Stocks Lower into Final Hour on Pakistan News, Profit-taking and More Economic Pessimism

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Semi longs, Software longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is negative today as the advance/decline line is substantially lower, almost every sector is declining and volume is light. Investor anxiety is above average again. Today’s overall market action is bearish. The NYSE Arms is a very high 1.62, the VIX is surging 7% back to 20 and the total put/call is an above-average .97. Cyclicals and small-caps are under the most pressure today on another spike in economic pessimism and profit-taking after recent gains. As well, the 10-year yield is falling 8 basis points. The broad market appears to be tracking the (XLF) closely again today. Given recent gains and today’s news, weakness isn’t too surprising. With such light volume, elevated levels of investor pessimism and high NYSE Arms reading it wouldn’t take too much buying to boost the averages into the close. I am also seeing positive action today among some growth stock leaders such as (MA), (AMZN), (BIDU), (AAPL) and (DECK). I expect US stocks to trade modestly higher into the close from current levels on diminishing credit market angst, seasonal strength, bargain-hunting and short-covering.

Today's Headlines

Bloomberg:
- As the US savings and loan crisis worsened in the 1980s, analysts tried to top each other’s estimates of the debacle’s cost to the federal government. Much the same thing is happening now with losses linked to subprime mortgages, with figures of $300 billion to $400 billion being bandied about. A more realistic amount is probably half or less than those exaggerated projections – say $150 billion. That’s hardly chicken feed, though not nearly enough to sink the US economy.
- Pakistan’s Bhutto Assassinated in Attack at Rally.
- The cost of borrowing dollars, euros and pounds fell, adding to evidence that measures by central banks to east the gridlock in money markets are succeeding.
- The Fed will reduce interest rates at every policy setting meeting “for the next two to three quarters,” PIMCO’s Paul McCulley said in a note released today to clients. The central bank will act to “truncate both the length and the severity” of a contraction in lending, McCulley said.
- Crude oil is rising to a one-month high after as investment fund speculation rose after an EIA repot showed US inventories fell more than expected.
- Wheat fell to a two-week low as rising production in Argentina, the world’s fourth-largest exporter of the grain, eased speculation by investment funds for further price gains.
- Sotheby’s(BID), the world’s second-largest auction house, sold about 46% more art this year as US, Russian and Asian collectors bid up prices for contemporary artists such as Francis Bacon and Jeff Koons.
- Cirrus Logic(CRUS), the maker of computer chips for Bose Corp. and Pioneer Corp., rose more than 5% on the Nasdaq after a fund founded by billionaire George Soros boosted its stake in the company almost sevenfold.
- Pacific Crest analyst Andy Hargeaves said Apple Inc. will meet or exceed his earnings estimates, the Mac will continue to take market share and that Apple is still a good buy over $200.

Wall Street Journal:
- Even as plasma and LCD television screens flew off the shelves before Christmas, manufacturers were starting to roll out a new technology that they predict will produce the next generation of mass-market video displays.

BloggingStocks:
- Apple’s new price target: $300.

CNNMoney.com:
- Vestas Wind Systems Gets Order From AES For 52 Turbines.

AP:
- Acting New Jersey Governor Richard Codey will sign into law a bill he sponsored that restricts paroled sex offenders from surfing the Internet.

Trends-Tendances:
- European Central Bank council member Guy Quaden said the financial-market turmoil has yet to have a major effect on Europe’s economy, citing an interview.

Bear Radar

Style Underperformer:

Small-cap Value (-1.86%)

Sector Underperformers:

REITs (-2.49%), Airlines (-2.39%) and Coal (-2.01%)

Stocks Falling on Unusual Volume:

SLM, IFN, UCBI, FSIN, SDTH, ESLR, SWWC and UCBI

Bull Radar

Style Outperformer:

Large-cap Growth(-.89%)

Sector Outperformers:

Utilities (-.40%) Energy (-.55%) and Computer Hardware (-.54%)

Stocks Rising on Unusual Volume:

BT, TNH, EVY, ADPI, MELI, CSUN, OPTT, PANL, CWCO, FSYS, HURC, CREE, COMV, ELON, CRMT, LAYN, FTEK, MBLX, DRYS, BVN, MWA, POT, IVN and CHA

Bearish Sentiment Still Exceeds Levels Seen at Depths of 2000-2003 Bear Market

* Notwithstanding historical individual investor pessimism, corporate insiders continue to buy their own stocks hand over fist.

