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Stocks: Euro Debt Concerns and Weak Data Pressure

by Dave Hightower on November 15, 2011

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The stress level in global equity markets has picked up in early morning action, fueled by growing European debt concerns and a round of disappointing economic data pointing to a tough slog to come. Italian bond yields have rallied back above the 7.0% handle this morning and this morning’s Spanish Bill auction drew yields that were more than 1.0% above October levels and that auction also saw less participation than the prior offering. The higher yields highlight the growing concern that Euro zone leaders have in tackling their debt crisis, not to mention unsustainable debt service costs. Credit spreads in France are also on the rise from mounting fears that French banks hold a significant share of Italy’s 2 trillion in debt. Adding to the weakness this morning was a round of disappointing Euro zone economic data. While Q3 Euro zone GDP matched expectations, the more forward looking German ZEW sentiment gauge came in much weaker than expected and fell to levels not seen since the fall of 2008. This underscores the negative impact that election/debt proceedings in the region have had on investor psychology. Weak European trade early this morning has also pressured US shares, and that is expected to continue into this today’s active US economic data calendar. While the clock ticks on the US Super Committee debt-reduction talks, there appears to be a growing consensus that leaders may pass the buck under the guise of a more definitive change in tax policy. US economic data this morning includes October Producer Prices, October retail sales and September business inventories.

S&P 500: The December S&P 500 enters the early US trading hours off 2.7% from Monday’s high, struggling under the pressure of mounting European debt concerns. An increase in Italian, French, Spanish and Greek borrowing costs highlight the level of concern in the market. These concerns have taken Greek banks shares down by more than 7.0% this morning, hamstrung by disappointing GDP data and mounting concerns whether new leadership can fix the nation’s debt problem. The weak financial backdrop this morning is expected to exert added downside force on the US financial sector. The Commitments of Traders Futures and Options report as of November 8th for S&P 500 Stock Index showed non-commercial traders were net long 12,119 contracts, an increase of 7,692. Non-commercial and non-reportable traders combined held a net long position of 16,986 contracts, down 1,499 contracts on the week. This reflects a selling on strength mentality from speculators, and that is viewed as a negative short term force. After yesterday’s failed attempt to break through the upper end of the recent trading range, the December S&P 500 looks poised for a test of 1224.00, and then at the November low of 1208.00.

DOW: The December E-mini Dow established a lower low during the early morning hours, as it extended the downdraft from yesterday’s high to 220 points. While the index may have drafted a level of support from yesterday from gains in Boeing, Caterpillar and reports that Berkshire took on a more than 5.0% stake in IBM, this morning’s tone has shifted back to Europe. Dow Jones Index components Home Depot and Wal-Mart report their quarterly results prior to the Wall Street open, and that could shed further insight into the health of the US consumer. The Commitments of Traders Futures and Options report as of November 8th for Dow Jones Index $5 showed non-commercial traders were net long 5,712 contracts, a decrease of 1,696. Non-commercial and non-reportable traders combined held a net long position of 8,705 contracts, for a decrease of 2,580 in their net long positioning. This selling pressure took place as the index rallied more than 400 points and that is seen as a negative. The bear camp has control to start this morning, with support entering at 11,910 and then at last week’s low of 11,661.

NASDAQ: The December NASDAQ enters the US trading session with losses of more than 1.0%, pressured by renewed Euro zone debt concerns and fears that global growth could be slowing. Earnings late Monday from Urban Outfitters showed the company falling short of Q3 sales forecasts, and that seems to be offering an added negative this morning. The NASDAQ will be keeping a close watch on Amazon today, as the company begins shipping its $199 Fire designed to capture the lower end of the tablet market. Dell reports their quarterly results after the bell this afternoon and is expected to show a more than 4.0% increase in earnings compared to the year ago quarter. The Commitments of Traders Futures and Options report as of November 8th for NASDAQ Mini showed non-commercial traders were net long 45,021 contracts, a decrease of 9,200. Non-commercial and non-reportable traders combined held a net short position of 1,038 contracts. These traders have gone from a net long to a net short position. The early morning tone in the December NASDAQ is negative, with 200 day moving average support at 2290.50.

