Wednesday, January 04, 2012

Stocks Slightly Lower into Final Hour on Rising Eurozone Debt Angst, Profit-Taking, Technical Selling, Rising Energy Prices

Broad Market Tone:

  • Advance/Decline Line: Lower
  • Sector Performance: Mixed
  • Volume: Below Average
  • Market Leading Stocks: Outperforming
Equity Investor Angst:
  • VIX 22.26 -3.09%
  • ISE Sentiment Index 136.0 +65.85%
  • Total Put/Call .92 +19.48%
  • NYSE Arms .85 +3.71%
Credit Investor Angst:
  • North American Investment Grade CDS Index 119.56 +1.32%
  • European Financial Sector CDS Index 265.48 +5.33%
  • Western Europe Sovereign Debt CDS Index 379.50 +1.89%
  • Emerging Market CDS Index 304.21 +2.80%
  • 2-Year Swap Spread 47.0 -1 bp
  • TED Spread 57.0 -1 bp
  • 3-Month EUR/USD Cross-Currency Basis Swap -105.0 -2 bps
Economic Gauges:
  • 3-Month T-Bill Yield .01% +1 bp
  • Yield Curve 172.0 +2 bps
  • China Import Iron Ore Spot $138.80/Metric Tonne +.36%
  • Citi US Economic Surprise Index 63.60 -1.4 points
  • 10-Year TIPS Spread 2.07 +7 bps
Overseas Futures:
  • Nikkei Futures: Indicating -51 open in Japan
  • DAX Futures: Indicating +12 open in Germany
  • Higher: On gains in my Tech sector longs, emerging markets shorts and index hedges
  • 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 mildly bearish, as the S&P 500 trades slightly lower and sits near the high-end of its recent range on rising Eurozone debt angst, global growth fears, technical resistance and rising energy prices. On the positive side, Steel, Software, Homebuilding, Road&Rail, Restaurant and Disk Drive shares are especially strong, rising more than +.75%. Cyclical shares are relatively strong again. The 10-year yield is rising +4 bps to 1.98%. Johnson Redbook Weekly Retail Sales rose +3.7% this week versus a +3.5% gain the prior week, which is a modest positive. On the negative side, Oil Tanker, Networking, Medical Equipment, Drug, Hospital, Insurance and REIT shares are under pressure, falling more than 1.0%. Small-caps are relatively weak and (XLK) has underperformed throughout the day. Oil is rising +.25%, Copper is dropping -2.8%, Lumber is down -3.2% and Gold is gaining +.50%. Despite 2-3% ytd gains in most Asian indices and some better manufacturing data out of China, the Shanghai Composite finished its first day of trading in the new year down -1.4%, which is a red flag. Spanish(-1.72%) and Italian(-2.04%) equities led Europe lower today. The Bloomberg European Bank/Financial Services Index fell -1.6%, as well. The Spain sovereign cds is soaring +9.4% to 438.33 bps, the Germany sovereign cds is gaining +2.24% to 104.0 bps, the Italy sovereign cds is jumping +4.6% to 514.17 bps, the France sovereign cds is rising +1.4% to 221.33 bps, the Japan sovereign cds is gaining +2.5% to 143.54 bps, the Hungary sovereign cds is soaring +11.0% to 719.19 bps and the Russia sovereign cds is gaining +3.76% to 280.33 bps. The Italian/German 10Y Yield Spread is flat at 501.51 bps(still near the highest since Dec. 1995). The Western Europe Sovereign CDS Index is still approaching 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 -1.7% to -105.23 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 -23.3% since Sept. 7th of last year. Market volume remains poor, however market leading stocks are trading better today after recent underperformance. One of my longs, (AAPL), is helping to lift the Naz to the flatline. (AAPL) looks poised to test its all-time high over the coming weeks and should continue to outperform over the intermediate-term, as well. This Friday's jobs report is especially important given ongoing global economic weakness. US stocks can rally further in the short-term on more positive US economic data, but credit gauges in Europe must calm soon or equity weakness is likely. 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, rising energy prices, technical resistance, profit-taking and more shorting.


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