TheChek News Flow

It's Not the VIX That's Vexing the Market Sentiment gauges suggest investor overoptimism, which could augur a stock correction.

Part of the job of a technical analyst is to assess the psychology of the market. Charts help us see what investors are doing. To get a handle on what investors are thinking—which can suggest what they might do in the future—we turn to sentiment analysis.

Right now, several measures of investor sentiment are at very optimistic levels. Indeed, some are "too optimistic," which suggests everyone who is going to buy stocks has already done so. Without fresh demand, just a paucity of new buying can be enough to start a correction.

In recent days, the CBOE VIX, which stands for "volatility index" and measures the volatility of options on the Standard & Poor's, made headlines with its plunge to levels not seen since 2007. Considering its nickname, "the fear index," we can surmise that investors were not worried about the stock market at all.

At such lows, however, the lack of fear actually becomes a contrarian indicator to sell stocks. If everyone is this fearless, then any shock from within the market or without can cause a stampede to the exits for a quick decline. Remember, "everyone" owns stocks and would be trying to sell at the same time into a market that lacks demand to buy them.

The problem is that the VIX is not very good at calling market tops. At market bottoms, whether major bear market lows or large correction lows, it does indeed do a good job.

But how many times have we seen the VIX move to new lows as the market keeps rising? Just recently, when the VIX closed below the widely watched 12-level on May 21, the Dow Jones Industrial Average was just starting the rally that is still officially in force even with Wednesday's decline (see Chart).

Fortunately, there are many ways to slice and dice the market's mood. One of the more popular is the Investors Intelligence survey of financial advisors jumped to levels usually preceding important selloffs. At roughly 62%, the recent survey reading is on the level with that seen in October 2007, just before the last bear market began.

That does not mean a major correction is imminent, but it does suggest the market is priced for perfection. Any bad news, such as Wednesday's report from World Bank cutting its global growth projection, can send prices tumbling.

Another interesting indicator is CNNMoney's Fear & Greed Index. Calculated from several data sets including price trend, options activity, market breadth, junk-bond demand and volatility, it read 89 out of 100 before trading Wednesday, down two points from Tuesday's 91. Last week, it was at 70, and one month ago it was at 53. That is quite an increase and tells us that people have jumped into this rally with both feet, both hands and a tail.

Other sentiment indicators are not quite so frothy. The Daily Sentiment Index (DSI), a survey of futures traders maintained by veteran trader Jake Bernstein, proprietor of JakeBernstein.com, reads 75 out of 100 for the E-mini S&P 500 futures. That's relatively high but not quite in the danger zone. And over the past year, it does seem that the DSI, as with the VIX, is better at calling bottoms than tops.

And for a different take, Todd Salamone, senior vice president of research at Schaeffer's Investment Research, disagrees that sentiment is frothy. He said that equity put buying relative to call buying is coming off of multimonth highs, as traders unwind bets against the market during the recent multiweek dtrading range in the big stock indexes. High levels of put buying relative to call buying suggest fear, not froth. Z I won't debate whether indicators measuring investor sentiment are different from those measuring professional sentiment. But from what I see in many sentiment gauges, the weight of the evidence leans toward the market being too sanguine for its own good right now.

Jason Goepfert, who runs the SentimenTrader.com Website, offered a third view, saying that the low levels of volatility expectations across asset classes have forced traders to make bolder bets.

It is the same concept. Traders and investors are taking risks without worrying about the consequences. That should be a warning for everyone.

Inditex: Fashion FX What happens when a market darling in retailing, priced for its perfect future, disappoints? The stock gets crushed. Just ask Asos, whose profit warning last Thursday resulted in a 30 per cent share price drop. Inditex, Spain’s largest listed retailer and parent of fast fashion brand Zara, is also beloved. The list of holders reads like a who’s who of blue-chip investors. The shares rallied on Wednesday, after the company announced a drop in first-quarter net profit of 7 per cent. The results were better than feared. But this seems like a limp cause for cheer in a stock trading at an expensive 27 times forecast earnings. Fans of Inditex point to its consistent historical double-digit growth: 11 per cent in revenues and 14 per cent in net income (after minorities) on average a year between 2007 and 2013. But these numbers bury the fact that 2013 net income was flat even as sales rose. The company cites two factors for the drag: currencies and the high base effect of a stellar year in 2012. Inditex should be lauded for a good performance then, and currency impacts are also volatile, hard to forecast and tend to reverse. Investors may choose to forgive: Inditex has a centralised distribution model with a high proportion of costs in euros. This, after all, gives the company its fast fashion edge. But the currency issue may not be so easily dismissed. International expansion is part of the growth story – plenty of room to grow in markets where Inditex has an estimated 1 per cent market share – and exposure to emerging economies increases the appeal. But the forex complexities that attend such markets may make steady growth increasingly hard to deliver. Investors dislike uncertainty and tend not to pay highly for it. The stock may not derate like Asos. But even if profit growth returns, the ride may be about to get bumpier.

