30 -2.20%
  • European Financial Sector CDS Index 258.19 -5.88%
  • Western Europe Sovereign Debt CDS Index 380.50 -2.31%
  • Emerging Market CDS Index 306.05 -1.53%
  • 2-Year Swap Spread 40.0 unch.
  • TED Spread 57.0 unch
  • 3-Month EUR/USD Cross-Currency Basis Swap -93.0 +6 bps
Economic Gauges:
  • 3-Month T-Bill Yield .01% unch.
  • Yield Curve 173.0 +2 bp
  • China Import Iron Ore Spot $142.30/Metric Tonne +1.64%
  • Citi US Economic Surprise Index 88.80 -.9 point
  • 10-Year TIPS Spread 2.06 -3 bps
Overseas Futures:
  • Nikkei Futures: Indicating +47 open in Japan
  • DAX Futures: Indicating +6 open in Germany
  • Higher: On gains in my Tech, Retail, Medical 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 trades back to its late-Oct. high, despite Eurozone debt angst, global growth fears and rising energy prices. On the positive side, Steel, I-Bank, Homebuilding and Oil Service shares are especially strong, rising more than +2.5%. Cyclical and small-cap shares are relatively strong again. Copper is rising +2.8% and Lumber is gaining +1.09%. Johnson Redbook weekly retail sales rose +3.3% this week versus a +3.7% gain the prior week. Asian shares surged overnight, led by a +2.7% gain in the Shanghai Composite on easing optimism and comments from a Chinese regulator regarding a push for more stock ownership. I still think China is just taking its foot off the brake rather than embarking on a new big easing cycle. Another substantial easing cycle, given their real inflation problem, still bubble-like real estate prices and massive overcapacity, would prove a large policy error over the coming year, in my opinion. Major European indices surged around +2.5% today, led higher by a +3.1% gain in Italian shares. While Europe appears to be calming temporarily, the contractions in many of the economies in the region will likely lead to intensifying debt concerns again before quarter’s end. The Germany sovereign cds is falling -4.2% to 106.33 bps, the France sovereign cds is falling -6.52% to 222.0 bps, the Spain sovereign cds is falling -4.42% to 421.67 bps, the Russia sovereign cds is declining -6.92% to 257.0 bps and the UK sovereign cds is down -6.2% to 94.67 bps. On the negative side, Hospital shares are under pressure, falling more than -1.5%. Oil is rising +.8%, Gold is gaining +1.5% and the UBS-Bloomberg Ag Spot Index is up +.32%. Moreover, the 10Y T-Note continues to trade well, which is another concern. The China sovereign cds is gaining +.86% to 150.61 bps, the Japan sovereign cds is gaining +.47% to 153.21 bps and the Saudi sovereign cds is jumping +4.5% to 142.46 bps. The Italian/German 10Y Spread is falling -1.48% to 523.50 bps(still very near highest since Dec. 1995). The Western Europe Sovereign CDS Index is still very near its recent all-time high. The TED spread continues to trend higher and 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 3M EUR/USD Cross-Currency Basis Swap is rising +6.39% to -92.97 bps, which is back to late-Oct. 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. Overall, while improving, European credit gauges are still at very stressed levels despite the fact that the European debt crisis “can-kicking” solution is supposedly at hand. China Iron Ore Spot has plunged -21.4% since Sept. 7th of last year. Leadership is lacking again today and volume remains poor. The market still has a "tired" feel, despite recent gains. For a sustainable equity advance from current levels, 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. However, a convincingly break above the late-Oct. high would likely lead to further short-term gains. 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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