Stocks Sharply Lower into Final Hour on Tax Hike Worries, Rising Economic Pessimism, Increasing Financial Sector Fear, More Shorting

BOTTOM LINE: The Portfolio is about even into the final hour as losses in my Medical longs, Internet longs and Biotech longs offset gains in my Index hedges and emerging market/commodity shorts. I have not traded today, thus leaving the Portfolio 50% net long. The tone of the market is very negative as the advance/decline line is substantially lower, every sector is declining and volume is above average. Investor anxiety is also above average. Today’s overall market action is very bearish. The VIX is rising 9.64% and is elevated at 50.82. The ISE Sentiment Index is below average at 106.0 and the total put/call is above average at 1.07. Finally, the NYSE Arms has been running above average most of the day, hitting 2.16 at its intraday peak, and is currently 1.51. The Euro Financial Sector Credit Default Swap Index is rising 2.39% today to 152.33 basis points. This index is still below its all-time high of 164.0 on Feb. 24^th. The North American Investment Grade Credit Default Swap Index is rising 2.71% to 229.30 basis points. This index is still well below its Dec. 5^th record high of 285.99. The TED spread is rising 1.48% to 103 basis points. The TED spread is now down 360 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising .73% to 69.0 basis points. The Libor-OIS spread is falling .26% to 101.0 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 5 basis points to .94%, which is down 170 basis points since July 7th. The 10-year TIPS spread bottomed at .65% in October 1998 during the Asian financial crisis and at 1.24% in October 2001 during the technology bubble-bursting meltdown. The 3-month T-Bill is yielding .23%, which is down 1 basis point today. We are finally seeing the type of “get me out at any price” action that usually indicates, at the very least, a tradable bottom is close at hand. However, gauges of investor angst are not quite yet at levels that generally mark a meaningful low. The bearish action in gold is noteworthy given its “safe haven” stature and investors’ current love affair with the precious metal. The US dollar continues to trade very well, but is very near another significant level of resistance. I disagree with those that believe US stocks can’t go up without a meaningful dollar decline. The most cyclical stocks are down the most today, with the MS Cyclical Index dropping 8.11%. I continue to believe these stocks will underperform over the intermediate-term. Stocks that can show relatively healthy growth or just hold their own in this type of economic environment should continue to substantially outperform the major averages. Nikkei futures indicate a -200 open in Japan and DAX futures indicate an -19 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on rising economic pessimism, more shorting, increasing financial sector pessimism and tax hike worries.

Bear Radar

Style Underperformer:
Mid-cap Growth (-5.54%)

Sector Underperformers:
Coal (-15.15%), Oil Tankers (-10.58%) and HMOs (-10.52%)

Stocks Falling on Unusual Volume:
CLF, HBC, GMXR, MICC, GDP, NIHD, FCX, SU, WFC, PCZ, APA, WGOV, AMED, PSYS, NUVA, LHCG, IPCM, MICC, ANSS, DECK, LECO, WMGI, KYE, TOO, IEV, KSP and EVR

Stocks With Unusual Put Option Activity:
1) HBC 2) HST 3) EXPD 4) SU 5) MRO

Bull Radar

Style Outperformer:
Large-cap Growth (-1.70%)

Sector Outperformers:
Utilities (-.51%), Software (-.64%) and Computer Hardware (-.98%)

Stocks Rising on Unusual Volume:
SNE, IOC, NTT, DCM, ATHN, APSG, TWGP, FGXI, FCN and WTM

Stocks With Unusual Call Option Activity:
1) HOLX 2) ARO 3) VRTX 4) MRVL 5) MHS

Links of Interest

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Monday Watch

Weekend Recommendations
Barron's:
- Made positive comments on (WMI), (ETN), (JEC), (FDS), (BAX), (DELL), (SRCL) and (FCFS).

Citigroup:

- Upgraded (TYC) to Buy, target $25.

- Reiterated Buy on (HS), target $12.

- Reiterated Buy on (INTC), target $16.

Night Trading
Asian indices are -3.50% to -.75% on avg.
S&P 500 futures -1.61%.
NASDAQ 100 futures -1.84%.

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Who’s Speaking?
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Earnings of Note
Company/Estimate
- (KFN)/.33

- (DISH)/.49

- (OSG)/1.61

- (EIX)/.64

- (FCN)/.54

- (WEN)/.05

- (CNO)/.29

- (CCO)/.11

- (MDR)/.42

- (MTZ)/.25

Upcoming Splits

- None of note

Economic Releases

8:30 am EST

- Personal Income for January is estimated to fall .2% versus a .2% decline in December.