TODAY’S MARKET IDEAS: Disappointing German Sentiment readings, Spanish Bill sale and sluggish Euro zone periphery GDP readings fuel the bear earlier this morning. Escalating borrowing costs also reflect a negative vote of confidence on new leadership changes in Italy and Greece. Sentiment is quite negative to start this morning, and it probably takes a bullish result from this morning’s US scheduled data to begin to neutralize the selling. Yesterday’s failed attempt to break through resistance and subsequent downdraft points to a downside test of 11,750 in the December E-mini Dow and 1224 in the December S&P 500.

Stocks: Optimism Surrounding EU Talks; Positive Asian Econ News

by Dave Hightower on October 24, 2011

Global equity markets are on a higher track this morning supported by more optimism surrounding European debt crisis talks and positive economic data out of Asia. It seems the one item agreed on at this weekend’s EU summit was that the ECB would not backstop EFSF funds. The market still wants to believe that European officials are closer to a deal on bank recapitalization and how to leverage EFSF funds. Flash Purchasing Managers’ data out of China broke a 3-month streak of contraction, and that was seen as a positive that helped to rally base metals and resource related shares early this morning. It also helped the Chinese Shanghai Composite Index broke a 4-day losing streak. Favorable export readings out of Japan, on a boost in demand for automotive parts, also lent a positive early morning tone. Meanwhile, interest rate markets in Europe showed a different reaction to yesterday’s EU summit, with German Bunds reversing early morning losses and rallying to new highs on the session. Perhaps some of that early morning reversal came from disappointing PMI data out of Europe. There was also talk from a major Wall Street firm indicating that the US faced another credit downgrade by year’s end. This morning’s US economic calendar presents the latest read on Chicago Manufacturing, which is expected to show only a fractional gain on the month.

S&P 500: The December S&P 500 is on a higher track this morning as it extends last week’s bullish chart breakout to the upside. It seems that the combination of well-received meetings in Brussels over the weekend, along with friendly economic data out China overnight have given the bulls some early morning firepower. However, anxiety is building ahead of a final decision on the European debt situation on Wednesday. This heightened anxiety is highlighted by an index of Greek bank stocks, which plunged by 15% during the early morning hours, fearing a deeper markdown Greek government bonds held in the private sector (haircuts are now ranging from 40 to 50%).With a little more than 20% of the S&P 500 companies reporting earnings, nearly three-fourths have beaten street estimates. Texas instruments reports their quarterly earnings after the bell today, with EPS expected to show about a 20.0% decline from the year ago quarter. The trade is expected to keep a close eye on the earnings for a read on chip demand ahead of the holiday season. The Commitments of Traders Futures and Options report as of October 18th for S&P 500 stock index showed non-commercial traders were net long 5,749 contracts, an increase of 7,523, which represents a change from a net short to net long position. Non-commercial and non-reportable traders combined held a net short position of 11,737 contracts, a decrease of 6,037 on the week. The bull camp holds the cards to start this morning, looking for more bullish confirmation to extend gains out of the past 2.5 months trading range.

DOW: The December E-mini Dow extended Friday’s gains during the initial morning hours and have reached their highest level since August 2nd. The positive action has helped confirm a technical breakout on the charts above the 2.5 month trading range, which would normally give the all clear for a sustained rally higher. However, the reluctance of a number of momentum indicators to confirm the breakout, Euro zone uncertainty and average trading volumes detract from the bullishness. Caterpillar reports earnings before the Wall Street open and is expected to show a 26% gain in EPS compared to the year ago quarter. Probably even more important will be the company’s forward outlook in the face of growing economic headwinds. Meanwhile, the Commitments of Traders Futures and Options report as of October 18th for Dow Jones Index $5 showed non-commercial traders were net long 8,739 contracts, a decrease of 3,476. Non-commercial and non-reportable traders combined held a net long position of 6,681 contracts, a decrease of 1,200 on the week. It is possible that the speculative selling trend during last week’s congestion was probably the result of profit-taking from the October rally. The early edge goes to the bull camp this morning, with potential upside targeting coming in at 12,097 based on the recent congestion pattern.

NASDAQ: The December NASDAQ established a higher high during the early morning hours and sits just 38 points below last week’s high. In addition to optimism surrounding the EU Summit over the weekend, the NASDAQ could be benefiting from news that Google has been out looking for financial backing for a potential bid for Yahoo. The Commitments of Traders Futures and Options report as of October 18th for Nasdaq Mini showed non-commercial traders were net long 37,971 contracts, an increase of 24,457. Non-commercial and non-reportable traders combined held a net long position of 11,749 contracts, which reflects a shift from a net short to a net long position. While the buying trend of the speculators is seen as a positive force, those figures could be overstated, as the NASDAQ slipped nearly 30 points after the report was conducted. The bulls have the early advantage this morning, with key resistance at 2388.50.

TODAY’S MARKET IDEAS: The December E-mini Dow and S&P 500 have confirmed a close above the recent 2.5 month trading range, which on the surface is bullish. It is a step closer in leaving the October low as an intermediate bottom. However, there still remain a number of unresolved issues overhanging the market: US Economic growth prospects and concrete steps to resolve the European debt crisis. For now, both factors have seen some positive press, but more is needed to justify the higher price levels. Sentiment is beginning to flash bearish warning signals, like a put to call ratio that is reflecting excessive bullish optimism. A key theme to watch in today’s trade is for a noted pick up in fund buying interest now that the major indices have broken out of their respective trading ranges. Volume was average Friday, but for a significant push out of the range probably needs to see greater participation. We maintain a positive short-term bias, but remain suspect over another leg higher at this juncture.

Commodity Outlook – 2011.10.24

by Dave Hightower on October 22, 2011

Below is an excerpt from The Hightower Report’s most recent Newsletter. To receive access to this story, with trade strategies, and our daily coverage of 16 markets, visit futures-research.com for your free 2 week trial!

The most positive thing that can be said about the global economy is that some sectors have managed to hold up against the deterioration that was seen for most of the last 4 months. Clearly the Euro zone debt crisis has been and continues to be the primary cloud hanging over consumer and investor sentiment. One only needs to look back to the negative reactions in consumer confidence to the Fukushima incident and the August US debt debate to understand that the current debt event has the potential to be a very important junction. While the US debt situation remains unsolved, the markets can be expected to trade primarily off the ebb and flow of the Euro zone crisis. In other words, internal fundamental factors are likely to take a back seat to headlines and big picture macroeconomic influences.

Since the outcome of the October 23rd EU meeting (after this writing) looks to be the dominating influence for a large portion of this week’s trade, one might expect a rather significant expansion of volatility. At stake is the latest loan of 8 billion Euros, which is only a small portion of the 350 billion Euros that Greece owes the World Bank, the EU and a long list of European banks. While the trade as of this writing was assuming something in the range of 2 trillion Euros for the EFSF, a more troublesome concern is that ratings agencies have already begun another round of sovereign debt downgrades, with Spain, France and Italy under increased scrutiny.

While recent history suggests that another “plan” won’t fully end the Euro zone debt crisis, it is possible that a euphoria window might be presented and that many markets might see an extension of the relief rallies that have already been engineered from the September and October lows. Those that are skeptical of a final and sustainable Euro zone fix (with good reason) might consider buying near to expiration, near to the money call options and buying longer dated, further out of the money put options, particularly in those physical commodity markets that are heavily tied to the recession/no recession theme.

For flight-to-quality markets or markets that could come under pressure temporarily in the wake of a favorable EFSF funding announcement from the October 22-23 time frame, one should consider buying near to the money, near to expiration puts and buying further out of the money, longer time duration calls.

