Thursday, January 22, 2009

Stocks Falling into Final Hour on Financial Sector Concerns, Earnings Jitters and More Shorting

BOTTOM LINE: The Portfolio is mixed into the final hour as gains in my Computer longs, Healthcare longs and Education longs offset losses in my Medical longs and Biotech longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is bearish as the advance/decline line is substantially lower, most sectors are falling and volume is about average. Investor anxiety is above average. Today’s overall market action is bearish. The VIX is rising 4.95% and is elevated at 48.83. The ISE Sentiment Index is below average at 112.0 and the total put/call is slightly above average at .91. Finally, the NYSE Arms has been running high most of the day, hitting 10.24 at its intraday peak, and is currently 1.06. The Euro Financial Sector Credit Default Swap Index is rising 1.9% today to 119.0 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 falling 2.93% to 218.26 basis points. The TED spread is rising 5.2% to 107 basis points. The TED spread is now down 359 basis points in just over three months. The 2-year swap spread is rising 1.67% to 68.38 basis points. The Libor-OIS spread is rising 1.58% to 93 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 5 basis points to .63%, which is down 207 basis points in just over 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 .09%, which is down 2 basis points today. “Growth” stocks are substantially outperforming “value” stocks so far this year. This year’s best-performing style is mid-cap growth, which is 4.47% lower ytd. The worst performing style is small-cap value, which is 12.8% lower ytd. I expect this trend to continue through year-end. I am finally seeing signs that investors are beginning to reward companies that can execute relatively well, notwithstanding decelerating earnings growth, in a poor economic environment. This is a meaningful change from recent action. (GOOG) reports after the close today. While its growth is slowing, I suspect the company can deliver relatively strong results throughout this downturn and will eventually be rewarded a much healthier premium, as a result. GOOG's short interest ratio is currently at a record high of 1.78. I will look to add to my long position on any meaningful pullback in the shares from current levels. Nikkei futures indicate a -150 open in Japan and DAX futures indicate an +20 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, bargain-hunting and declining financial sector worries.

No comments: