Thursday, January 29, 2009

Stocks Falling into Final Hour on Rising Long-Term Rates, Financial Sector Pessimism

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Retail longs and Financial longs. I added to my (IWM)/(QQQQ) hedges this morning and then covered them this afternoon, thus leaving the Portfolio 75% net long. The tone of the market is very negative as the advance/decline line is substantially lower, almost every sector is falling and volume is below average. Investor anxiety is above average. Today’s overall market action is bearish. The VIX is falling rising 7.03% and is very high at 42.45. The ISE Sentiment Index is below average at 122.0 and the total put/call is slightly above average at .94. Finally, the NYSE Arms has been running very high most of the day, hitting 3.88 at its intraday peak, and is currently 1.45. The Euro Financial Sector Credit Default Swap Index is rising 5.39% today to 114.67 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 1.32% to 195.42 basis points. The TED spread is falling 5.21% to 95 basis points. The TED spread is now down 371 basis points in over three months. The 2-year swap spread is rising 8.22% to 59.25 basis points. The Libor-OIS spread is falling 1.25% to 94 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 13 basis points to 1.02%, which is down 168 basis points in over six months. 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 .23%, which is up 5 basis points today. Market-leading stocks are holding up relatively well. “Growth” stocks are again outperforming “value” shares. The AAII % Bulls fell to 25.27%, while the % Bears rose to 47.25% this week. I suspect the rise in gold and the 10-year yield is starting to bother the broad US stock market. Gold is likely rising on European buying as their economies and currency continue to weaken. The 10-year is supposedly falling on supply concerns. Economists expect US 4Q GDP, which is released tomorrow, to fall 5.5%. I suspect the decline in growth won’t be as bad as feared, which could also be pressuring bonds today. I expect the Fed’s quantitative easing initiative to kick into full gear on any meaningful rise in long-term rates from current levels. Volume has been light, with a high NYSE Arms reading, on today’s sell-off, which is a positive. Nikkei futures indicate a -175 open in Japan and DAX futures indicate a -22 open in Germany tomorrow. I expect US stocks to trade modestly lower into the close from current levels on more shorting, financial sector pessimism and rising long-term rates.

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