From a big picture perspective, the recent slide in many commodity prices should eventually be seen as a big value play, but even if the Euro zone situation is put to rest, the markets still need to see the US come to terms with its unfulfilled promise to reduce its budget by just over 2 trillion dollars. In looking at a chart of the speculator net long position in non-financial commodities, one can see that nearly two-thirds of the peak position has already been eliminated. Another sharp slide in prices could mean that commodities will have once factor in a return to recession or worse.

In retrospect, the 4th quarter of 2011 is likely to be known as the “2 trillion” period, as the Euro zone needs 2 trillion Euros just to kick the can down the road and the US needs to reduce spending by at least two trillion to live to fight another day. In classic economic terms, the US economy continues to hold together, with a decent payroll report for September on the books, auto sales staying firm and real estate managing to avoid further deterioration. More importantly, weekly initial jobless claims figures remain close to a downside breakout (see chart), and it is possible that a period of optimism from the Euro zone could pave the way for a slight recovery in the economy and a measure of calm ahead. While it is not too late to avoid a US recession, consumer and investor sentiment will be threatened over the coming five weeks if political leaders are unable to remove the uncertainty that breeds anxiety.

Payrolls Better Than Expected

by Dave Hightower on October 7, 2011

Economy may not be as bad as feared with the payroll report being better than expected. While not an indication that things are great, things may not be as recessionary as feared. If you removed the over all fear of global economic mayhem, physical commodities should start trading on their own fundamentals.

Supportive News Out of EU; China Corn Production Concerns Support

by Dave Hightower on October 5, 2011

A bit of an exhale on the European debt crisis with news of a plan that would attempt isolate the problems. Bernanke warns of weak US economy, but promises to support the economy if necessary. This tamped down flight-to-quality buys of bonds and precious metals. Some private jobs numbers out this week ahead of the US numbers Friday. The corn markets seems to have found some support from production concerns out of China and US acreage reductions.

Plans Out of the EU Providing a Lift

by Dave Hightower on September 27, 2011

Quite a change over the last 24 hours. It seems that the September wash-out in commodities has, at least temporarily, run its course.

Risk-Off Mentality Overshadows the Markets; Physical Commodity Liquidation

by Dave Hightower on September 22, 2011

Positive Tone Despite Negatives; Optimism from “Operation Twist?”

by Dave Hightower on September 20, 2011

Bit more optimistic view this morning in spite of a Italian debt downgrade by S&P and disappointing economic news out of Germany overnight. The dollar is down which is giving some physical commodities a lift. Perhaps there is some expectation of additional quantitative easing from the FOMC meeting tomorrow.

Stocks: Euro Zone Concerns Pressure the Markets

by Dave Hightower on September 19, 2011

Progress on the Euro zone debt crisis took two-steps backwards over the weekend, and that has heightened the fear element in the market and pressed global equities lower. While there were modest gains in the Japanese Nikkei following Friday’s rally on Wall Street, European shares came under heavy selling pressure Monday morning. The combination of German Chancellor Angela Merkel losing a regional election over the weekend and minimal progress among EU leaders at a 2-day meeting in Poland has compromised sentiment. It also appears that global financial markets were dealt another blow to confidence with Greece’s Prime Minister canceling his visit to the US. Some viewed the cancelled meeting as a sign that the debt crisis might be worse than expected. Meanwhile, the bottom line is that the European debt situation has not improved and there are still no concrete plans to deal with the crisis. Two catalysts this week worthy of shifting sentiment, include a meeting among BRIC leaders later this week to discuss euro zone support and a 2-day FOMC meeting that could result in new stimulus measures to bolster the struggling US economy. President Obama is expected to introduce his new deficit reduction plan today to help finance his new jobs bill. The package is expected to go to the Super-Committee, but so far new tax proposals on the wealthy, inspired by Warren Buffett have been met with mixed emotions.

