Wednesday, February 13, 2008

Stocks Surging into Final Hour on Less Economic Pessimism, Bargain-Hunting, Short-Covering

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi longs, Software longs, Computer longs, Medical longs and Biotech longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is very positive as the advance/decline line is substantially higher, almost every sector is rising and volume is about average. Investor anxiety is above average. Today’s overall market action is very bullish. The VIX is falling 5% today, but remains high at 25.0. The ISE Sentiment Index hit a very depressed 48.0 and the total put/call hit an above-average 1.06 today. Growth stocks are substantially outperforming value stocks, with many posting huge gains relative to the broad market. Today’s overall market action is even more impressive considering there really isn’t any meaningfully positive news to account for the strong move in the major averages and financials began the day under duress. I suspect the large short/sell every rally crowd is beginning to get a bit worried by this action. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 8 basis points today to 2.26%, which is down from 2.48% in late November. Inflation expectations remain muted and stable, despite the recent rebound in commodity prices. Fed fund futures now imply a 68.0% chance, down from 80.0% yesterday, for a 50 basis point rate cut at the upcoming meeting and a 32% chance for a 75 basis point cut, which is up from 20% yesterday. The US dollar is breaking out of its recent trading range versus the yen, which is also a positive. One of my longs I recently added to, (AMSC), is surging 8% today on strength in other alternative energy stocks and conference call comments. The company said its expects revenues to exceed $150M in FY08 and that it sees a huge growth opportunity in China’s power grid and it expects a lot more business in China in the future. This stock is volatile and high risk, but should be a huge winner long-term. Nikkei futures indicate an +270 open in Japan and DAX futures indicate a +70 open in Germany. I expect US stocks to trade mixed-to-higher into the close from current levels on bargain-hunting, less economic pessimsim and short-covering.

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