Iraq Signals Openness to U.S. Airstrikes Against al Qaeda, U.S. Officials Say

WASHINGTON—Iraq has privately signaled to the Obama administration that it would allow the U.S. to conduct airstrikes with drones or manned aircraft against al Qaeda militant targets on Iraqi territory, senior U.S. officials said Wednesday.

The Obama administration is considering a number of options, including the possibility of providing "kinetic support" for the Iraqi military fighting al Qaeda rebels who seized two major cities north of Baghdad this week, according to a senior U.S. official who added that no decisions have been made.

Officials declined to say whether the U.S. would consider conducting airstrikes with drones or manned aircraft.

Iraq has long asked the U.S. to provide it with drones that could be used in such strikes, but Washington has balked at supplying them, officials said.

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Europe Bankers Cringe at Escalating U.S. Fines Amid BNP Skirmish 2014-06-12 04:31:46.140 GMT

By Elisa Martinuzzi and Ambereen Choudhury June 12 (Bloomberg) -- HSBC Chairman Douglas Flint had some advice for bank executives meeting in London last week: Read up on how the U.S. uses financial warfare against its enemies in a foreign-policy shift that’s entangling lenders. * Since HSBC agreed to pay $1.9b to settle money-laundering probes in the U.S. 18 months ago, the largest such accord at the time, the Department of Justice has magnified its demands; it wants a guilty plea and a $10b fine from France’s BNP Paribas for doing business in sanctioned nations such as Sudan and Iran, people with knowledge of the matter say * The amount sought from BNP is adding to U.S. operational risks and the unpredictability of fines, European banking executives interviewed by Bloomberg News said; Sharon Bowles, a European Union lawmaker who chairs the bloc’s economic and monetary affairs committee, said she’s worried the collateral damage will be the banking system’s stability * “I’m concerned about the system risk to banks,” Bowles said in an interview; “There is now a different regime in the U.S., and they pay much more punitive fines than is the norm in Europe. We have spent a lot of taxpayers’ money to stabilize the banking system, which could now be destabilized” * Link to full story

For Related News and Information: BNP Drops as U.S. Said to Seek $10 Billion in Settlement NSN N6EC0D6JTSF5 <GO> France’s Noyer Says BNP Case May Prompt Shift Away From Dollar NSN N70SJV6JIJUT <GO>

--With assistance from Hugh Son, Dakin Campbell and Yalman Onaran in New York, Fabio Benedetti-Valentini in Paris, Tom Schoenberg in Washington and David Scheer in Seattle.

To contact the reporters on this story: Elisa Martinuzzi in Milan at +39-02-8064-4218 or emartinuzzi@bloomberg.net; Ambereen Choudhury in London at +44-20-3525-3862 or achoudhury@bloomberg.net To contact the editors responsible for this story: Edward Evans at +44-20-3525-3190 or eevans3@bloomberg.net Keith Campbell, Robert Friedman

After Hours Summary: RH +14.5%, DDC +0.1%, SIGM -0.5% following earnings/guidance

After Hours Gainers: Companies trading higher in after hours in reaction to earnings: RH +14.5%, DDC +0.1%

Companies trading higher in after hours in reaction to news: ZLCS +56.5% (Epirus Biopharmaceuticals announced positive data from a Phase 3 trial of BOW015 in patients with active rheumatoid arthritis; ZLCS entered into an agreement and plan of merger with Epirus on April 15), MSLI +10.4% (announced announces $22.1 mln bought deal financing; Underwriters to purchase 13 mln common shares), KEYW +9.2% (U.S. Government Agency has selected HawkEye G for advanced threat detection; HawkEye G is developed by KEYW holding Hexis Cyber Solutions), TIBX +4.6% (Praesidium issued letter to TIBCO's Board of Directors; reports ownership of approx. 5.5 mln shares), BCR +2.2% (announced $500 mln share repurchase authorization), BTU +1.2% (Senator Investment Group discloses 5.5% passive stake in 13G filing)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings: SIGM -0.5%

