Wednesday, June 27, 2007

Stocks Finish Sharply Higher on Diminishing Sub-Prime Worries and Short-Covering

S&P 500 1,506.34 +.90%
DJIA 13,427.73 +.68%
NASDAQ 2,605.35 +1.21%
Russell 2000 838.46 +1.49%
Wilshire 5000 15,187.08 +.96%
Russell 1000 Growth 596.72 +1.0%
Russell 1000 Value 858.88 +.85%
Morgan Stanley Consumer 730.23 +.51%
Morgan Stanley Cyclical 1,072.66 +.82%
Morgan Stanley Technology 625.94 +1.30%
Transports 5,129.77 +1.05%
Utilities 496.11 +1.70%
MSCI Emerging Markets 130.21 +.16%

Total Put/Call 1.05 -2.78%
NYSE Arms .72 -41.42%
Volatility(VIX) 15.53 -17.79%
ISE Sentiment 116.0 -15.94%

Futures Spot Prices
Crude Oil 69.01 +1.83%
Reformulated Gasoline 225.46 +.34%
Natural Gas 6.93 +.76%
Heating Oil 202.51 +1.60%
Gold 645.80 +.08%
Base Metals 246.31 -2.53%
Copper 335.25 +1.09%

10-year US Treasury Yield 5.08% unch.
US Dollar 82.32 +.03%
CRB Index 312.30 +.51%

Leading Sectors
Biotech +2.20%
REITs +2.08%
Alternative Energy +2.12%

Lagging Sectors
Insurance +.20%
Gaming +.08%
Hospitals +.05%

Evening Review
Market Performance Summary
WSJ Data Center
Sector Performance

ETF Performance
Style Performance
Commodity Movers

Market Wrap CNBC Video(bottom right)
S&P 500 Gallery View
Timely Economic Charts
PM Market Call
After-hours Movers
After-hours Stock Quote
In Play

Afternoon Recommendations
Bank of America:

- Rated (SPR) Buy, target $42.

- Rated (CRWN) Buy, target $9.25.

Afternoon/Evening Headlines
- Treasury Secretary Henry Paulson said Congress shouldn’t punish Blackstone Group LP with higher taxes because it became a publicly traded partnership, and he warned against “unintended consequences” of broader efforts to tax hedge funds and buyout firms.
- Merrill Lynch(MER) CEO O’Neal and Goldman Sachs Group(GS) CEO Lloyd Blankfein offered reassurance to investors today, saying they see few risks of widespread turmoil in the credit markets.
- James Glassman, senior US economist at JPMorgan(JPM), sees the Fed “on the sidelines” and the price of oil dropping.
- Corn fell to a six-week low in Chicago on speculation that rains will revive Midwest crops threatened by hot, dry weather earlier this month.
- Sugar fell in NY on renewed speculation that rising Brazilian and Indian production will widen a global glut.
- A Senate panel probing the National Security Agency’s domestic terrorism surveillance program issued subpoenas to the White House, VP Dick Cheney and the Justice Dept. for documents showing the Bush administration’s legal justification for the program.
- Shares of Nike Inc.(NKE), the world’s largest sneaker maker, posted their biggest gain in 4 ½ years after the company said orders for clothing and shoes rose 12%, the most since 1997.
- Shares of ComScore Inc.(SCOR), Data Domain(DDUP) and Spreadtrum Communications(SPRD) soared in their first day of trading as demand for speedier wireless connections and Web content renewed investor appetite for technology stocks.
- Bed Bath & Beyond(BBBY) said first quarter profit rose 4.2% after customers bought less bedding and curtains as US home sales slowed. The stock fell 4.3% in after-hours trading.

WABC television:
- NYC is experiencing scattered power outages, affecting parts of the South Bronx, East Harlem and the Upper East Side.

BOTTOM LINE: The Portfolio finished higher today on gains in my I-Banking longs, Medical longs, Semi longs, Biotech longs and Base Metal shorts. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was positive today as the advance/decline line finished higher, every sector rose and volume was above average. Measures of investor anxiety were above-average into the close. Today's overall market action was very bullish. Growth stocks were especially strong, however, every sector I follow finished higher. Technology stocks outperformed again today, and the MS Tech Index is now 10.6% higher year-to-date vs. a 7.2% gain for the S&P 500. Corn fell another 3.6% and has completely broken down technically. I continue to believe a major top in the commodity is already in place. This spurred another 1% decline in the Goldman Ag Commodity Sub-Index. Retail options traders exhibited bearish sentiment throughout the day. The Nikkei futures are indicating an up 100 open in Japan. I suspect U.S. stocks will build on today's gains tomorrow.

Here is a five-year chart of NYSE short-interest:

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As you can see, short interest was basically flat from mid-2002 through first quarter 2005, which is what I would expect considering the massive number of new hedge funds created during that period and a large stock rally off the bottom in October 2002. However, the recent parabolic rise in short interest, the largest four-month percentage increase on record (+30%), is stunning considering recent stock gains and is symptomatic of the current U.S. negativity bubble, in my opinion. Moreover, the only ETF that is ranked in the top 30 NYSE short positions is the iShares Russell 2000 Index (IWM). The rest are equities. I think this is a direct result of the massive capital that is allocated to low correlation U.S. stock strategies and the undying belief by the herd that the U.S. will continue to underperform all other global markets indefinitely. I suspect, given their horrific risk-adjusted underperformance over the last few years, that some low-correlation U.S. stock strategies will see significant redemptions at year-end and that a large percentage of this capital will move into more positively correlated U.S. stock strategies. As well, I think a chain reaction of events has already begun that will lead to a dramatic positive change in perception by global portfolio managers regarding the prospects for US stocks vs. most other global markets. The recent parabolic rise in short interest is unsustainable and only brings the "mother of all short-covering rallies" closer, in my opinion.

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