Tuesday, January 20, 2009

Stocks Sharply Lower into Final Hour on More Short-Selling, Rising Financial Sector Pessimism, Increasing Global Economic Concerns

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Retail longs, Technology longs and Medical longs. I was stopped out of a trading long, added (QQQQ)/(IWM) 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 above average. Today’s overall market action is very bearish. The VIX is rising 22.1% and is very elevated at 56.18. The ISE Sentiment Index is below average at 125.0 and the total put/call is above average at .95. Finally, the NYSE Arms has been running at a high level most of the day, hitting 2.78 at its intraday peak, and is currently 2.37. The Euro Financial Sector Credit Default Swap Index is rising 8.97% today to 117.33 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 4.39% to 220.69 basis points. The TED spread is rising .01% to 102 basis points. The TED spread is now down 364 basis points in just over three months. The 2-year swap spread is rising 6.83% to 61.75 basis points. The Libor-OIS spread is falling .90% to 93 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 8 basis points to .56%, which is down 214 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. The US dollar is soaring 1.76% today. The US Economic Surprise Index has risen to -80.70, while the European Economic Surprise Index has declined to -152.0. I suspect the US currency will take out its recent highs versus the euro over the coming weeks. Recent eurozone economic data, European bank developments and ECB comments/actions are greatly impacting global stock markets in a negative way, in my opinion. Nikkei futures indicate a -210 open in Japan and DAX futures indicate a -51 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on more shorting, increasing economic pessimism and rising financial sector worries.

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