Monday, July 28, 2008

Stocks Lower into Final Hour on Financial Sector Concerns, Rise in Oil, Profit-Taking, More Shorting

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Computer longs, Biotech longs and Internet 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 substantially lower, most sectors are negative and volume is below average. Investor anxiety is slightly above average. Today’s overall market action is bearish. The VIX is rising 5.11% and is still above-average at 24.08. The ISE Sentiment Index is low at 115.0 and the total put/call is above average at 1.05. Finally, the NYSE Arms has been running above average most of the day and is currently 1.22. The Euro Financial Sector Credit Default Swap Index is falling 1.12% today to 78.76 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 +.23% today to 135.40 basis points. The TED spread is rising 3.16% to 1.11. Given recent reports, I suspect much of today’s action is a result of the many hedge funds that are having a very hard time this month, cutting risk across the board. One of my long-held longs, (ISRG), is down 3.8% today after a “negative” article in Barron’s over the weekend. I strongly disagree with the main premise of the article that the future growth of the company is being overestimated. In my opinion, new procedure and overseas long-term growth opportunities are still meaningfully underestimated. I plan to add to this long position on any significant decline in the share price from current levels. Nikkei futures indicate a -90 open in Japan and DAX futures indicate an +5 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering and bargain-hunting.

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