Friday, July 18, 2008

Stocks Mostly Lower into Final Hour on Earnings Jitters, Profit-Taking

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Internet longs, Biotech 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 mildly negative as the advance/decline line is slightly lower, sector performance is mixed and volume is heavy. Investor anxiety is slightly above-average. Today’s overall market action is neutral given recent gains. The VIX is falling 2.88% and is still above-average at 24.29. The ISE Sentiment Index is low at 112.0 and the total put/call is around average at .92. Finally, the NYSE Arms has been running about average most of the day and is currently 1.02. The Euro Financial Sector Credit Default Swap Index is falling 3.01% today to 84.61 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 -1.92% today to 137.26 basis points. The TED spread is falling 1.14% to 1.37. I am surprised that the financials aren’t giving back any of their recent gains and that oil is unable to even bounce from recent losses. The broad market is stronger today than the major averages suggest. The defense, alternative energy, networking, medical equipment, utility, energy, oil service, computer service, telecom, drug, hospital, hmo, restaurant, gaming and airline sectors are all flat-to-higher on the day. The 10-year yield is rising 8 basis points, which is a function of the recent decline in oil as it takes pressure off the economy, not rising inflation expectations. The 10-year TIPS spread, a good gauge of inflation expectations, has dropped 20 basis points in 9 days to 2.44%. I suspect we could see some further near-term weakness as stocks continue to consolidate recent gains before another surge higher later next week. I view the 9.8% drop in Google(GOOG) shares as way overdone. They only “missed” due to poor forecasting of interest income and their conservative comments are only prudent given the current macro backdrop. I plan to add to this long position on any further meaningful weakness from current levels as I anticipate a strong finish to the year for the stock. Nikkei futures indicate a +332 open in Japan and DAX futures indicate an +38 open in Germany on Monday. I expect US stocks to trade mixed into the close from current levels as short-covering, falling energy prices, diminishing credit market angst and less financial sector pessimism offsets profit-taking and earnings jitters.

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