Thursday, February 04, 2010

European Woes Catch Up With The Market

Yesterday, a colleague and I were talking about the sharp rise in credit default swaps (CDS) in Europe, specifically Greece and Spain. I noted that it didn't seem to be hitting our markets yet, but likely would at some point. Well, it seems that point is today, as the worries over sovereign debt are overshadowing positive earnings reports from the likes of Visa (V) and Cisco (CSCO), as well as some solid same-store sales reports among retailers.

The weakness in Europe is boosting the dollar to a five-month high, and further pressuring commodities. Oil is lower near $75, while gold is really tumbling below $1080.

Among the sector ETFs, all 10 are lower, led by energy (-2.9%) and financials (-2.6%), as well as industries like gold miners (-4.7%), steel (-4.75%), and agribusiness (-3.0%). Emerging markets are also weak (-3.25%).

In economic news, factory orders were solid (+1.0%) for December, but initial jobless claims for the week came in a little higher than expected.

European stocks are obviously lower, despite the ECB and Bank of England holding interest rates steady. Asian markets were also lower.

The 10-year yield is lower to 3.63%, and the VIX is spiking +13.3% higher to 24.50.

Trading comment: I have been saying to keep some powder dry, and today's action validates that thesis. I would make notes of those companies that have reported strong earnings but whose stocks have not benefited. I think when the market stabilizes, those stocks will be good bounce candidates.

In the meantime, we will need to continue to monitor things we didn't use to have to worry about, like the possibility of European nations falling further into debt trouble, as well as Dubai which was never really resolved. I would expect bearish sentiment to continue to rise in this environment, which from a contrarian standpoint is a precursor to a market bottom.

long V, MOO


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