Tuesday, January 12, 2010

Stocks Lower into Final Hour on Financial Sector Political Fears, Profit-Taking, China Hard-Landing Worries

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Financial longs and Technology 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 very negative as the advance/decline line is substantially lower, almost ever sector is declining and volume is slightly above average. Investor anxiety is high. Today’s overall market action is mildly bearish. The VIX is rising +6.38% and is around average at 18.68. The ISE Sentiment Index is slightly below average at 135.0 and the total put/call is around average at .81. Finally, the NYSE Arms has been running very high most of the day, hitting 2.22 at its intraday peak, and is currently 1.65. The Euro Financial Sector Credit Default Swap Index is rising +6.71% to 58.24 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 +2.24% to 77.95 basis points. This index is also well below its Dec. 5th record high of 285.99. The TED spread is up -2 basis points to 21 basis points. The TED spread is now down 442 basis points since its all-time high of 463 basis points on October 10th, 2008. The 2-year swap spread is falling -.90% to 26.76 basis points. The Libor-OIS spread is unch. at 11 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is unch. at 2.47%, which is down -18 basis points since July 7th, 2008. The 3-month T-Bill is yielding .04%, which is up +2 basis points today. Economically sensitive shares are underperforming today, with the MS Cyclical Index falling -1.91%. HMO, Semi, Gold, Ag and Alt Energy shares are especially weak, falling 2.50%+. A number of market leaders are underperforming today. On the positive side, investor angst is surging quite a bit with a relatively mild pullback in the major averages. Long-term rates are at session lows, falling -10 bps. There are pockets of relative strength in various sectors. I suspect today’s weakness is much more related to profit-taking in overbought sectors, China worries and financial sector political concerns than (AA)’s disappointing earnings report. Asia, was barely lower last night. I expect those shares to come under pressure tonight. However, if they remain firm the pullback in US stocks may prove very short-lived. Nikkei futures indicate a -109 open in Japan and DAX futures indicate an +4 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on profit-taking, China hard-landing worries, more shorting and financial sector political fears.

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