Wednesday, January 14, 2009

Stocks Sharply Lower into Final Hour on Financial Sector and Economic Pessimism

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Financial longs, Internet longs and Medical longs. I added (IWM)/(QQQQ) hedges and added to my (EEM) short today, thus leaving the Portfolio 75% net long. The tone of the market is very bearish as the advance/decline line is substantially lower, every sector is declining and volume is below average. Investor anxiety is very high. Today’s overall market action is very bearish. The VIX is rising 14.24% and is elevated at 49.46. The ISE Sentiment Index is below average at 114.0 and the total put/call is high at .91. Finally, the NYSE Arms has been running at an exceptionally high level most of the day, hitting 7.74 at its intraday peak, and is currently 2.72. The Euro Financial Sector Credit Default Swap Index is rising 2.98% today to 109.33 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 4.7% to 228.16 basis points. The TED spread is dropping another 1.2% to 98 basis points. The TED spread is now down 368 basis points in just over three months. The 2-year swap spread is rising 4.33% to 54.25 basis points. The Libor-OIS spread is falling 2.20% to 91 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down 15 basis points to .48%, which is down 227 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 .10%, which is down 1 basis point today. Recent expected bad news is still impacting stock prices negatively on low volume with high investor angst. The US dollar is holding its recent trading range against the yen, which is a positive. The ECB should announce a 75+ basis point cut tomorrow. As well, tomorrow’s (JPM) earnings report should also remove some uncertainty, which could help lift stocks. Nikkei futures indicate a -313 open in Japan and DAX futures indicate an +5 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on more economic and financial sector pessimism.

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