Stocks Finish Near Session Lows on Weakness in Financial and Cyclical Shares

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Stocks Sharply Lower into Final Hour as Extreme Pessimism Builds

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Software longs and Semi longs. I covered my (QQQQ)/(IWM) hedges and took profits in some existing shorts today, thus leaving the Portfolio 100% net long. The overall tone of the market is very negative today as the advance/decline line is substantially lower, most sectors are declining and volume is heavy. Investor anxiety is very high again. Today’s overall market action is bearish. The total put/call hit a very high 1.48 and the ISE Sentiment Index hit a record low 23.0 today. The VIX is finally spiking today, rising 11%, to a relatively high 27. There are some bright spots today despite the headline losses. The Morgan Stanley Tech sector index is only .2% lower on the day. Computer services, biotech, retail, restaurants, networking, semis, software and computer hardware are all higher or just slightly lower on the day. As well, a number of market leading stocks are being accumulated today on every tick lower in the averages and others trade as though they are “washed out.” There are also an unusual number of stocks rising on volume today given the losses in the major averages. I will monitor the close today and decide whether or not to further shift market exposure. I expect US stocks to trade modestly higher into the close from current levels on short-covering, bargain hunting and lower energy prices.

Housing Starts Fall Again, Jobless Claims Plunge, Philly Fed Contracts More Than Expected

- Housing Starts for December fell to 1006K versus estimates of 1145K and 1173K in November.

- Building Permits for December fell to 1068K versus estimates of 1135K and 1162K in November.

- Initial Jobless Claims for this week fell to 301K versus estimates of 331K and 322K the prior week.

- Continuing Claims rose to 2751K versus estimates of 2705K and 2685K prior.

- The Philly Fed for January fell to -20.9 versus estimates of -1.0 and -5.7 in December.

BOTTOM LINE: Housing starts were lower than expected in December as homebuilders try to pare down inventory, Bloomberg reported. For all of 2007, housing starts fell 25%. I continue to believe new home construction will remain muted over the intermediate-term as homebuilders continue to work down inventories. With home sales stabilizing over the last three months near mid-1995 levels and mortgage rates plunging recently, I wouldn’t be surprised to see home sales surprise on the upside over the coming months on some pent up demand.

The number of Americans filing first-time claims for unemployment benefits unexpectedly plunged to a three-month low last week, Bloomberg reported. The four-week moving average of claims fell to a two-month low of 328,500, from 340,250 the prior week. The unemployment rate among those eligible for benefits, which tracks the US unemployment rate, rose back to 2.1% from 2.0% the prior week, which is still a historically low level. With all the housing-related job losses that have already occurred over the last two years, continuing record US exports and the impending retirement of millions of baby-boomers, it is very possible the job market is stabilizing at still healthy levels.

Manufacturing in the Philly region contracted more than expected in January, Bloomberg reported. The New Orders component fell to -15.2 from 12 the prior month. The Inventory component fell to -11.7 from -6.5 the prior month. The Employment component fell to -1.5 from 3.8 in December. The Future Expectations component fell to 5.2 from 11.1. While this number is surprisingly negative, it is important to note that it averaged -15.1 for four months during the 1995 mid-cycle slowdown, hitting a low of -21.0 during that period, and the US economy, which was more dependent on manufacturing then than now, never tipped into recession. I expect this indicator to improve next month on inventory rebuilding.

ISE Sentiment Index(ISEE) Makes New Record Low

Bottom Line: The ISE Sentiment Index(ISEE) made a new record low this morning of 23.0. This is well below the prior record of 36.0 on July 3, 2006. This contrary indicator has had a very good track record in the past for marking meaning market bottoms.

Bull Radar

Style Outperformer:

Large-cap Growth (-.76%)

Sector Outperformers:

Homebuilders (+1.38%), Networking (+1.12%) and Computer Hardware (+.93%)

Stocks Rising on Unusual Volume:

CGV, ELY, PENN, LCRD, COGO, HMSY, ICLR, URBN, VRUS, MATR, JASO, ASML, LULU, GENZ, CVCO, ULBI, AKAM, NUVA, TRMB, ADCT, OMCL, TIF, CN, WSM, BRP, FELL, HMC, MO, PPG, BK, ROC, AFSI, BCS and AZN

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