Monday, September 15, 2008

Stocks Sharply Lower into Final Hour on Rising Credit Angst, Financial Sector Pessimism, Global Growth Worries

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Computer longs and Medical longs. I added to my (QSII) long and added (IWM)/(QQQQ) hedges today, thus leaving the Portfolio 75% net long. The tone of the market is very negative as the advance/decline line is substantially lower, almost every sector is falling and volume is above average. Investor anxiety is very high. Today’s overall market action is bearish. The VIX is rising 12.98% and is high at 28.99. The ISE Sentiment Index is low at 106.0 and the total put/call is very high at 1.44. Finally, the NYSE Arms has been running around average most of the day, after peaking at 1.09 this morning, and is currently .91. The Euro Financial Sector Credit Default Swap Index is +29.66% today to 123.17 basis points. This index is up from a low of 52.66 on May 5th, but down slightly from 129.46 basis points on March 20th. The North American Investment Grade Credit Default Swap Index is +24.9% at 187.0 basis points. The TED spread is rising 45.76% to 1.97 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is plunging another 18 basis point to 1.77%, which is down 85 basis points in just over seven weeks and at the lowest level since July 2003. Fed fund futures now imply a 62.0% chance for a 25 basis point rate cut at tomorrow’s FOMC meeting versus 12.0% on Friday. This seems a little high to me, but with the plunge in inflation expectations and recent US dollar strength the Fed has the leeway to cut now if they deem necessary. Despite the large drop in the (XLF) today, it is still right at the bottom end of the trading range it has been in($19.50-$23.50) since July 17th. The Regional Bank etf, (KRE), is holding up relatively well today, declining 1.9%. Many market leading growth stocks that aren’t dependent on a vigorous global economy are substantially outperforming today. The Goldman Hedge Fund VIP Index(favorite long positions of hedge funds), which is heavily populated with very cyclical companies, is substantially underperforming today, falling 5.48%. This is likely contributing to more forced selling in the hedge fund community. The US dollar, which was down big last night on the Lehman news, has recouped almost all its losses today, currently down .15%, which is a positive. The technology sector saw significant net insider buying last week. According to the Washington Service, technology corporate insiders purchased $101,478,865 worth of stock last week and sold $26,977,172 worth. I would have liked to have seen a higher NYSE Arms reading today and a greater feel of panic. We could get that tomorrow morning, depending on how Asia opens and developments with AIG. Nikkei futures indicate a -444 open in Japan and DAX futures indicate a -35 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, less forced selling, lower commodity prices, rising Fed rate cut odds and bargain-hunting.

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