Thursday, May 07, 2009

Stocks Sharply Lower into Final Hour on Profit Taking, Higher Energy Prices, Rising Long-Term Rates,

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Financial longs, Technology longs, Retail longs and Medical longs. I took profits in a few longs and added (IWM)/(QQQQ) hedges this morning, thus leaving the Portfolio 75% net long. The tone of the market is very negative as the advance/decline line is substantially lower, most sectors are declining and volume is heavy. Investor anxiety is above average. Today’s overall market action is bearish. The VIX is rising 6.22% and is very high at 34.47. The ISE Sentiment Index is slightly below average at 131.0 and the total put/call is slightly below average at .78. Finally, the NYSE Arms has been running above average most of the day, hitting 1.32 at its intraday peak, and is currently 1.12. The Euro Financial Sector Credit Default Swap Index is plunging another 11.32% today to 122.35 basis points. This index is down from its record March 10th high of 208.75. The North American Investment Grade Credit Default Swap Index is dropping 6.83% to 141.38 basis points. This index is also well below its Dec. 5th record high of 285.99. The TED spread is falling another 2.46% to 78 basis points. The TED spread is now down 385 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is dropping another 2.70% to 45.0 basis points. The Libor-OIS spread is falling 2.67% to 75 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 13 basis point to 1.60%, which is down 104 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 .18%, which is unch. today. For the second day in a row the broad market has mostly ignored positive news. I think most of today’s weakness is related to profit-taking and the rise in the 10-year yield. The US sovereign debt credit default swap is plunging another 24.4% today, which makes the rise in yields less of a concern, in my opinion. Most of the sell-off in bonds is likely related to safe-haven selling after more positive economic data. While yields may rise a bit further into a new higher trading range, I seriously doubt we are about to embark upon a period of soaring interest rates. The AAII % Bulls rose to 44.09%, while the % Bears fell to 33.33% this week, which is a negative. For the second month in a row, equity long/short hedge funds massively underperformed the S&P 500, which rose 9.7% in April versus their -.5% decline. As well, market neutral fell -.85% during the month. Many of these funds were having great relative performance years before the recent rally, which is likely leading to renewed performance anxiety. It appears many are still short or very underexposed to US stocks. Thus, while the major averages are extended short-term and will likely see more weakness, I suspect many funds will use this weakness to cover and add US stock exposure, which should keep any near-term pullback relatively mild in nature. Nikkei futures indicate a -135 open in Japan and DAX futures indicate a -2 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on profit-taking, more shorting, higher energy prices and higher long-term interest rates.

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