Friday, January 30, 2009

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

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 and to my (EEM) short today, thus leaving the Portfolio 50% net long. The tone of the market is negative as the advance/decline line is 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 rising 6.4% and is very high at 45.38. The ISE Sentiment Index is low at 91.0 and the total put/call is above average at 1.01. Finally, the NYSE Arms has been running very high most of the day, hitting 6.58 at its intraday peak, and is currently 2.62. The Euro Financial Sector Credit Default Swap Index is rising 2.98% today to 117.0 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 rising .87% to 197.12 basis points. The TED spread is rising .66% to 96 basis points. The TED spread is now down 370 basis points in over three months. The 2-year swap spread is rising 6.01% to 61.75 basis points. The Libor-OIS spread is falling 2.56% to 92 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 9 basis points to 1.11%, which is down 159 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 unch. today. Stocks are falling today on increasingly hostile rhetoric from the new administration towards the business community and disappointment over news that the government is temporarily abandoning the “bad bank” idea to buy troubled assets. Given stock losses this month, it is also a negative that stocks were unable to bounce on today’s better-than-feared GDP report or month-end short-covering. On the positive side, market-leading stocks are holding up relatively well again. There is also an unusual number of stocks rising on volume today given the losses in the major averages. Stockpicking skills are becoming increasingly important. Last year, the vast majority of stocks fell despite their fundamentals or valuation. This year, select stocks that can grow relatively well in this environment should continue to outperform the S&P 500 significantly. Nikkei futures indicate a -110 open in Japan and DAX futures indicate a -15 open in Germany tomorrow. I expect US stocks to trade modestly lower into the close from current levels on more shorting and financial sector pessimism.

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