Chris Zwermann from Zwermann Financial says the Euro could ignite further gains in equities as shorts are squeezed out of the Euro and forced to sell dollars.

David Rosenberg isn’t going down without a fight.  The staunch bear believes the market is looking “toppy” and is displaying many of the characteristics of the 2007 market highs.  In a strategy note this morning, he notes the declining rate of change in the S&P 500:

“The S&P 500 has basically been hovering around the 1,100 threshold since October 15, getting as low as 1,042 and as high as 1,150 in what can only be described as a tight 10% band. (As an aside, the 13 week rate of change for the S&P 500 has swung to negative territory.) It has split the time above and below the line almost perfectly evenly as well (52% above, 48% below). We can understand the emotions involved in such a prolonged sideways band — a down move to 1,080 triggers calls for a correction, while moves up back to 1,120 prompts calls for a new high coming around the corner.”

He says today’s market is very similar to 2007 when we hovered near the highs for several months before tipping over.  He claims the economic data supports a market top here:

“In a secular bull market, a six-month trading range can be viewed as a pause that refreshes. But in a secular bear market, it more than likely reflects a classic topping formation, as was the case in the spring and summer of 2007 when the S&P 500 also flirted with the 1,500 mark for as long a period as it has hovered around the 1,100 threshold since last fall. Keep in mind that similar to 2007, we are starting to see some fraying around the edges in the latest set of economic data releases — jobless claims, housing starts and sales, core goods orders and shipments, construction, ISM and consumer confidence.”

Source: Gluskin Sheff

Investors Business Daily has updated their market outlook from negative to positive.  In justifying their strategy change they note the S&P 500’s move above the 50 day moving average, strength in important sectors such as tech, and the increasing number of new highs.  This leads them to believe institutions could be more active buyers of equities in the coming weeks.

Using history as a precedent, they see Monday’s rally as an encouraging sign for future returns:

“There are some encouraging precedents for Monday’s follow-through.  In 2005, the market posted two follow-throughs that came with index gains of about 1.5% or 1.7%.  Those May and October moves produced meaningful market advances.”

Perhaps most important is strength in China, which has no doubt been the engine of the global recovery.

“Another positive note came from the market in Hong Kong, which staged a follow-through of its own Monday. Anumber of Chinese stocks rallied Monday and are U.S. market leaders.”

Nonetheless, they don’t appear to have the same conviction they have had with some of their past bullish calls (which included a March ‘09 buy call).  Specifically, they are concerned about the weak gains during the recent rally as well as the poor accumulation levels.    This makes the rally particularly susceptible to breaking down:

“Although the market has made a bullish signal, questions remain, partly because Monday’s index gains weren’t so lofty.  The NYSE, S&P 500 and Dow still have poor Accumulation/Distribution Ratings.  Market uptrends always begin with a follow-through, but not every follow-through works.”

Source: IBD

We saw some bullish action in natural gas and and oil today as investors saw the dip in nat gas as a buying opportunity and the rally in oil as the beginning of something much bigger:

UNG – United States Natural Gas ETF – Shares of the natural gas exchange-traded fund, which mirrors the price and performance of natural gas, are down 1.85% to $9.67 with just under one hour remaining in the trading session. Options traders initiated bullish plays in the March contract despite the dip lower in the price of the underlying shares. It looks like one investor initiated a bullish risk reversal to position for a rebound in the price per UNG share by March expiration. The trader sold 8,250 in-the-money puts at the March $10 strike for a premium of $0.64 each in order to offset the cost of buying 8,250 calls at the same strike for $0.40 apiece. The trader pockets a net credit of $0.24 per contract on the reversal, which he keeps if shares of the fund trade above $10.00 by expiration day. Additional profits are available to the upside if and when the price per share exceeds $10.00 apiece.

USO – United States Oil Fund LP – Shares of the U.S. Oil Fund, which invests in futures contracts for West Texas Intermediate light, sweet crude oil, are up 3.85% to $37.71 today. Bullish trading patterns emerged throughout the first half of the trading session, with notable activity apparent in the April contract. It appears one trader initiated a ratio call spread to position for an improved USO share price by expiration in approximately two months time. The investor picked up 5,000 calls at the March $40 strike for an average premium of $0.95 apiece, and sold 10,000 calls at the higher March $45 strike for $0.20 each. The net cost of the transaction amounts to $0.55 per contract. Thus, the maximum potential payoff for the trader is $4.45 per contract if shares of the underlying stock rally 19.30% over the current value of the fund to $45.00 ahead of expiration. The investor breaks even on the transaction only if USO’s shares increase 7.50% to $40.55 by March expiration.

