Monday, December 15, 2008

Stocks Lower into Final Hour on Madoff Fraud Concerns, Shorting and Financial Sector Pessimism

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Medical longs, Internet longs and Computer longs. I added (IWM)/(QQQQ) hedges this morning, thus leaving the Portfolio 75% net long. The tone of the market is very bearish as the advance/decline line is substantially lower, almost every sector is falling and volume is light. Investor anxiety is above average. Today’s overall market action is bearish. The VIX is rising 7.55% and is very elevated at 58.32. The ISE Sentiment Index is below average at 111.0 and the total put/call is above average at 1.02. Finally, the NYSE Arms has been running above average most of the day, hitting 1.34 at its intraday peak, and is currently 1.19. The Euro Financial Sector Credit Default Swap Index is rising 4.48% today to 142.81 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 2.24% to 266.84 basis points. The TED spread is falling 2.62% to 186 basis points. The TED spread is now down 280 basis points in just over two months. The 2-year swap spread is down .95% to 103.75 basis points. The Libor-OIS spread is falling 4.79% to 162 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down 4 basis points to .11%, which is down 251 basis points in about 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. The 3-month T-Bill is yielding .01%, which is unch. today. Today’s action is disappointing, but volume is light ahead of a number of market-moving events. Much of today’s weakness is likely related to disclosures over the weekend about the extent of the Madoff fraud. Goldman Sachs(GS) seems late to the party on their downgrade of (AAPL) to Neutral. I still think intermediate/long-term investors selling the stock around current levels are making a big mistake. Nikkei futures indicate an +6 open in Japan and DAX futures indicate a -15 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, bargain-hunting, lower energy prices and diminishing credit market angst.

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