Companies trading lower in after hours in reaction to news: NEWL -10.5% (Ironridge Global IV confirmed it prevailed on the Temporary Restraining Order and Petition for Preliminary Injunctive Relief Pending Arbitration brought by NewLead Holdings), VTSS -9.2% (announced that it is offering to sell shares of its common stock in an underwritten public offering), APU -4.0% (announced that Heritage ETC, affiliate of Energy Transfer Partners, commenced a public underwritten offering,of 8.5 mln AmeriGas common units that it currently holds), ARIA -3.9% (announced proposed $175 mln offering of convertible senior notes due 2019), PBF -3.1% (announced secondary public offering of 18 mln shares of Class A common stock by funds affiliated with The Blackstone Group and First Reserve Management), COMM -2.0% (commenced an offering to sell 15,000,000 shares of its common stock by an affiliate of The Carlyle Group), RRC -1.6% (announced 4.56 mln share common stock offering), CLNY -1.5% (announced preferred stock offering)

Asian Market Update: NZD hits 3-week highs on hawkish statement accompanying RBNZ rate hike; Australia employment falls but only on part-time job loss

***Economic Data*** - (NZ) NEW ZEALAND CENTRAL BANK (RBNZ) RAISES OFFICIAL CASH RATE BY 25BPS TO 3.25%, AS EXPECTED - (AU) AUSTRALIA MAY EMPLOYMENT CHANGE: -4.8K V +10.0KE (1s decline in 4 months); UNEMPLOYMENT RATE: 5.8% V 5.8%E - (AU) AUSTRALIA APR CREDIT CARD BALANCES (A$): 49.8B V 49.8B PRIOR; CREDIT CARD PURCHASES: 21.3B V 23.0B PRIOR - (KR) BANK OF KOREA (BOK) LEAVES 7-DAY REPO RATE UNCHANGED AT 2.50% (AS EXPECTED); 13th straight pause - (JP) JAPAN MAY TOKYO AVERAGE OFFICE VACANCIES: 6.5% V 6.6% PRIOR - (JP) JAPAN APR MACHINE ORDERS M/M: -9.1% (biggest decline in 4 months) V -10.8%E; Y/Y: 17.6% V 13.3%E - (KR) SOUTH KOREA MAY EXPORT PRICE INDEX M/M: -1.6% V -2.7% PRIOR; Y/Y: -8.1% V -7.4% PRIOR; IMPORT PRICE INDEX M/M: -1.7% V -2.5% PRIOR; Y/Y: -6.8% V -6.9% PRIOR - (UK) UK MAY RICS HOUSE PRICE BALANCE: 57% V 52%E

Market Snapshot (as of 03:30 GMT): - Nikkei225 -0.8%, S&P/ASX -0.3%, Kospi -0.2%, Shanghai Composite -0.2%, Hang Seng -0.3%, Jun S&P500 +0.1% at 1,945, Aug gold flat at $1,261, Jul crude oil +0.2% at $104.60/brl

***Highlights/Observations/Insights*** - NZD rose as much as 90pips against the dollar to 0.8650 (3-week high) and 120pips in the AUD/NZD cross following a much more hawkish than expected RBNZ statement accompanying its widely anticipated rate hike. After tightening rates by 25bps, RBNZ projected June-end GDP at 4%, reiterated that prices for New Zealands export commodities remain historically high, and also noted the high level of NZ$ not sustainable at current levels. The rally behind the kiwi was mainly due to the RBNZ projections coming as part of its quarterly policy statement, as it affirmed Dec-end 90-day bill rate at 4%, potentially signally another 2 rate hikes this year. 2016-end is still seen at 5.2%, which does little to sway or slow its previously forecasted tightening cycle of 200bps. Traders anticipated today's statement to be much more dovish and possibly signal a pause due to slowing dairy prices and persistent strength in the NZD. Instead, even some of the more skeptical analysts have now renewed expectations for another 25bp move next month.

