Friday, January 09, 2009

Stocks Falling into Final Hour on More Economic Pessimism, Shorting

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Healthcare longs, Medical longs and Internet longs. I added back (IWM)/(QQQQ) hedges and added to my (EEM) short today, thus leaving the Portfolio 75% net long. The tone of the market is bearish as the advance/decline line is substantially lower, most sectors are declining and volume is below average. Investor anxiety is high. Today’s overall market action is bearish. The VIX is falling .75% and is elevated at 42.25. The ISE Sentiment Index is below average at 133.0 and the total put/call is above average at .96. Finally, the NYSE Arms has been running very high most of the day, hitting 2.14 at its intraday peak, and is currently 1.62. The Euro Financial Sector Credit Default Swap Index is falling 1.51% today to 96.17 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 falling 1.65% to 200.25 basis points. The TED spread is down 6.52% to 120 basis points. The TED spread is now down 346 basis points in about three months. The 2-year swap spread is falling .93% to 54.25 basis points. The Libor-OIS spread is falling 8.01% to 1.08 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 4 basis points to .58%, which is down 217 basis points in about six 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 .06%, which is down 2 basis points today. Volume is light again on today’s sell-off with a high NYSE Arms reading. However, the stock and bond market’s reactions to today’s news are negatives. I am also seeing a number of conflicting moves is various securities. While another stock rally could materialize at any time, I am going to leave my hedges on until I gain more clarity on these moves next week. Nikkei futures indicate an +14 open in Japan and DAX futures indicate an +24 open in Germany on Monday. I expect US stocks to trade mixed-to-lower into the close from current levels on more shorting and economic pessimism.

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