S&P 500: The December S&P 500 starts in the red this morning as it appears to be ending last week’s five-day winning streak. The December S&P 500 rallied slightly more than 8.0% from last week’s low to Friday’s close to challenge the August 31st high. We think it takes something rather significant to power beyond the August 31st high of 1223.00. European bank shares came under heavy selling pressure this morning, led by SocGen and UBS. UBS indicated that they have covered all of the positions highlighted in the unauthorized trading losses, but they seem to have come with a larger price tag approaching $2.3 billion. Commodity related shares are under pressure this morning, seemingly in response to a lack of progress in Europe over the weekend that triggered concerns of slowing commodity demand. The Commitments of Traders Futures and Options report as of September 13th for S&P 500 showed non-commercial traders were net short 51,648 contracts, an increase of 2,702. The commercial traders were net long 69,419 contracts, an increase of 11,168. Non-commercial and non-reportable traders combined held a net short position of 69,417 contracts, an increase of 11,165 contracts in their positioning. This is just 1,000 contracts less than the fall 2007 extreme and could be nearing extremely oversold territory. Meanwhile, the 4.0% rally in the S&P 500 since the report window closed, could be the result of squeezing those new shorts out of the market. For this morning, the December S&P 500 has support below at 1182.50.

DOW: The December E-mini Dow had a gap lower open Sunday evening and has slipped back to the 11,250 area. Dow stocks received a lift last week on reports that United Technologies was tapping into the credit markets for as much is $20 billion. There also appears to be chatter that United Technologies may be considering the acquisition of aircraft supplier, Goodrich, which some viewed as a positive. However, fears of a spreading European debt contagion and lack of control by European officials has drastically shifted sentiment this morning in favor of the bear camp. The Commitments of Traders Futures and Options report as of September 13th for Dow Jones Index $5 showed non-commercial traders were net long 11,244 contracts, a decrease of 344. The Commercial traders were net short 9,783 contracts, an increase of 1,099. Non-commercial and non-reportable traders combined held a net long position of 9,783 contracts. This represents an increase of 1,099 in the net long position held by these traders. The technical action in the December E-mini Dow favors the bear camp, with near-term targeting below at 11,250. There is gap resistance above the market at 11,351 to 11,444.

NASDAQ: The December NASDAQ has taken a negative turn below Friday’s low this morning and is down nearly 2% from Friday’s high. This comes in the wake of last week’s five-day trough to peak rally of 9.0%. While most of the early morning action has been driven by a risk-off attitude stemming from the euro zone debt crisis, there is a chance that shares of Netflix could recover from last week’s 26.3% slide. Netflix is expected to split its business into two units, separating streaming movies from the DVD mail service. The Commitments of Traders Futures and Options report as of September 13th for NASDAQ Mini showed non-commercial traders were net long 9,927 contracts, an increase of 456. Non-commercial and non-reportable traders combined held a net long position of 34,441 contracts, an increase of 950 on the week. The bears have the early edge in the December NASDAQ, with support below at 2248.50 and then at 2239.25.

TODAY’S MARKET IDEAS: US equity markets begin the new week under pressure, largely in response to fresh Euro zone debt concerns and risk of the contagion spreading across the global market place. There is an apparent safety bid present in debt markets, and after last week’s gains pushed markets into short term overbought territory, suggests that more near term downside is possible. The December S&P 500 has a support shelf below at 1182.50, and if violated has the potential for a slide targeting 1155.00 level. The December S&P 500 has resistance above at the August 31-September 1 high trade from 1204.00 to 1219.00. This corresponds to 11,591-11,474 in the December E-mini Dow. We remain suspect that US indices can continue their march higher without a fresh positive news development.

Bit of a Negative Bias in Equities as We Close the Week

by Dave Hightower on September 16, 2011

Little bit of a setback in equities with the positive buzz out of the Euro-Zone wearing off. Consumer Sentiment numbers will be important today. Gold and Silver are on the ropes as of late but have been rejecting the early morning moves so far. Grains are recovering a bit with an overly negative bias over the past week. Reports of derivative trading causing the recent slide in grains has surfaced.

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