Wednesday, September 17, 2008

Stocks Sharply Lower into Final Hour on Rising Credit Angst, Financial Sector Pessimism, Higher Commodity Prices

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Computer longs, Internet longs and Gaming longs. I added (IWM)/(QQQQ) hedges, added to my (EEM) short this morning and covered some of these positions this afternoon, thus leaving the Portfolio 75% net long. The tone of the market is very negative as the advance/decline line is sharply lower, most sectors are falling and volume is heavy. Investor anxiety is very high. Today’s overall market action is very bearish. The VIX is rising 14.5% and is very high at 34.66. The ISE Sentiment Index is very low at 89.0 and the total put/call is very high at 1.42. Finally, the NYSE Arms has been running around average most of the day, after peaking at 3.96 this morning, and is currently .84. The Euro Financial Sector Credit Default Swap Index is +5.02% today to 150.17 basis points. This index is up from a low of 52.66 on May 5th and at a new high. The North American Investment Grade Credit Default Swap Index is +5.87% to 205.76 basis points. The TED spread is rising 38.3% to 3.02 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down another 2 basis point to 1.61%, which is down 101 basis points in about eight weeks and at the lowest level since January 2003, when deflation was the concern. The fact that credit angst is surging to records today, despite the AIG news, is a large negative. The (XLF) is breaking down through its recent trading range, which is also a negative. Many gauges of stock market angst are at levels normally associate with meaningful market bottoms, however the NYSE Arms has been unusually low after its initial opening spike. I am seeing many instances of "capitulation" selling in individual equities and I suspect some stocks are making their lows today. Nikkei futures indicate a -305 open in Japan and DAX futures indicate an +2 open in Germany tomorrow. I expect US stocks to trade modestly lower into the close from current levels on more shorting, forced selling, higher commodity prices, rising financial sector pessimism and global growth worries.

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