Stocks Lower into Final Hour on Profit-taking, Shorting, Higher Energy Prices

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Biotech longs, Computer longs and Medical longs. I added (IWM)/(QQQQ) hedges and added to my (EEM) short this morning, thus leaving the Portfolio 75% net long. The overall tone of the market is mildly negative as the advance/decline line is slightly lower, most sectors are declining and volume is above average. Investor anxiety is high again. Today’s overall market action is just mildly bearish. The VIX is rising 7% today to a very high 29.65. The total put/call is an above average 1.05 and the ISE Sentiment Index hit a very low 87.0 today. As well, the NYSE Arms has been high all day. This morning’s gains left the major averages very extended short-term. Microsoft’s(MSFT) immediate weakness this morning following such a stellar quarter was a tell. Moreover, there are many hedge fund blow-up rumors swirling today. Many stocks are higher on the day, despite the losses in the major averages. Weakness is the most pronounced in the retailers and financials, which have had humongous gains in a very short period. Economically sensitive small-caps and cyclicals are outperforming substantially today. I still seriously doubt a full retest of recent lows will occur, as so many expect. Given how extended Asian indices are, I would expect to see weakness there Sunday night, which could further pressure US shares Monday morning. Nikkei futures indicate a -200 point decline on the open in Japan Sunday night. Fed fund futures now imply a 72.0% chance for a 50 basis point cut and a 28.0% chance for a 25 basis point cut at the Jan. 30^th meeting. I expect US stocks to trade mixed-to-lower into the close from current levels on profit-taking, higher energy prices and more shorting.

Today's Headlines

Bloomberg:
- The risk of European companies defaulting headed for the biggest weekly decline in almost two months amid speculation bond insurer Ambac Financial Group(ABK) will be bought by billionaire Wilbur Ross.
- Biofuels made from biomass and waster are “very promising,” because their feedstock doesn’t compete with food crops for agricultural land, according to a fund manager at ABN Amro Asset Management.
- The bipartisan agreement on an economic stimulus package reached by House leaders and President Bush was immediately undermined by senators intent on ensuring that their ideas get a hearing before any bill becomes law.
- Merrill Lynch(MER) is “very well positioned” to grow in 2008, CEO Thain said.
- US homebuilder shares are poised for their biggest weekly gain since 1995, as investors and analysts say the market for new homes may have hit bottom.
- The SEC wants to wrap its sweeping probe into whether companies improperly backdated stock options by the end of this year, the agency’s enforcement chief said.

Wall Street Journal:
- Lobbyists Smoothed the Way For a Spate of Foreign Deals. Two yeas ago, the US Congress pressured the Arab emirate of Dubai to back out of a deal to manage US ports. Today, governments in the Persian Gulf, China and Singapore have snapped up $37 billion of stakes in Wall Street, the bedrock of the US financial system.
- The Tax Threat to Prosperity.
- The Bill & Melinda Gates Foundation plan to donate $306 million to six farming organizations to boost agricultural productivity in developing countries.

CNBC:
- Nestle SA, the world’s largest food company, expects less commodity cost pressure this year than in 2007, Chairman Peter Brabeck-Letmathe said.

USA Today:
- President Bush plans to propose doubling the funding to combat HIV/AIDS overseas in his last State of the Union address next week.

CNNMoney.com:
- Treasuries advance amid hedge fund rumors.

Telegraph:
- Bernanke calms fears of a credit bloodbath.

Frankfurter Allgemeine Zeitung:
- Cisco Systems(CSCO) expects “ardent growth” of video data on the World Wide Web to boost investment in Internet infrastructure, fueling the company’s long-term growth, citing Europe’s Cisco’s Europe head, Chris Dedicoat. The number of video streams broadcast on the Web amounted to 250 million in 2007, exceeding a forecast of as many as 70 million broadcasts, Dedicoat said.

globeandmail:
- Iraq expects to increase oil production this year to 3.7 million barrels per day and hopes to sign contracts to boost the output from oil fields that aren’t production to capacity, Iraq’s oil minister said. “We have increased our production by 400,000 barrels a day over the last three months,” he said. “This has been a very big increase…from 1.9 million barrels a day to 3.3 million. The Iraqi minister said the recent rise in oil prices was not a result of a shortage of crude oil. “On the contrary, there is as much crude oil on the market as people want,” he said. “It has been gambling by speculators, just betting on the prices really, disregarding the fundamentals of the oil markets.”

AAII % Bears 59.0, Still Highest Since October 18, 1990 After Iraq’s Invasion of Kuwait and During Peak of Recession

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

The AAII percentage of bulls rose to 25.1% this week from 24.3% the prior week. This reading is still at a very depressed level. The AAII percentage of bears rose to 59.0% this week from 54.4% the prior week. This reading is still at an extraordinarily elevated level. The last time the AAII % Bears was this high was October 18, 1990 after Iraq’s invasion of Kuwait and before Operation Desert Storm began on January 17, 1991. The peak of the 1990-1991 recession also occurred during 4Q 1990 as GDP fell 3.0%. The S&P 500 rose 65% over the next three years after this peak in bearishness. Moreover, the 10-week moving average of the percentage of bears is currently at 50.9%, also an extraordinarily 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 7.9 percentage points 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 40.7%, also an extraordinarily elevated level seen during only one other period since tracking began in the 80s. That period was December 1990-April 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 40.7% is above the peak in the % bears 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 86.3% higher from the October 2002 major bear market lows and 13.0% off its recent record high.

Individual investor pessimism towards US stocks remains deep-seated and historical in nature, which bodes very well for further outsized gains over the intermediate-term. This is just more evidence of the current “US negativity bubble.” It is also noteworthy that as investor pessimism grows ever thicker as short interest soars to new record highs, corporate insiders continue to display downright giddy behavior with their recent stock activity during this pullback. The retail sector saw substantial insider buying over the last six weeks, notwithstanding the current extreme investor pessimism towards the prospects for consumer spending. The Morgan Stanley Retail Index is up 14.0% over the last ten days. During the 2000 economic downturn after the bursting of the 90s technology stock bubble, insiders were bailing in droves. I still expect US stocks to rise sharply later this year as the undying belief in an imminent recession begins to fade and the uncertainty currently surrounding the financial sector continues to lift substantially.

Bear Radar

Style Underperformer:

Large-cap Value (-.01%)

Sector Underperformers:

Airlines (-2.92%), Retail (-2.28%) and Utilities (-1.61%)

Stocks Falling on Unusual Volume:

TPX, CYN, TGI, ING, DV, SYNA, DROOY, VSEA, IBKR, NTLS and AEG

Bull Radar

Style Outperformer:

Small-cap Growth (+.78%)

Sector Outperformers:

Alternative Energy (+2.35%), Oil Service (+2.14%) and Homebuilders (+2.09%)

Stocks Rising on Unusual Volume:

TDK, FDG, GBX, ROL, PKI, ITF, KWR, NSH, SCSC, VPRT, BLOG, ABFS, SPWR, JRCC, JRJC, VARI, FRME, RAIL, ROCM, ENOC, ODFL, BRCM, MCHP, EZPW, EPAY, MSCC, TASR, AMGN, WG, ALY, WNR, NTG, SNP, RTP, PCU, PTR, AXS, ABK and PETS

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