Tuesday, September 30, 2008

Stocks Soaring into Final Hour on Bargain-Hunting, Short-Covering and Less Financial Sector Pessimism

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Biotech longs, Gaming longs, Computer longs and Internet longs. I covered all my (IWM)/(QQQQ) hedges and some of my (EEM) short this morning, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, almost every sector is rising and volume is above average. Investor anxiety is elevated. Today’s overall market action is bullish. The VIX is falling 15.3% and is elevated at 39.71. The ISE Sentiment Index is below average at 117.0 and the total put/call is high at 1.25. Finally, the NYSE Arms has been running low most of the day and is currently .54. The Euro Financial Sector Credit Default Swap Index is falling 11% today to 117.33 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 2.0% to 171.50 basis points. The TED spread is falling 11.3% to 3.14 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down another 7 basis points to 1.56%, which is down 106 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 rising 3.9% today after yesterday’s steep decline. This index is now down 18.7% for the quarter. I think much of yesterday’s decline was related to hedge fund redemption selling. I am hearing more and more chatter of coordinated global rate cuts, which would be a large positive. As well, Reuters reported over the last hour that the SEC will say the results of disorderly transactions are not determinative when measuring fair value. This should have been done a long time ago, but nonetheless would be another large positive. The US dollar continues to trade very well and I suspect this will again begin to weigh on most commodities over the coming weeks. Weekly retail sales rose 1.4% this week versus a 1.5% gain the prior week. The four-week average of weekly retail sales is a gain of 1.6%, which is below the long-term average, but well above the .6% gain during February of this year. The main negatives I see today are that breadth isn’t that great and some key gauges of credit angst continue to rise. These gauges need to begin to meaningfully reverse to ensure a sustainable stock rally. Nikkei futures indicate a +450 open in Japan and DAX futures indicate an +106 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on bargain-hunting, less financial sector pessimism and short-covering.

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