Tuesday, November 18, 2008

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

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Internet longs and Medical longs. I covered some of my (IWM)/(QQQQ) hedges today, thus leaving the Portfolio 75% net long. The tone of the market is bearish as the advance/decline line is lower, almost every sector is declining and volume is about average. Investor anxiety is above average. Today’s overall market action is bearish. The VIX is rising 5.5% and is historically elevated at 72.84. The ISE Sentiment Index is very low at 88.0 and the total put/call is above average at 1.0. Finally, the NYSE Arms has been running above average most of the day, hitting 1.65 at its intraday peak, and is currently .1.20. The Euro Financial Sector Credit Default Swap Index is up 3.38% today to 115.50 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 up 4.41% to 217.94 basis points. The TED spread is falling 1.93% to 210 basis points. The TED spread is now down 254 basis points in about five weeks. The 2-year swap spread is rising 1.62% to 109.50 basis points. The Libor-OIS spread is rising .67% to 176 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is plunging 21 basis points to .55%, which is down 207 basis points in under five months and at the lowest level since Bloomberg record-keeping began in August 1998. The 10-year TIPS spread bottomed at .65% in October 1998 during the Asian financial crisis and at 1.24% in October 2001 during the technology bubble-bursting meltdown. Today’s action is worse than the major averages would suggest. Breadth is poor and many market leaders are down 4-5%. A number of sectors are down 4%+, as well. The (XLF) continues to trade heavy. On the positive side, volume is only average, some widely followed tech stocks(IBM, HPQ, AAPL, RIMM) trade well and the bears are unable to gain meaningful traction despite several potential downside catalysts. Nikkei futures indicate a -75 open in Japan and DAX futures indicate a -35 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering and bargain-hunting.

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