Thursday, July 24, 2008

Stocks Falling into Final Hour on Financial Sector Pessimsim, Global Growth Worries, Profit-Taking

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Alternative Energy longs, Gaming longs, Software longs and Computer longs. I added (IWM)/(QQQQ) hedges and added to my (EEM) short today, thus leaving the Portfolio 75% net long. The tone of the market is negative as the advance/decline line is lower, sector performance is mostly negative and volume is above-average. Investor anxiety is slightly above average. Today’s overall market action is bearish. The VIX is rising 7.6% and is still above-average at 22.93. The ISE Sentiment Index is low at 92.0 and the total put/call is above average at 1.03. Finally, the NYSE Arms has been running above average most of the day and is currently 1.26. The Euro Financial Sector Credit Default Swap Index is rising .26% today to 78.50 basis points. This index is up from a low of 52.66 on May 5th, but down from 129.46 basis points on March 20th. The North American Investment Grade Credit Default Swap Index is +.48% today to 133.57 basis points. The TED spread is falling another 7.73% to 1.16. The 10-year TIPS spread, a good gauge of inflation expectations, has dropped 32 basis points in 13 days to 2.32% on the fall in commodities. This remains a large positive. Former Treasury Secretary Lawrence Summers was on CNBC today. He said that the “worldwide commodity price environment is troubling.” However, he is proposing a massive US infrastructure spending plan to stimulate the economy. I agree that infrastructure spending should be increased, but not “massively.” A massive infrastructure spending increase would boost commodities further, send interest rates/inflation higher, pressure the US dollar, result in another down-leg in housing and increase job losses, in my opinion. I believe the number one threat to the global economy now is the bubble in commodities and that we should be looking for ways to burst that bubble, not inflate it further. Today’s market action is somewhat puzzling. Stocks like BIDU, QCOM, AMZN, CELG and STRA are sporting massive gains even as the Naz falls 1.6%. Breadth isn’t too bad considering the losses in the headline averages. The biotech, drug, medical equipment, wireless, computer service and energy sectors are all holding up well. Investors are worried that the global economy is slowing too much. We need to see stabilizing economic data overseas or another large decline in commodities to get the major averages moving higher again. Nikkei futures indicate a -160 open in Japan and DAX futures indicate an +12 open in Germany tomorrow. I expect US stocks to trade modestly lower into the close from current levels on profit-taking, more shorting, global growth worries and financial sector pessimism.

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