Source: IB

With uncertainty returning to markets and the problems of debt continuing to trouble investors, the dollar remains the primary beneficiary.  Of course, a strong dollar creates numerous problems for various asset classes.  In a recent strategy note, David Rosenberg of Gluskin Sheff notes the various ways to position yourself for a dollar rally:

Since the onset of the credit crisis in 2007, there have seen three occasions when a surge in risk aversion caused a period of U.S. dollar strength on flight-to-safety trades — July 15, 2008 to September 11 2008 (around the GSEs); September 22, 2008 to November 21, 2008 (post-Lehman financial collapse) and then from December 17, 2008 to March 5, 2009 (the final leg down in the financials). Here is what happened, on average, during these dollar-rally episodes — ultra-defensive strategies and heightened volatility:

• The DXY (U.S. dollar index) rallied an average of 12.3%.

• During these episodes, the Canadian dollar sank 11% against the U.S. dollar, but was only down 1.9% against a basket of non-U.S. currencies.

• The S&P 500 corrected an average of 18.5%. Underperforming S&P equity sectors included materials, energy, industrials and financials. Outperformers included utilities, staples, health care, tech and telecom.

• Despite the downdraft in commodities, the TSX performed in line with the S&P — losing 18%.

• In the TSX sectors, the winners and losers were different than in the U.S.A.: Financials and industrials actually outperformed. Only materials and energy seriously dragged down the Canadian market. As in the U.S., staples, health care, utilities, tech and telecom outperformed. Outside of resources, the TSX sectors actually outperformed their S&P comparable.

• Still, it pays to note that we are talking about “relative” performance. Every equity sector on both sides of the border was down during these periods.

• The oil price, on average, fell 26%, and gold was off an average of 11%. The CRB index corrected an average of 22%.

• The VIX index surge an average of 34% during these U.S. dollar-rally episodes.

• We saw a bull steepening in the bond market — 2-year T-note yields plunge an average of 36bps while 10-year T-note yields dipped 8bps.

• Baa corporate spreads widened an average of 54bps; and by 268bps for high-yield bonds.

Source: Gluskin Sheff

Strategists at Credit Suisse entered 2010 with a very cautious tone and an outlook similar to our own – 2010 would be a year of halves.  The first half would be a continuation of the trends that helped the market surge in 2009 while headwinds would build near H2 2010 and result in market declines.   The recent downturn in stocks hasn’t changed their outlook and they view the sell-off as a buying opportunity (see JP Morgan’s similar outlook here as well as Raymond James’ outlook here).

The team’s tactical indicators are mildly bullish at current levels and quickly approaching levels that were buys in 2009:

Our tacticals are mildly supportive of equities:
Interestingly, the % of nyse stocks trading above their 10-week MA (currently at 32%) is around similar levels where market bottomed during recent corrections (end of Oct it troughed at 30%, in early July 09 at 37%). Normally a buy signal is when this indicator falls below 20% but perhaps most of the correction has already occurred??

Sentiment data also supports their bullish thesis as the majority of investors remain net bearish:

Like us, Credit Suisse sees continuing strong trends in the earnings picture which makes it very difficult to formulate a thesis for a substantial decline in stocks.  Credit Suisse notes the very strong trend in earnings expectations, the high level of “better than expected” earnings and the uptrend in the upgrade cycle.  Bespoke recently noted the outperformance on Monday’s over the last few months.  This has been largely due to the upgrade cycle.  Yesterday alone, there were 41 upgrades of S&P 500 firms versus 13 downgrades according to Briefing.com.  One of the primary reasons we focus a great deal of our research at TPC on the earnings cycle is due to the high influence analysts have on the market.  According to Credit Suisse, analysts on average, upgrade stocks for 11 months prior to the beginning of a new uptrend in the bull market cycle.  This means we could see a strong continued trend in upgrades until Q2 of 2010 – roughly around the same time where we believe earnings outperformance will begin to dip substantially and earnings estimates will begin to rise dramatically.

