Tuesday, December 18, 2007

Stocks Higher into Final Hour, Reversing Sharply From Mid-day Declines

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Software longs, Biotech longs and Medical longs. I covered all of my (IWM)/(QQQQ) hedges, added slightly to my (GOOG)/(AAPL)/(ISRG) longs and covered some of my (EEM) short today, thus leaving the Portfolio 100% net long. The overall tone of the market is positive today as the advance/decline line is higher, most sectors are rising and volume is about average. Investor anxiety is above average again. Today’s overall market action is bullish. The TED spread is falling another 7 basis points today to 189 basis points. It has declined 32 basis points in six days, which is a big positive. As well, the 10-year swap rate is falling to 63.7 basis points over Treasuries, which is down from 87.5 basis points over Treasuries one month ago. Gauges of credit market angst are beginning to fall meaningfully, which seems to be mostly ignored by investors so far. Investor reactions to the Goldman Sachs(GS) and Best Buy(BBY) earnings reports are other examples of good news failing to be rewarded as the undying belief by the herd that the future for the US economy is bleak remains firmly in tact. I continue to believe that as we move into the first quarter of next year without seeing a further meaningful deterioration in economic data that stocks will rise substantially from current levels as the recession trades get taken off. Below trend economic growth, low interest rates and decelerating inflation should prompt another explosive move higher in true “growth” stocks. I expect US stocks to trade modestly higher into the close from current levels on falling energy prices, diminishing credit market angst, bargain-hunting and short-covering.

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