- Australia net employment fell for the first time in 4 months and widely missed expected increase of 10K jobs, however the move lower in AUD was as brief as it was negligible. Despite the headline miss, most of the losses were in the part-time sector, which shed 27K jobs, while full-time actually gained 22K. This was also evident in the total hours worked component, as it saw its biggest rise of 26.5M in 13 months and largely made up for participation rate falling to a 8-year low of 64.6%. AUD/USD matched its 1-month highs just above $0.9410 after the RBNZ rate decision, and only sold off some 10pips on the jobs report to session-low $0.9365.

- Bank of Korea left rates on hold as widely expected in another unanimous decision. BOK said global economy is expected to sustain modest recovery while domestic growth has been impacted by the falling consumer confidence due to the ferry accident. BOK also reiterated economy will maintain negative output gap for time being and pointed to slowing growth in EM and the US taper as key external risks.

- Ahead of tomorrow's BOJ decision, local press speculated the central bank would raise its outlook on foreign economies (mainly due to strength in US jobs) while once again maintaining economic assessment for Japan. Also of note tomorrow, Japan govt will unveil draft economic policy guidelines speculated to contain a formal commitment to lower corporate tax rates of as low as in the 20pct. USD/JPY retested above the ¥102 handle, up about 15pips on the day.

***Speakers/Political/In the Papers*** - (CN) China state researcher Fan: China may continue to conduct targeted RRR cuts; PBoC should cut interbank rate to 2% - Chinese press - (CN) Goldman Sachs China economist Song Yu: China economy likely to regain growth momentum during H2 2014 - Chinese press - (CN) China Premier Li Keqiang: China has achieved 60% of 2014 employment target during Jan-May - financial press - (CN) China SAFE (fx regulator): fast accumulation of fx reserves increases difficulties to set macro economic policies - financial press - (JP) BOJ could raise its outlook on foreign economies in policy statement this week; Expected to leave domestic economic assessment unchanged as "continued to recover moderately" - Nikkei News - (JP) BOJ to consider maintaining large balance sheet after meeting its inflation target - financial press - (JP) Japan govt and ruling party officials said to have decided to cut corporate tax rate to 20% over the next several years (current rate above 35%) - Nikkei - (KR) South Korea reportedly may replace Fin Min Hyun soon - Korean press

***Fixed Income/Commodities/Currencies*** - JGB: (JP) Japan MoF sells ¥242.6B in 0.2% (0.2% prior) 5-yr Notes; Avg yield: 0.183% v 0.185% prior; Bid to cover: 4.47x v 4.62x prior - (CN) PBoC to drain CNY40B in 28-day repos (33rd consecutive drain); Injects net CNY104B this week v injected CNY73B prior (5th consecutive week of net injection) - SLV: iShares Silver Trust ETF daily holdings fall to 10,321 tonnes from 10,354 tonnes prior (lowest since Jun 2nd)

***Equities*** US markets: - RH: Reports Q1 $0.18 v $0.10e, R$366M v $346Me; +13.8% afterhours - SMG: Reaffirms FY14 $3.05-3.20 v $3.20e; cuts FY14 sales guidance to flat y/y (implies FY14 Rev approx $2.82B v $2.85Be) [prior guidance was Rev +2-3% y/y]

Notable movers by sector: - Financials: WesFarmers WES.AU -0.6% (to sell insurance broking and premium funding unit) - Materials: Metallurgical Corp of China 1618.HK -2.6% (May sales results) - Energy: Xinyi Solar 968.HK +6.6% (H1 guidance) - Industrials: Chongqing Gangjiu 600279.CN +2.6%, Nanjing Port 002040.CN +4.7%, Shanghai International Port 600018.CN +1.5% (China State Council calls for development of Yangtze economic zone); Takata Corp 7312.JP -2.7%, Toyota Motor 7203.JP -0.6% (vehicle recalls); Xinyi Glass 868.HK -4.5% (H1 guidance); Hitachi 6501.JP -0.8% (FY15/16 sector sales target); Mitsubishi Heavy 7011.JP +1.7% (no decision for Alstom unit); Downer EDI DOW.AU -2.9% (analyst action); Leighton Holdings LEI.AU +0.9% (outlines strategic blueprint) - Healthcare: Ramsay Health Care RHC.AU +3.2% (analyst action)