Friday, November 16, 2007

Stocks Mostly Lower into Final Hour With Anxiety High

BOTTOM LINE: The Portfolio is about even into the final hour as losses in my Commodity shorts offset gains in my Medical and Biotech longs. I have not traded today, thus leaving the Portfolio 75% net long. The overall tone of the market is negative today as the advance/decline line is lower, most sectors are falling and volume is above average. Investor anxiety is high. Retail options traders, however, are finally displaying the kind of pessimism I would expect to see near a meaningful market bottom. Cisco's (CSCO) additional $10 billion buyback is one large positive today. NPD also said video game sales were 73% higher in October from last year. As well, the speculative and investment grade credit default swaps have stabilized this week. The AAII percentage of bulls dropped to 33.01% this week from 36.2% the prior week. This reading is approaching depressed levels. The AAII percentage of bears fell to 49.5% this week from 51.4% the prior week. This reading is still at elevated levels. Moreover, the 10-week moving average of the percentage of bears is currently at 37.3%, a high level. The 10-week moving average of the percentage of bears peaked at 43.0% at the major bear market low during 2002. The 50-week moving average of the percentage of bears is currently 37.4%, an elevated level seen during only two other periods since tracking began in the 1980s. Those periods were October 1990 to July 1991 and March 2003 to May 2003, both of which were near major stock market bottoms. The extreme readings in the 50-week moving average of the percentage of bears during those periods peaked at 41.6% on Jan. 31, 1991, and 38.1% on April 10, 2003. We are currently still close to eclipsing the peak in long-term bearish sentiment during the 2000 to 2003 market meltdown. I find this astonishing, notwithstanding the recent pullback, given that the S&P 500 is 100% higher from the October 2002 major bear market lows and just 6.6% off a record high. It is also noteworthy that as pessimism grows ever thicker, corporate insiders are displaying downright giddy behavior with their recent stock activity. Prior to the 2000 economic downturn, insiders were bailing in droves. I expect US stocks to trade modestly higher into the close from current levels on bargain hunting and short-covering.

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