Monday, August 18, 2008

Stocks Lower into Final Hour on Global Growth Concerns, Financial Sector Pessimism, More Shorting

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Internet longs, Gaming longs, Alternative Energy longs and Medical 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, almost every sector is falling and volume is light. Investor anxiety is high. Today’s overall market action is bearish. The VIX is surging 8.6% and is still above-average at 21.26. The ISE Sentiment Index is very low at 84.0 and the total put/call is above average at 1.03. Finally, the NYSE Arms has been running very high most of the day and is currently 1.60. The Euro Financial Sector Credit Default Swap Index is rising 1.2% today to 80.09 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 unch. today at 134.60 basis points. The TED spread is rising 5.38% to 1.03. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 6 basis point to 2.16%, which is the lowest since October 14, 2003 and down 47 basis points in six weeks. The fact that the (XLF) is falling so much despite energy price weakness is a negative. However, market volume is light and angst is high, which is usually an indication that the bears are unable to gain traction. Recent market action still appears to me to be related to a large fund or funds cutting risk across the board. The US Dollar index is falling .14%. However, as I said last week, the index was technically extended into a zone of resistance and the safe-haven buying due to the Russian/Georgia war is likely subsiding. I expect the dollar to consolidate recent gains in the short-run before staging another surge higher over the coming weeks. If CNBC is any indication, it seems as though the vast majority of pundits believe the recent historical decline in commodities is just a pullback in a bull market that will last many more years. I still think commodity bulls are underestimating the velocity of the current global slowdown in demand, future supply increases and the staying power of the current US dollar rally. Oil still trades very poorly given recent potential upside catalysts. Nikkei futures indicate a -230 open in Japan and DAX futures indicate a -34 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, lower energy prices and bargain-hunting.

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