Wednesday, November 28, 2007

Stocks Soaring into Final Hour on Another Plunge in Oil, Financial Sector Strength, Short-Covering, Bargain-Hunting

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi longs, Medical longs, Biotech longs, Retail longs, Computer longs, Internet longs and Software longs. I took profits in some of my (TLT) long and added to my (ILMN) long this morning, thus leaving the Portfolio 100% net long. The overall tone of the market is exceptionally positive today as the advance/decline line is substantially higher, every sector is rising and volume is heavy. Investor anxiety is above average despite today’s sharp gains. The 10-year TIPS spread, one of the best indicators of inflation expectations, is falling another 4 basis points today and is down 14 basis points in two days. This is mainly the result of the breakdown in energy prices. Pundits are saying that today’s rally is mainly the result of fed rate cut expectations. However, fed fund futures have implied a near 100% chance for another cut at the upcoming meeting for several weeks. In my opinion, the huge move in the broad market the last couple of days is directly related to the sharp decline in oil and firming of the US dollar. As I have said many times, record oil prices have had a much greater negative impact on the broad market than is commonly perceived. Moreover, despite the spin from the media, retail sales over the weekend, both online and offline, were much better than expected. There remains little evidence of the imminent recession that has been predicted for several years. There is much evidence that the US housing slowdown, combined with booming exports, is leading to modestly below average growth over the intermediate-term. The current macro backdrop remains exceptional for true “growth” stocks. Growth stock leaders are significantly outperforming the broad market during both weak markets and strong ones like today. For the most part, the stocks that I have disclosed that I am long are performing spectacularly year-to-date. These include GOOG +50%, AAPL +113%, ISRG +238%, ILMN +42%, GILD +41%, AMSC +138%, NUAN +80%, BRCM -12%, UA -4%, PWR +39% and TLT +11%. I now believe the broad market and US dollar have bottomed for the intermediate-term and that oil has put in at the very least an intermediate-term top. I expect US stocks to trade mixed-to-higher into the close from current levels on financial sector strength, a firmer US dollar, short-covering, bargain-hunting and lower energy prices.

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