Monday, June 15, 2009

Stocks Lower into Final Hour on Rising Economic Concerns, More Shorting, Profit-Taking

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Financial longs, Technology longs and Medical longs. I added (IWM)/(QQQQ) hedges and added (EEM) short 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, every sector is declining and volume is about average. Investor anxiety is high. Today’s overall market action is very bearish. The VIX is rising 9.91% and is very high at 30.93. The ISE Sentiment Index is below average at 117.0 and the total put/call is slightly below average at .77. Finally, the NYSE Arms has been running very high most of the day, hitting 3.68 at its intraday peak, and is currently 2.44. The Euro Financial Sector Credit Default Swap Index is rising 6.22% today to 109.67 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 rising 3.89% to 129.33 basis points. This index is also well below its Dec. 5th record high of 285.99. The TED spread is rising .47% to 46 basis points. The TED spread is now down 417 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is falling 6.90% to 39.63 basis points. The Libor-OIS spread is falling 1.83% to 40 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 5 basis points to 1.88%, which is down 76 basis points since July 7th. The 3-month T-Bill is yielding .15%, which is down 2 basis points today. The most economically sensitive stocks are underperforming today on rising worries over credit availability throughout Europe, potential currency devaluations in Eastern Europe and some weaker-than-expected US economic data. The recent rise in energy prices and mortgage rates are likely to continue to negatively impact US economic data over the coming weeks. I continue to believe the crowded "reflation" trade will underperform over the intermediate-term. It is also a negative to see such a big jump in the euro financial sector credit default swap index. On the positive side, volume is relatively light and the NYSE Arms is soaring today. Moreover, the ISE Sentiment Index hit an extraordinarily depressed reading of 38.0 this morning, which is a positive. Nikkei futures indicate a -139 open in Japan and DAX futures indicate an +2 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on more shorting, profit-taking, rising economic worries and greater financial sector pessimism.

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