Stocks Finish Sharply Lower, Weighed Down by Commodity, Financial, HMO, Airline, Gaming, Construction and Hospital Shares

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In Play

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

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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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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.