- Personal Spending for January is estimated to rise .4% versus a 1.0% decline in December.

- The PCE Core for January is estimated to rise .1% versus unch. in December.

10:00 am EST

- ISM Manufacturing for February is estimated to fall to 34.0 versus 35.6 in January.

- ISM Prices Paid for February is estimated to rise to 33.5 versus 29.5 in January.

- Construction Spending for January is estimated to fall 1.5% versus a 1.4% decline in December.

Other Potential Market Movers
- The Fed’s Lacker speaking, Fed’s Rosengren speaking, Fed’s Foreign Exchange Rates Statistical Release, (DNA) Investment Community Meeting, Deutsche Bank Media/Telecom Conference, Citi Global Property Conference and Morgan Stanley Tech Conference could also impact trading today.

BOTTOM LINE: Asian indices are sharply lower, weighed down by financial and commodity shares in the region. I expect US stocks to open lower and to maintain losses into the afternoon. The Portfolio is 50% net long heading into the week.

Weekly Outlook

Click here for Wall St. Week Ahead by Reuters.

Click here for stocks in focus for Monday by MarketWatch.

There are several economic reports of note and a few significant corporate earnings reports scheduled for release this week.

Economic reports for the week include:

Mon. – Personal Income, Personal Spending, PCE Core, ISM Manufacturing, ISM Prices Paid, Construction Spending

Tues. – Pending Home Sales, Total Vehicle Sales, weekly retail sales reports

Wed. – Weekly MBA mortgage applications report, weekly EIA energy inventory report, Challenger Job Cuts, ADP Employment Change, ISM Non-Manufacturing, Fed’s Beige Book

Thur. – ICSC Chain Store Sales, 4Q Non-farm Productivity, 4Q Unit Labor Costs, Initial Jobless Claims, Factory Orders

Fri. – Change in Non-farm Payrolls, Unemployment Rate, Average Hourly Earnings, Consumer Credit

Some of the more noteworthy companies that release quarterly earnings this week are:

Mon. – Dish Network(DISH), Wendy’s(WEN), Conseco(CNO), Clear Channel(CCO), McDermott(MDR)

Tues. – Autozone(AZO), Tech Data(TECD), Chico’s FAS(CHS), Kenneth Cole(KCP), VeriFone(PAY)

Wed. – Liz Claiborne(LIZ), Joy Global(JOYG), PetSmart(PETM), Foot Locker(FL), BJ’s Wholesale(BJ), Big Lots(BIG), Toll Brothers(TOL)

Thur. – Ciena Corp(CIEN), Urban Outfitters(URBN), Cooper Cos.(COO), Intrepid Potash(IPI), Costco(COST)

Fri. – H&R Block(HRB), Korn/Ferry(KFY), Blockbuster(BBI)

Other events that have market-moving potential this week include:

Mon. – Fed’s Lacker speaking, Fed’s Rosengren speaking, Fed’s Foreign Exchange Rates Statistical Release, (DNA) Investment Community Meeting, Deutsche Bank Media/Telecom Conference, Citi Global Property Conference, Morgan Stanley Tech Conference

Tue. – Fed’s Lockhart speaking, Bernanke’s Testimony Before Senate Budget Committee, (SD) analyst conference, (BP) strategy presentation, (JAH) analyst day, (EAC) analyst meeting, (LMNX) analyst meeting, (ARRS) analyst meeting, Deutsche Bank Media/Telecom Conference, Citi Global Property Conference, Sandler O’Neill Financial Services Conference, Morgan Stanley Tech Conference

Wed. – Fed’s Fisher speaking, Fed’s Lockhart speaking, Fed’s Beige Book, (ICGE) investor meeting, (TAP) analyst meeting, Morgan Stanley Tech Conference, UBS Nat Gas/Electric/Coal Conference, Citi Global Property Conference, Deutsche Bank Media/Telecom Conference, Keefe Bruyette Woods Regional Bank Conference

Thur. – Fed’s Lockhart speaking, Geithner Testimony Before House Budget Cmte on FY10 Treasury Budget, (CUB) analyst meeting, (WTW) investor day, (XOM) analyst meeting, (CTCT) analyst meeting, Keefe Bruyette Woods Regional Bank Conference

Fri. – Fed’s Dudley speaking, Fed’s Plosser speaking, (FWLT) investors meeting, (PNY) shareholders meeting

BOTTOM LINE: I expect US stocks to finish the week mixed as bargain-hunting, technical buying, lower energy prices and diminishing financial sector pessimism offset more shorting, rising credit market angst, tax hike worries and increasing economic pessimism. My trading indicators are giving mostly bearish signals and the Portfolio is 50% net long heading into the week.