Monday, February 01, 2010

Stocks Higher into Final Hour on Short-Covering, Less Economic Fear, Diminishing Financial Sector Pessimism

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Technology longs, Biotech longs and Financial longs. I covered some of my (IWM)/(QQQQ) hedges and some of my (EEM) short this morning, thus leaving the Portfolio 75% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are rising and volume is about average. Investor anxiety is high. Today’s overall market action is mildly bullish. The VIX is falling -7.03% and is above-average at 22.89. The ISE Sentiment Index is near average at 138.0 and the total put/call is below average at .76. Finally, the NYSE Arms has been running below average most of the day, hitting .79 at its intraday peak, and is currently .79. The Euro Financial Sector Credit Default Swap Index is rising +3.21% to 84.17 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 +.36% to 95.12 basis points. This index is also well below its Dec. 5th record high of 285.99. The TED spread is down -2 basis points to 16 basis points. The TED spread is now down 447 basis points since its all-time high of 463 basis points on October 10th, 2008. The 2-year swap spread is rising +5.30% to 28.16 basis points. The Libor-OIS spread is unch. at 10 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up +5 basis points to 2.38%, which is down -27 basis points since July 7th, 2008. The 3-month T-Bill is yielding .08%, which is +2 basis points today. Small-caps are underperforming again today. Market leading stocks are also underperforming. Retail shares are flat on the day. CDS indices are mostly higher today, which is also a negative. On the positive side, Coal, Energy, Oil Service, Gold, Steel and Disk Drive shares are substantially outperforming, rising 3%+. The Citi US Economic Surprise Index is rising to 26.2 today, the best level since Dec. 14th. Overall, today’s rebound is mediocre in quality. The hardest-hit commodity-oriented stocks are seeing the largest up moves today on only average volume, which is usually indicative of short-covering rather than vanilla buying. Moreover, I’m surprised that rumors of the likely demise of the “Volcker Rule” aren’t having a more positive impact on (XLF). Asia traded poorly again last night. While the market is oversold short-term, a test of recent lows is likely over the coming days. Nikkei futures indicate an +115 open in Japan and DAX futures indicate a -12 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on more shorting, euro sovereign debt fears, china bubble worries and US political concerns.

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