Thursday, October 02, 2008

Stocks Sharply Lower into Final Hour on Global Growth Worries and Forced Selling

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Gaming longs, Computer longs, Medical longs and Software longs. I added to my (IWM)/(QQQQ) hedges and to my (EEM) short this morning, thus leaving the Portfolio 50% net long. The tone of the market is very negative as the advance/decline line is substantially lower, every sector is falling and volume is about average. Investor anxiety is very elevated. Today’s overall market action is very bearish. The VIX is rising 15.3% and is very elevated at 45.85. The ISE Sentiment Index is very low at 82.0 and the total put/call is high at 1.30. Finally, the NYSE Arms has been running high most of the day and is currently 1.47. The Euro Financial Sector Credit Default Swap Index is rising 6.7% today to 123.33 basis points. This index is up from a low of 52.66 on May 5th, but down from 157.81 on Sept. 16th. The North American Investment Grade Credit Default Swap Index is rising 1.5% to 173.01 basis points. The TED spread is rising 7.8% to 3.61 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down another 7 basis points to 1.49%, which is down 113 basis points in less than three months and at the lowest level since October 2002, when deflation was the concern. The Goldman Sachs Hedge Fund VIP Index(favorite longs of the hedge fund community) is falling another 6.4% today. I continue to believe the rescue package will help the economy meaningfully over the intermediate/long-term, but will unlikely unclog the credit markets in the short-run, which is the most pressing problem. This is a global issue and it needs a more significant coordinated global response. I wouldn’t be surprised to see this as early as next week. I plan to cover some of my hedges into the close. Nikkei futures indicate a -190 open in Japan and DAX futures indicate an +40 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on forced selling, more shorting, financial sector pessimism and global growth worries.

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