Tuesday, August 11, 2009

Stocks Lower into Final Hour on Profit-Taking, Rising Financial Sector Pessimism, More Shorting, China Bubble Fears

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Steel longs and Financial longs. I took profits in a financial long and added to another medical long today, thus leaving the Portfolio 100% net long. The tone of the market is very negative as the advance/decline line is substantially lower, sector performance is mostly negative and volume is below average. Investor anxiety is high. Today’s overall market action is bearish. The VIX is rising 4.32% and is very high at 26.07. The ISE Sentiment Index is below average at 115.0 and the total put/call is slightly below average at .76. Finally, the NYSE Arms has been running high most of the day, hitting 1.50 at its intraday peak, and is currently 1.49. The Euro Financial Sector Credit Default Swap Index is rising 4.45% today to 82.0 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 4.95% to 110.38 basis points. This index is also well below its Dec. 5th record high of 285.99. The TED spread is falling 8.18% to 28 basis points. The TED spread is now down 438 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is falling 6.74% to 41.50 basis points. The Libor-OIS spread is rising .05% to 26 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 4 basis points to 1.91%, which is down 75 basis points since July 7th. The 3-month T-Bill is yielding .18%, which is up 3 basis points today. Today’s headline losses aren’t too bad so far. There are an unusual number of stocks I monitor rising today given broad market losses. As well, Road & Rail shares are jumping 1.35%. Retail, HMO, Computer, Medical, Biotech, Drug and Homebuilding shares are substantially outperforming today. The 10-year yield is down 21 basis points since yesterday morning’s high, which is a large positive given this week’s bond supply. I am somewhat surprised at the market’s resilience today given bank stock losses and several negative headlines. A high NYSE Arms and below average volume indicate the bears lack conviction. The bond market’s reaction to tomorrow’s FOMC announcement will be key. Nikkei futures indicate a -65 open in Japan and DAX futures indicate an +32 open in Germany tomorrow. I expect US stocks to trade mixed into the close from current levels as profit-taking, more shorting, rising financial sector pessimism and China bubble worries offset lower long-term rates, less economic fear and diminishing healthcare reform concerns.

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