Thursday, January 12, 2012

Stocks Rising into Final Hour on Less Eurozone Debt Angst, Less Financial/Tech Sector Pessimism, Short-Covering, Lower Energy Prices

Broad Market Tone:

  • Advance/Decline Line: Higher
  • Sector Performance: Most Sectors Rising
  • Volume: Below Average
  • Market Leading Stocks: Performing In Line
Equity Investor Angst:
  • VIX 20.87 -.86%
  • ISE Sentiment Index 116.0 +3.57%
  • Total Put/Call .83 +5.06%
  • NYSE Arms 1.14 +55.77%
Credit Investor Angst:
  • North American Investment Grade CDS Index 115.02 -2.28%
  • European Financial Sector CDS Index 246.66 -3.77%
  • Western Europe Sovereign Debt CDS Index 370.50 -1.49%
  • Emerging Market CDS Index 304.98 -1.92%
  • 2-Year Swap Spread 35.0 -3 bps
  • TED Spread 55.0 -1 bp
  • 3-Month EUR/USD Cross-Currency Basis Swap -80.0 +7 bps
Economic Gauges:
  • 3-Month T-Bill Yield .02% +1 bp
  • Yield Curve 169.0 +1 bp
  • China Import Iron Ore Spot $142.20/Metric Tonne unch.
  • Citi US Economic Surprise Index 77.40 -10.4 points
  • 10-Year TIPS Spread 2.03 +1 bp
Overseas Futures:
  • Nikkei Futures: Indicating +19 open in Japan
  • DAX Futures: Indicating +31 open in Germany
  • Slightly Higher: On gains in my Tech and Biotech sector longs
  • Disclosed Trades: Added to my (SCO) long, took profits in an Ag long
  • Market Exposure: 75% Net Long
BOTTOM LINE: Today's overall market action is mildly bullish, as the S&P 500 trades slightly above its late-Oct. high, despite Eurozone debt angst, some earnings disappointments, disappointing US economic data, rising global growth fears and high energy prices. On the positive side, Defense, Alt Energy, Oil Tanker, Disk Drive, Networking and Construction shares are especially strong, rising more than +1.0%. Cyclical shares are outperforming again. Copper is rising +2.8%, the UBS-Bloomberg Ag Spot Index is falling -2.4% and Oil is falling -2.2%. Major European stock indices were mostly higher today, led by Italy’s +2.1% gain. However, France and the UK were slightly lower. Spanish shares, the worst-performing in Europe ytd(-1.62%), were flat on the day. The Bloomberg European Bank/Financial Services Index rose +1.2%. Overall, given the improvement in credit gauges and bounce in the euro today, I am surprised European equities did not trade better. The Germany sovereign cds fell -4.92% to 100.67 bps, the France sovereign cds is falling -4.94% to 209.33 bps, the Spain sovereign cds is down -4.66% to 394.50 bps, the Italy sovereign cds is down -4.41% to 494.17 bps and the UK sovereign cds is down -3.32% to 91.33 bps. On the negative side, Energy, Hospital, REIT, Computer Service and Oil Service shares are under pressure, falling more than -.75%. Gold is gaining +.5% and Lumber is falling -1.8%. The 10Y T-Note Yield is rising +2 bps to 1.92%, but is still not confirming the recent equity rally and better US economic data, which remains a concern. Major Asian indices were mostly lower overnight despite a better CPI in China, led down by a -.74% drop in Japanese shares. The Nikkei has lagged the rest of Asia so far this year, falling -.82% ytd. The China sovereign cds is rising +1.98% today to 149.55 bps and has not improved with other cds over the last week. The Italian/German 10Y Spread is falling -7.24% to 479.64 bps(still near highest since Dec. 1995). The Western Europe Sovereign CDS Index is still very 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 3M EUR/USD Cross-Currency Basis Swap is rising +11.0% to -80.37 bps, which is back to mid-Sept. levels. 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 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. The AAII % Bulls rose to 49.14 this week, while the % Bears rose to 17.18. Overall, investor sentiment remains too bullish given the macro backdrop, in my opinion. Leadership quality and volume remain poor. The surge in jobless claims, while only one week, is a big negative. Much of the recent market rally, led by homebuilders and financials, has been predicated on the notion of a meaningfully improving jobs market. It is also noteworthy that Lumber is breaking down technically to a new 52-week low and has declined -12.4% since Dec. 29. The market still has a "tired" feel, despite recent gains. 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. However, a convincingly break above the late-Oct. S&P 500 high would likely lead to further short-term gains. I expect US stocks to trade mixed-to-higher into the close from current levels on less financial/tech sector pessimism, short-covering, lower energy prices and declining Eurozone debt angst.

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