Monday, September 29, 2008

Stocks Sharply Lower into Final Hour on Defeat of Financial Rescue Package, Global Growth Worries, Rising Credit Angst

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Medical longs, Gaming longs, Computer longs and Internet longs. I added (IWM)/(QQQQ) hedges, added to my (EEM) short substantially and then covered some of these positions today, thus leaving the Portfolio 75% net long. The tone of the market is very negative as the advance/decline line is sharply lower, every sector is declining and volume is heavy. Investor anxiety is extraordinarily elevated. Today’s overall market action is very bearish. The VIX is soaring 38.0% and is extraordinarily elevated at 47.85. 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 rising 4.1% to 181.0 basis points. The TED spread is rising 22.9% to 3.59 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down 13 basis points to 1.63%, which is down 99 basis points in less than three months and at the lowest level since January 2003, when deflation was the concern. The Goldman Sachs Hedge Fund VIP Index(favorite longs of the hedge fund community) is falling another 10.3% today. Emerging markets will likely see further declines tonight. I would not be surprised to finally see more constructive commentary from central bankers in Europe tomorrow. A coordinated global response is likely at this point. Nikkei futures indicate a -500 open in Japan and DAX futures indicate a -180 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on global growth worries, rising credit angst, financial sector pessimism and more shorting.

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