Tuesday, July 07, 2009

Stocks Sharply Lower into Final Hour on Technical Selling, More Shorting, Government Uncertainty, Rising Economic Angst

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Technology longs, Medical longs and Defense longs. I added (IWM)/(QQQQ) hedges and added to my (EEM) short this morning, thus leaving the Portfolio 75% 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 high. Today’s overall market action is very bearish. The VIX is rising 5.17% and is very high at 30.52. The ISE Sentiment Index is around average at 136.0 and the total put/call is above average at 1.03. Finally, the NYSE Arms has been running high most of the day, hitting 1.44 at its intraday peak, and is currently 1.39. The Euro Financial Sector Credit Default Swap Index is falling 2.09% today to 106.67 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 .65% to 141.70 basis points. This index is also well below its Dec. 5th record high of 285.99. The TED spread is falling 9.86% to 36 basis points. The TED spread is now down 428 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is falling 3.46% to 38.31 basis points. The Libor-OIS spread is down 1.93% to 34 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is unch. at 1.62%, which is down 102 basis points since July 7th. The 3-month T-Bill is yielding .18%, which is up 3 basis points today. I am seeing signs that some market leading stocks are now ignoring good news, which is always a red flag. As well, the macro news today was just mixed, yet the major averages are seeing meaningful declines. (TLT) is breaking above its 50-day moving average. Given the rise in German May manufacturing orders, the US dollar continues to trade well. The most economically sensitive shares are again badly underperforming the broad market. I think increasing rhetoric regarding the need for a second stimulus package is spooking investors to an extent. As well, the constant uncertainty over what the government plans to do in certain sectors appears to be taking its toll. Nikkei futures indicate a -87 open in Japan and DAX futures indicate a -9 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on rising economic anxiety, more shorting and technical selling.

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