The AAII percentage of bulls dropped to 30.0% this week from 35.85% the prior week. This reading is now at depressed levels. The AAII percentage of bears rose to 50.0% this week from 47.2% the prior week. This reading is now at an elevated level. Moreover, the 10-week moving average of the percentage of bears is currently at 46.7%, an elevated level. It has only been higher one other period in its history, which was September 1990-December 1990. Moreover, the 10-week moving average of the percentage of bears peaked at 43.0% right near the major bear market low during 2002. It is astonishing that the 10-week moving average of the % bears is currently greater than at any time during the bubble bursting meltdown of 2000-2003, which was arguably the worst stock market decline since the Great Depression.

Furthermore, the 50-week moving average of the percentage of bears is currently 38.6%, an elevated level seen during only one other period since tracking began in the 80s. That period was October 1990-July 1991, right near another major stock market bottom. The extreme reading of the 50-week moving average of the percentage of bears during that period peaked at 41.6% on Jan. 31, 1991. The current reading of 38.6% is slightly above the peak during the 2000-2003 bear market, which was 38.1% on April 10, 2003. I find this even more astonishing, notwithstanding the recent pullback, given that the S&P 500 is currently 105% higher from the October 2002 major bear market lows and just 4.6% off a record high.

Individual investor pessimism towards US stocks is currently deep-seated and historical in nature. This is just more evidence of the current “US negativity bubble” and bodes well for further out-sized stock market gains over the intermediate-term. It is also noteworthy that as investor pessimism grows ever thicker, corporate insiders continue to display downright giddy behavior with their recent stock activity during this pullback. It is even more interesting that the retail sector is seeing substantial insider buying, notwithstanding the current extreme investor pessimism towards the prospects for consumer spending. Prior to the 2000 economic downturn, insiders were bailing in droves. I continue to believe US stocks are poised for very strong performance during the first quarter of next year as the undying belief in an imminent recession fades and the uncertainty currently surrounding the financial sector lifts substantially.

Durable Goods Orders Rise, Jobless Caims Rise Slightly, Consumer Confidence Improves

- Durable Goods Orders for November rose .1% versus estimates of a 2.0% gain and a .4% decline in October.

- Durables Ex Transports for November fell .7% versus estimates of a .5% increase and a .9% decline in October.

- Initial Jobless Claims for this week rose to 349K versus estimates of 340K and 348K the prior week.

- Continuing Claims rose to 2713K versus estimates of 2645K and 2638K prior.

- Consumer Confidence for December rose to 88.6 versus estimates of 86.5 and a reading of 87.8 in November.

BOTTOM LINE: Orders for US durable goods rose less than forecast in November, partially restrained by a drop in defense orders, Bloomberg reported. Orders for military equipment fell 24%. However, Bookings Excluding Defense Equipment rose 1.2%. Orders for non-defense capital goods excluding aircraft, a gauge of future demand, declined .4% versus a 2.9% decline in October. Shipments of those items, used in computing GDP, rose .2% versus a 1.2% drop in October. Orders for transportation equipment rose 1.9%, boosted by a 21% jump in commercial aircraft demand. I expect Durable Goods Orders Ex Transports to rebound next month on inventory rebuilding.

The number of Americans filing first-time jobless claims for unemployment insurance rose slightly last week, Bloomberg reported. However, the four-week moving-average of new claims fell to 342,500 from 343,500. As well, the unemployment rate among those eligible to collect benefits, which tracks the US unemployment rate, remained at a historically low 2%. I continue to believe the job market will remain healthy over the intermediate-term without generating substantial unit labor cost increases.

Consumer confidence in the US unexpectedly rose in December, led by a gain in optimism about the future, Bloomberg said. However, the Present Conditions component fell to 108.3 from 115.7 the prior month. The Future Expectations component rose to 75.5 from 69.1 the prior month. Those consumers expecting more jobs in the next six months rose to 11.2% from 10.6% the prior month. The percentage of consumers planning to purchase an automobile over the next six months rose to 6.1% from 4.8% in November. This month’s gain in the headline confidence index was boosted by a surge in confidence in the Southeast Central(+19.5% to 97.0) and the Northwest Central regions(+15.3% to 108.3). I expect consumer confidence to improve again next month on diminishing credit market angst, less overall economic pessimism, lower interest rates, lower energy prices, higher stock prices and a stable job market.