All of this leads Credit Suisse to maintain their bullish stance:

Bottom line: we are not changing our fundamental view and stay overweight equities targeting 1,220 on the s&p by mid-2010. We admit that near-term pressures remain: (i) worries about China’s “tightening”- which we think are exaggerated, (ii) Greece (and rest of peripheral Europe)- we have been negative on peripheral Europe for a while, especially Spain (we would u/w domestic Spain); (iii) Obama’s proposal on banks (uncertainty unnerves investors, we are underweight Eur banks). We would buy equity on dips, especially plays on Chinese consumer (e.g. luxury goods).

Source: Credit Suisse

Today saw more of the same from last week’s bullish options trading in the Chinese ETF, FXI.   Bulls were again placing bullish bets on China as investors hope the sell-off has created a solid buying opportunity:

FXI – iShares FTSE/Xinhua China 25 Index Fund – Shares of the FXI exchange-traded fund, which invests in 25 of the largest and most liquid Chinese companies, rallied 2.25% to $39.22 today. The move higher in shares of the underlying stock perhaps motivated the investor responsible for transacting a bullish risk reversal in the May contract. It appears the trader sold 7,500 puts at the March $37 strike for a premium of $1.92 apiece in order to finance the purchase of 7,500 calls at the higher May $42 strike for an average premium of $1.53 each. The optimistic trader pockets a net credit of $0.39 per contract on the reversal, which he keeps if the FXI’s share price remains at or above $37.00 through expiration. Additional profits accumulate in the event that shares of the ETF increase 7% from the current price to surpass the effective breakeven price of $42.00 by expiration in May. We note that shares of the fund traded above $42.76 as recently as January 19, 2010.

Source: IB

Someone thinks the sell-off in China is overdone and they’re putting their money behind that bet.  An institutional trader was seen making a sizable bet on the FXI, the China ETF, on the back of a nearly 15% correction that has taken the fund down in 9 of the last 11 sessions:

FXI – iShares FTSE/Xinhua China 25 Index Fund – Shares of the exchange-traded fund, which invests in twenty-five of the largest and most liquid Chinese companies, are down 0.75% to $38.27 with just under one hour remaining in the trading session. FXI’s share price has declined nearly 15% in the past few weeks, from a 2010 high of $44.53 on January 6, 2010, down to an intraday low today of $37.89. One option trader’s actions in the March contract today suggest he has had enough of the downturn, and is looking for a sharp rebound by expiration in two months. The investor initiated a three-legged combination play using both calls and puts on the fund. It appears the main portion of the trade is a ratio-bullish risk reversal involving the sale of 5,000 deep in-the-money put options at the March $41 strike for a premium of $3.66 each, spread against the purchase of 10,000 calls at the same strike for $0.70 apiece. The purchase of 10,000 puts at the March $35 strike for $0.85 each rounded out the third leg of the transaction. The investor pockets a net credit of $0.56 per contract on the trade, which he keeps if shares rally up to $41.00 by expiration. Additional profits accrue to the upside if shares bounce 7.15% higher to surpass the $41.00-level. The 10,000 put options at the March $35 strike serve as a buffer against losses in case shares of the FXI do not improve in the next couple of months. The investor risks having shares of the underlying put to him at an effective price of $40.44 each should the March $41 strike puts remain in-the-money through expiration, and the March $35 strike puts land out-of-the-money.

Source: IB

An excellent piece in the Financial Times highlighted the growing discrepancy in global bank share valuations.  As the credit crisis unfolded and U.S. banks tumbled Chinese banks have continued to thrive.  At the height of the equity market bubble in 2000 U.S. banks ranked as 5 of top 6 most expensive in terms of price to book value.  As money has poured into emerging markets over the last 10 years Chinese banks have seen unprecedented growth.  Valuations have ballooned as well.  Chinese banks now own 5 of the top 6 positions in terms of valuations.

Despite the tumble in U.S. banks many gurus and large investors have shown increasing interest in the big U.S. banks.  In addition, the U.S. government remains highly accommodative towards helping U.S. banks earn their way out of the credit crisis.  A long U.S. banks/short Chinese banks trade might be worth a contrarian look.