Stocks Rise Most in 5 Years, Boosted by Financial, Airline, Internet, Rail, Steel and Homebuilding Shares

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In Play

Stocks Soaring into Final Hour on Diminishing Financial Sector Angst, A Firmer Dollar, Short-Covering, Bargain-Hunting

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Medical longs, Computer longs and Gaming longs. I covered all of my (IWM)/(QQQQ) hedges and some of my (EEM) short into the pullback after the FOMC announcement, thus leaving the Portfolio 100% net long. The overall tone of the market is very bullish as the advance/decline line is substantially higher, almost every sector is rising and volume is above-average. Investor anxiety is above-average, despite today’s sharp gains. Today’s overall market action is very bullish. The VIX is falling, but remains high at 25.92. The ISE Sentiment Index is a very low 88.0 and the total put/call is an above-average 1.0. Finally, the NYSE Arms has been low all day and is currently .42. According to Bankrate.com, the national average 30-year fixed rate mortgage has declined 34 basis points since last Tuesday to 5.74%. As well, weekly retail sales rose 1.1% this week versus a gain of 1.0% the prior week and up from a .5% gain three weeks ago. The G-7 currency volatility index is falling to 12.56 today, down from a 52-week high of 14.48 yesterday, which is also a positive. The Fed’s 75 basis point rate cut has helped strengthen the US dollar. The (XLF) is at session highs, rising 7.1%. I would expect to see strong gains in Asia tonight. The Shanghai Composite fell another 4% last night and is down 40.1% from last October’s high. Nikkei futures indicate an +410 open in Japan and DAX futures indicate an +40 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on diminishing financial sector angst, less economic pessimism, short-covering and bargain-hunting.

10-Year Swap Spread Graph

(click on image to enlarge)

BOTTOM LINE: The 10-year swap spread is falling another 4.5 basis points today to 59.0 basis points over Treasuries. The spread has plunged 27.9 basis points over the last six days. This indicates that the Fed is having some success at reliquifying the market and that risk tolerance is increasing, which is a large positive.

Bear Radar

Style Underperformer:

Small-cap Value +2.74%

Sector Underperformers:

Gold (-1.7%), Foods (-.81%) and HMOs (-.48%)

Stocks Falling on Unusual Volume:

SMTS, ARTC, GTY, SRZ and SYX

Producer Prices Decelerate, Housing Starts Fall Again

- The Producer Price Index for February rose .3% versus estimates of a .4% rise and a 1.0% gain in January.

- The PPI Ex Food & Energy for February rose .5% versus estimates of a .2% gain and a .4% increase in January.

- Housing Starts for February fell to 1065K versus estimates of 995K and an upwardly revised 1071K in January.

- Building Permits for February fell to 978K versus estimates of 1020K and an upwardly revised 1061K in January.

BOTTOM LINE: Prices paid to US producers rose less than forecast in February, Bloomberg reported. Energy costs increased .8% versus a 1.5% gain the prior month. The price of gasoline rose 2.9% and natural gas prices gained 5.7%, the most since October 2005. Food prices fell .5%, led by vegetables and fruits, versus a 1.7% gain the prior month. The Core PPI rose more than expected for the month and is 2.4% higher over the last 12 months, which is above the long-term average of 1.8%, but down from 2.9% in July 2005. The 10-year TIPS spread, a good gauge of inflation expectations, is 2.36% down from 2.68% three days ago. Fed fund futures now imply a 90.0% chance for a 100 basis point rate cut and a 10.0% chance for a 75 basis point cut. I think the Fed has an opportunity here to under-deliver, which would boost the US dollar. This may temporarily pressure stocks, but would be a big positive over the intermediate-term. A stronger dollar would have a much larger negative impact on commodity prices than the market currently perceives, in my opinion. Inflation fears have likely already peaked for the year.

Housing starts in the US dropped in February and building permits fell to the lowest level in more than 16 years, Bloomberg reported. Starts fell 28% in the Northeast. They rose 5.1% in the West and 3.9% in the South. They were unch. in the Midwest. Residential construction fell 25% last year, the most since 1981. Housing construction will remain muted over the intermediate-term as homebuilders continue to work down inventories.

Bull Radar

Style Outperformer:

Small-cap Growth (+2.93%)

Sector Outperformers:

I-Banks (+9.2%), Homebuilders (+6.5%) and Banks (+4.73%)

Stocks Rising on Unusual Volume:

LEH, JEF, UBS, BK, SI, SNP, BNE, BVN, OME, PEET, FCSX, GFIG, IFLO, MDRX, FMCN, AINV, HOFT, SHPGY, HMIN, PERY, COHU, CWCO, FTEK, MGLN, CVCO, FWLT, IPHS, AVTR, OTTR, SFI, IGM, KIE, FDS, KEX, JAS and GS