Thursday, November 20, 2008

Stocks Falling into Final Hour on Financial Sector Pessimism, Auto Bailout Worries, Forced Selling and Global Growth Concerns

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Internet longs, Biotech long, Computer longs and Medical longs. I covered some of my (IWM)/(QQQQ) hedges this morning and then added them back, thus leaving the Portfolio 50% net long. The tone of the market is very bearish as the advance/decline line is substantially lower, almost every sector is declining and volume is heavy. Investor anxiety is extraordinarily high. Today’s overall market action is very bearish. The VIX is rising 4.87% and is historically elevated at 77.88. The ISE Sentiment Index is low at 105.0.0 and the total put/call is very high at 1.29. Finally, the NYSE Arms has been running high most of the day, hitting 1.8 at its intraday peak, and is currently .86. The Euro Financial Sector Credit Default Swap Index is rising 2.71% today to 125.41 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 up 11.4% to 264.20 basis points. The TED spread is rising 1.24% to 214 basis points. The TED spread is now down 250 basis points in about five weeks. The 2-year swap spread is down 3.54% to 102.25 basis points. The Libor-OIS spread is rising .88% to 173 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is plunging 35 basis points to .01%, which is down 261 basis points in under five months and at the lowest level since Bloomberg record-keeping began in August 1998. The 10-year TIPS spread bottomed at .65% in October 1998 during the Asian financial crisis and at 1.24% in October 2001 during the technology bubble-bursting meltdown. The 3-month T-Bill is now yielding .01%. The market is continuing to price in a meaningful bout of deflation. Today’s downside move has volume behind it. I am hearing another large hedge fund is blowing out of positions in size today. I am seeing the type of capitulatory type action I would expect to see near another tradable low. This will likely occur by no later than Tues. Nikkei futures indicate a -203 open in Japan and DAX futures indicate a -70 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on financial sector pessimism, forced selling, more shorting and global growth worries.

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