Monday, September 22, 2008

Stocks Sharply Lower into Final Hour on Rise in Commodity Prices, Profit-taking, Global Growth Worries

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Computer longs, Medical longs and Gaming longs. I added more (IWM)/(QQQQ) hedges and added to my (EEM) short this morning and then took profits in 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, almost every sector is declining and volume is below average. Investor anxiety is around average. Today’s overall market action is bearish. The VIX is rising 1.9% and is very high at 32.69. The ISE Sentiment Index is below average at 140.0 and the total put/call is around average at .89. Finally, the NYSE Arms has been running below average most of the day and is currently .76. The Euro Financial Sector Credit Default Swap Index is falling -7.93% today to 99.0 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 -7.4% to 145.5 basis points. The TED spread is rising .8% to 2.34 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 4 basis point to 1.97%, which is down 65 basis points in just over eight weeks and at the lowest level since August 2003, when deflation was the concern. The decline in the US dollar is a large negative. However, I believe the decline is overdone and the currency will begin to stabilize around current levels before embarking on another move higher during 4Q. One of the main positives I see today is that volume is very light compared to the volume during the prior two days move higher. I would expect to see Asian equities down tonight, which could pressure US shares again on the open, however I suspect we will begin to see another turnaround soon thereafter. Nikkei futures indicate a -240 open in Japan and DAX futures indicate a -6 open in Germany tomorrow. I expect US stocks to trade mixed into the close from current levels as diminishing credit market angst and bargain-hunting offsets higher commodity prices, more shorting and global growth worries.

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