Tuesday, August 12, 2008

Stocks Lower into Final Hour on Financial Sector Pessimism, Global Growth Worries and Profit-Taking

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Computer longs, Biotech longs, Medical longs and Emerging Market shorts. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are declining and volume is about average. Investor anxiety is above average. Today’s overall market action is mildly bearish. The VIX is rising 5.3% and is still above-average at 21.2. The ISE Sentiment Index is low at 105.0 and the total put/call is above average at 1.05. Finally, the NYSE Arms has been running around average most of the day and is currently .95. The Euro Financial Sector Credit Default Swap Index is falling -1.44% today to 78.69 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 rising .48% today to 129.68 basis points. The TED spread is falling another -4.12% to .95. The 10-year TIPS spread, a good gauge of inflation expectations, is falling another 2 basis points to 2.14%, which is the lowest since October 8, 2003 and down 49 basis points in less than six weeks. Gold is falling another $7/oz. today, despite slight dollar weakness, and is down $213/oz. from its $1,033.90 high on March 17. The CRB RIND Index is falling convincingly below its 200-day moving-average for the first time since its bull move began in 2000. Many CNBC pundits are now calling for a bottom in oil. I think the commodity trades very poorly given recent potential positive catalysts. I’ll be very surprised if oil doesn’t test the psychologically important $100/bbl. level and somewhat surprised if it doesn’t finish the year below that level. Given the 5.4% decline in the (XLF), the Nasdaq is holding up very well. As well, airline, biotech, disk drive, computer hardware, software, paper, oil service, energy and defense stocks are all higher on the day. Growth stocks are again substantially outperforming value stocks. I still think the XLF has seen its low, but financials will not likely display sustained market leadership for quite some time. Nikkei futures indicate a -63 open in Japan and DAX futures indicate an +10 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on financial sector pessimism, global growth concerns and profit-taking.

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