Monday, March 09, 2009

Stocks Lower into Final Hour on Rising Credit Market Angst, Increasing Energy Prices, More Shorting, Tax Hike Worries

BOTTOM LINE: The Portfolio is mixed into the final hour as losses in my Technology longs and Biotech longs offset gains in my Index hedges, Emerging Market shorts and Medical longs. I added to my (IWM)/(QQQQ) hedges and added to my (EEM) short this morning, thus leaving the Portfolio 50% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are declining and volume is below average. Investor anxiety is about average. Today’s overall market action is bearish. The VIX is falling .10% and is elevated at 49.37. The ISE Sentiment Index is high at 213.0 and the total put/call is below average at .73. Finally, the NYSE Arms has been running low most of the day, hitting .29 at its intraday trough, and is currently .43. The Euro Financial Sector Credit Default Swap Index is rising 4.06% today to 205.0 basis points. This index is making another new record high. The North American Investment Grade Credit Default Swap Index is rising 3.75% to 257.22 basis points. This index is still below its Dec. 5th record high of 285.99. The TED spread is rising 1.36% to 111 basis points. The TED spread is now down 352 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising 1.91% to 80.0 basis points. The Libor-OIS spread is rising 1.94% to 105.0 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 1 basis point to .85%, which is down 179 basis points since July 7th. 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 .20%, which is up 1 basis point today. Market-leading stocks are under pressure again today. I continue to hear rumors of forced selling. Some gauges of investor angst still remain stubbornly low given the carnage that has recently taking place. Retail options traders appear to being betting on a rally in a meaningful way, which is a broad market negative. A low NYSE Arms reading, combined with below average volume, is a negative. As well, the VIX remains relatively subdued compared to prior market lows. The meaningful increase in gauges of credit angst is also a big negative. I think the possibility of the relaxation of the mark-to-market rule is the best hope for a significant upside catalyst. Nikkei futures indicate a -110 open in Japan and DAX futures indicate a -35 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on more economic pessimism, more shorting, higher energy prices, increasing credit market angst and tax hike worries.

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