Friday, September 26, 2008

Stocks Mostly Lower into Final Hour on Global Growth Worries, Rescue Package Uncertainty

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Medical longs, Biotech longs, Gaming longs and Emerging Market/Commodity shorts. I haven’t traded today, thus leaving the Portfolio 100% net long. The tone of the market is negative as the advance/decline line is lower, sector performance is mixed and volume is below average. Investor anxiety is above average. Today’s overall market action is mildly bullish. The VIX is rising 6.2% and is very high at 34.94. The ISE Sentiment Index is low at 109.0 and the total put/call is above average at 1.03. Finally, the NYSE Arms has been running below average most of the day and is currently .73. The Euro Financial Sector Credit Default Swap Index is rising 13.2% today to 122.0 basis points. This index is up from a low of 52.66 on May 5th, but down from 157.81 on Sept. 16th. The North American Investment Grade Credit Default Swap Index is falling .58% to 161.52 basis points. The TED spread is falling 3.6% to 2.91 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down 3 basis points to 1.76%, which is down 86 basis points in about 10 weeks and at the lowest level since July 2003, when deflation was the concern. Gauges of credit angst are mixed today, which is somewhat positive given the news. Action in the (XLF) is very encouraging. As well, the US dollar remains steady despite worries over the costs of the rescue package and weaker economic data. Oil will likely see another temporary surge on an announcement of the rescue package next week, but should begin to weaken again shortly thereafter. The Hedge Fund VIP Index(favorite longs of the hedge fund community) is falling another 2.3% today, substantially underperforming the broad market. I cautioned several months ago about the popularity of the fertilizer stocks and they are getting hit hard today. These stocks are getting oversold again short-term, but still have further downside, in my opinion. I continue to believe that most investors are still underestimating the impact of the global slowdown on commodity/infrastructure plays. One of my largest longs, (AAPL), is down today in sympathy with (RIMM). I think this is a mistake and will look to add again to my position on any meaningful downside in the shares from current levels. Nikkei futures indicate a +212 open in Japan and DAX futures indicate an +80 open in Germany on Monday. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, diminishing financial sector pessimism, lower credit market angst, falling commodity prices and bargain-hunting.

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