Thursday, January 05, 2012

Stocks Slightly Higher into Final Hour on Better US Economic Data, Short-Covering, Less Financial Sector Pessimism, Lower Food/Energy Prices

Broad Market Tone:

  • Advance/Decline Line: Higher
  • Sector Performance: Mixed
  • Volume: Below Average
  • Market Leading Stocks: Performing In Line
Equity Investor Angst:
  • VIX 21.44 -3.51%
  • ISE Sentiment Index 136.0 +2.26%
  • Total Put/Call .80 -14.89%
  • NYSE Arms 1.07 +17.64%
Credit Investor Angst:
  • North American Investment Grade CDS Index 121.28 +1.43%
  • European Financial Sector CDS Index 274.92 +7.03%
  • Western Europe Sovereign Debt CDS Index 383.83 +1.76%
  • Emerging Market CDS Index 311.24 +2.49%
  • 2-Year Swap Spread 45.0 -2 bps
  • TED Spread 57.0 unch
  • 3-Month EUR/USD Cross-Currency Basis Swap -109.0 -7 bps
Economic Gauges:
  • 3-Month T-Bill Yield .01% unch.
  • Yield Curve 174.0 +2 bps
  • China Import Iron Ore Spot $139.90/Metric Tonne +.79%
  • Citi US Economic Surprise Index 73.40 +9.8 points
  • 10-Year TIPS Spread 2.10 +3 bps
Overseas Futures:
  • Nikkei Futures: Indicating +9 open in Japan
  • DAX Futures: Indicating +23 open in Germany
  • Higher: On gains in my Tech/Biotech sector longs and emerging markets shorts
  • Disclosed Trades: Added to my (IWM)/(QQQ) hedges and to my (EEM) short, then covered some of them
  • Market Exposure: 75% Net Long
BOTTOM LINE: Today's overall market action is mildly bullish, as the S&P 500 reverses slightly higher, despite rising Eurozone debt angst, global growth fears, technical resistance and high energy prices. On the positive side, Software, Computer, Bank, Biotech, Hospital and HMO shares are especially strong, rising more than +1.0%. Cyclical and Small-Cap shares are relatively strong again. (XLF) has traded well throughout the day. The 10-year yield is rising +2 bps to 1.99%. Oil is falling -1.43%, the UBS-Bloomberg Ag Spot Index is falling -2.75% and Lumber is +1.34% higher. On the negative side, Coal, Energy, Oil Service, Steel, Construction and Gaming shares are under pressure, falling more than -.75%. Copper is dropping -.5% and Gold is gaining +.60%. Asian shares were mostly lower overnight. The Shanghai Composite opened higher and fell -1.6% from its intraday high, finishing down -.97%. This index hasn’t participated in the gains seen in other Asian indices and is now down -2.32% ytd. European shares were lower, led down by Spain(-2.94%) and Italy(-3.65%) which are now down -2.76% and -2.14% ytd, respectively. The Bloomberg European Bank/Financial Services Index is down -3.1%. As well, Brazil’s Bovespa is weak today, falling -1.4%. The Germany sovereign cds is jumping +6.6% to 110.83 bps(near Oct. 4 all-time high). The France sovereign cds is gaining +6.1% to 235.67 bps(near Nov. 25 all-time high). The Spain sovereign cds is rising +2.62% to 449.67 bps(+18.4% in 4 days and near Nov. 17 record high). The Hungary sovereign cds is rising +2.64% to 738.53 bps(+20.2% in 4 days to new all-time high). The Italian/German 10Y Yield Spread is rising +4.2% to 522.75 bps(near Nov. 9th high, which was highest since Dec. 1995). The Western Europe Sovereign CDS Index is very near its Dec. 15 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 falling -3.62% to -109.04 bps, which is back to mid-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 -22.7% since Sept. 7th of last year. The AAII % Bulls soared to 48.88 this week, while the % Bears Plunged to 17.16. The % Bears has only been lower one other week in the last 6 years. I continue to believe overall investor sentiment is too bullish given the still significant and developing headwinds from overseas and the fact that the average stock(VGY Index) is down -16.5% from its April 29th high. Despite today’s positive jobs readings, the 10-year yield is only rising +2 bps to 1.99% and is at the same levels as Sept./Oct. This is especially noteworthy considering the recent spate of positive US economic data and the equity rally off the lows. Moreover, the divergence between (XLF) and the Bloomberg European Bank/Financial Services Index is becoming unsustainable, in my opinion. Credit gauges in Europe must calm very soon or US equity weakness is likely, notwithstanding tomorrow's likely positive jobs report. 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. I expect US stocks to trade mixed-to-lower into the close from current levels on rising Eurozone debt angst, global growth fears, high energy prices, technical resistance, profit-taking and more shorting.

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