Friday, February 05, 2010

Stocks Reversing into Final Hour on Short-Covering, Bargain-Hunting, Less Financial Sector Pessimism

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Technology longs, Retail longs, Biotech longs, Emerging Market shorts and Commodity shorts. I covered some of my (IWM)/(QQQQ) hedges and some of my (EEM) short this afternoon, thus leaving the Portfolio 75% net long. The tone of the market is mildly negative as the advance/decline line is lower, most sectors are declining and volume is heavy. Investor anxiety is very high. Today’s overall market action is neutral. The VIX is rising +3.11% and is high at 26.89. The ISE Sentiment Index is low at 85.0 and the total put/call is very high at 1.26. Finally, the NYSE Arms has been running above average most of the day, hitting 1.79 at its intraday peak, and is currently .78. The Euro Financial Sector Credit Default Swap Index is rising +7.14% to 95.99 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 +4.77% to 100.77 basis points. This index is also well below its Dec. 5th record high of 285.99. The TED spread is +1 basis point to 17 basis points. The TED spread is now down 446 basis points since its all-time high of 463 basis points on October 10th, 2008. The 2-year swap spread is rising +2.39% to 30.50 basis points. The Libor-OIS spread is unch. at 10 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down -8 basis points to 2.25%, which is down -40 basis points since July 7th, 2008. The 3-month T-Bill is yielding .08%, which is unch. today. Commodity and Emerging market shares are underperforming today. Homebuilding, Construction and Oil Tanker shares are especially weak, falling 1.75%+. The Japan sovereign debt cds is rising +9.2% and the Russia sovereign cds is rising +7.0%. The euro has traded heavy throughout the day. Commodities remain under significant pressure and are sustaining significant technical damage. On the positive side, Coal, Gold, Internet, Semi, REIT, Road & Rail and Airline shares are rising 1%+. Today’s action looks mainly like short-covering to me. However, gauges of investors angst are spiking, which is a big positive. I think investors in general are underestimating the long-term ramifications of what is going on in Europe. I believe it is likely that the US dollar, while extended short-term, has entered a long-term uptrend, which most investors and companies are not positioned for. Nikkei futures indicate a -87 open in Japan and DAX futures indicate an +30 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, bargain-hunting, lower energy prices, less financial sector pessimism and lower long-term rates.

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