Thursday, November 05, 2009

Stocks Surging into Final Hour on Diminishing Economic Fear, Less Financial Sector Pessimism, Lower Energy Prices

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Biotech longs, Medical longs, Retail longs, Financial longs and Technology longs. I covered all my (IWM)/(QQQQ) hedges today, thus leaving the Portfolio 100% net long. The tone of the market is very positive as the advance/decline line is substantially higher, every sector is rising and volume is about average. Investor anxiety is very high. Today’s overall market action is very bullish. The VIX is falling -7.58% and is very high at 25.62. The ISE Sentiment Index is below average at 128.0 and the total put/call is slightly above average at .88. Finally, the NYSE Arms has been running slightly above average most of the day, hitting 1.19 at its intraday peak, and is currently .86. The Euro Financial Sector Credit Default Swap Index is falling -.69% today to 66.33 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 falling -.57% to 103.43 basis points. This index is also well below its Dec. 5th record high of 285.99. The TED spread is up +1 basis point to 24 basis points. The TED spread is now down 440 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising +.18% to 34.69 basis points. The Libor-OIS spread is unch. at 13 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up +3 basis points to 2.15%, which is down 50 basis points since July 7th. The 3-month T-Bill is yielding .03%, which is down -1 basis point today. Cyclical and small-cap shares, which had been under the most pressure of late, are strong outperformers today. HMO, Biotech, Bank, Defense, Coal, Alt Energy, Computer, Semi and Disk Drive stocks are especially strong, rising 2.5%+. The market shouldn’t have been that surprised by today’s strong productivity report(which bodes very well for profitability and future hiring) and Cisco’s earnings report. Thus, today’s broad-based rally is even more impressive. Investor angst gauges have been high throughout the day, considering the magnitude of today’s advance. As well, the AAII % Bulls plunged to 22.2% this week, while the % Bears jumped to 55.6%, which is a large positive. I expect an “around expectations” or “slightly better than expectations” jobs report tomorrow. A “bad” report is unlikely, in my opinion. While the market is extended now very short-term, I expect stocks to build on today’s gains next week. Nikkei futures indicate an +183 open in Japan and DAX futures indicate an +1 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on lower energy prices, less financial sector pessimism, diminishing economic fear, short-covering and bargain-hunting.

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