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Gary Smith’s Market Take for April 4, 2012

Here’s my take on the markets today, April 4, 2012. If you’d like to read more of my articles, click here.

Credit gauges are deteriorating today. The 2Y Swap Spread is rising +5.0% to 27.6 bps(+17.7% in 5 days). The TED Spread is gaining +1.28% to 40.30 bps. The 3M EUR/USD Cross-Currency Basis Swap is falling -1.75% to -50.87 bps. The FRA/OIS Spread is jumping +8.85% to 38.09 bps. The European Investment Grade CDS Index is gaining +4.12% to 129.33 bps. The European Financial Sector CDS Index is gaining +4.66% to 227.14 bps. The France sovereign cds is gaining +3.41% to 172.0 bps, the Spain sovereign cds is gaining +6.14% to 462.75 bps(+9% in 5 days), the Italy sovereign cds is up +4.72% to 407.87 bps(+9.5% in 5 days), the Portugal sovereign cds is gaining 2.96% to 1,075.81 bps and the UK sovereign cds is gaining +4.95% to 64.37 bps. Overall, credit gauges are starting to weaken too much as Spain’s economic troubles are intensifying at a faster pace than the “kick-the-can” crowd had hoped.

Major Asian indices fell around -1.25% overnight, led lower by a -2.29% decline in Japan. Major European indices are falling around -2.5%, led down by a -2.8% decline in Germany. Spanish equities are falling another -2.1% today and are now down -9.71% ytd. As I have been cautioning for awhile, this remains a large red flag for the region. As well, the Bloomberg European Financial Services/Bank Index is dropping -2.3%. This index is down -11.0% in about 2 weeks and is breaking below its 200-day moving average.

The Euro and oil are breaking below their 50-day moving averages. Gold continues to trade poorly and is very close to breaking its intermediate-term uptrend. The MBA Purchase Applications Index rose +7.2% this week, but remains in the same range it has been trapped in since May 2010. The Citi US Economic Surprise Index is falling another -5.0 points today to 6.80, which is the lowest since Oct. 17. The MS Cyclical Index(CYC) is underperforming again and is breaking below its 50-day moving average.

I said a couple of months ago that economic optimism would likely peak during 2Q. It is likely the peak has already passed. This does not mean the major averages can’t move higher after a pullback, but any further rally will likely be led by less economically-sensitive shares. However, if Spain starts unraveling at an accelerating pace, the major averages have likely also seen their peaks for the year. I added to my index trading hedges and sold a couple of my trading longs. I am positioned 50% net long.

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