Tuesday, October 14, 2008

Stocks Lower into Final Hour on Profit-taking, Global Growth Worries

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Internet longs, Computer longs and Biotech longs. I added (IWM)/(QQQQ) hedges, added to my (EEM) short and added to some commodity shorts this morning, thus leaving the Portfolio 75% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are declining and volume is above average. Investor anxiety is still very elevated. Today’s overall market action is mildly bearish. The VIX is rising 3.51% and is still historically elevated at 56.82. The ISE Sentiment Index is low at 100.0 and the total put/call is slightly below average at .82. Finally, the NYSE Arms has been running high most of the day, hitting 1.78 at its intraday peak, and is currently 1.37. The Euro Financial Sector Credit Default Swap Index is falling 7.25% today to 88.33 basis points. This index is up from a low of 52.66 on May 5th, but down significantly from 157.81 on Sept. 16th. The North American Investment Grade Credit Default Swap Index is falling 5.4% to 176.0 basis points. The TED spread is falling 4.57% to 436 basis points. The 2-year swap spread is falling 12.3% to 130.75 basis points. The Libor-OIS spread is dropping 3.6% to 343 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 1 basis point to 1.03%, which is down 160 basis points in just over three months and at the lowest level since February 1999. Considering market gains from the lows on Friday, today’s sell-off isn’t too bad. As well, the action in the (XLF) is a big broad market positive. Today’s meaningful declines in gauges of credit market angst are the first real signs that recent global initiatives are making a significant impact on the problem. If these gauges continue to improve another strong stock surge is very likely. Intel(INTC) reports after the close. I suspect their guidance will be weak. However, I wouldn’t be surprised to see the stock rebound tomorrow after an initial negative reaction, considering how much bad news is likely already priced into the shares around current levels. Nikkei futures indicate a -12 open in Japan and DAX futures indicate an +24 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, less financial sector pessimism, diminished forced selling and declining credit market angst.

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