Monday, March 02, 2009
Stocks Sharply Lower into Final Hour on Tax Hike Worries, Rising Economic Pessimism, Increasing Financial Sector Fear, More Shorting
Posted by Gary .....at 3:25 PM
BOTTOM LINE: The Portfolio is about even into the final hour as losses in my Medical longs, Internet longs and Biotech longs offset gains in my Index hedges and emerging market/commodity shorts. I have not traded today, thus leaving the Portfolio 50% net long. The tone of the market is very negative as the advance/decline line is substantially lower, every sector is declining and volume is above average. Investor anxiety is also above average. Today’s overall market action is very bearish. The VIX is rising 9.64% and is elevated at 50.82. The ISE Sentiment Index is below average at 106.0 and the total put/call is above average at 1.07. Finally, the NYSE Arms has been running above average most of the day, hitting 2.16 at its intraday peak, and is currently 1.51. The Euro Financial Sector Credit Default Swap Index is rising 2.39% today to 152.33 basis points. This index is still below its all-time high of 164.0 on Feb. 24th. The North American Investment Grade Credit Default Swap Index is rising 2.71% to 229.30 basis points. This index is still well below its Dec. 5th record high of 285.99. The TED spread is rising 1.48% to 103 basis points. The TED spread is now down 360 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising .73% to 69.0 basis points. The Libor-OIS spread is falling .26% to 101.0 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 5 basis points to .94%, which is down 170 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 .23%, which is down 1 basis point today. We are finally seeing the type of “get me out at any price” action that usually indicates, at the very least, a tradable bottom is close at hand. However, gauges of investor angst are not quite yet at levels that generally mark a meaningful low. The bearish action in gold is noteworthy given its “safe haven” stature and investors’ current love affair with the precious metal. The US dollar continues to trade very well, but is very near another significant level of resistance. I disagree with those that believe US stocks can’t go up without a meaningful dollar decline. The most cyclical stocks are down the most today, with the MS Cyclical Index dropping 8.11%. I continue to believe these stocks will underperform over the intermediate-term. Stocks that can show relatively healthy growth or just hold their own in this type of economic environment should continue to substantially outperform the major averages. Nikkei futures indicate a -200 open in Japan and DAX futures indicate an -19 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on rising economic pessimism, more shorting, increasing financial sector pessimism and tax hike worries.