Tuesday, October 28, 2008

Stocks Soaring into Close on Less Financial Sector Pessimism, Short-Covering and Bargain-Hunting

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Medical longs, Computer longs, Biotech longs, Retail longs and Internet longs. I covered all of my (IWM)/(QQQQ) hedges today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, almost every sector is rising and volume is above average. Investor anxiety is very high. Today’s overall market action is bullish. The VIX is falling 11.9% and is historically elevated at 70.58. The ISE Sentiment Index is very low at 96.0 and the total put/call is above average at 1.11. Finally, the NYSE Arms has been running low most of the day, hitting .26 at its intraday trough, and is currently .40. The Euro Financial Sector Credit Default Swap Index is falling 2.9% today to 110.0 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 gaining 1.7% to 223.80 basis points. The TED spread is falling 1.6% to 271 basis points. The TED spread is now down 193 basis points in under three weeks. The 2-year swap spread is up 2.05% to 122.2 basis points. The Libor-OIS spread is falling .23% to 262 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 6 basis points to .80%, which is down 183 basis points in about four months and at the lowest level since January 1999. The US dollar is rising the most against the yen since January 1974. I suspect the dollar will see a pullback against the euro, as it is very extended. This could give a boost to commodities in the short-run. It is extremely positive to see stocks finally ignore more negative news as consumer confidence hit the lowest reading on record. Historically, major lows for US stocks are made around the time of major lows in confidence. Given the rumor’s surrounding (MS)/(GS) the (XLF)’s 9.1% move higher is even more impressive. As well, given the massive profits for short-sellers this month, I would expect to see some more meaningful short-covering and another significant move higher for US stocks before week’s end. Nikkei futures indicate an +500 open in Japan and DAX futures indicate an +7 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, less financial sector pessimism, diminishing forced selling and bargain-hunting.

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