Friday, November 14, 2008

Stocks Lower into Final Hour on Earnings Worries, More Shorting and Global Growth Concerns

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Computer longs and Medical longs. I added (IWM)/(QQQQ) hedges today and then took profits in them, thus leaving the Portfolio 100% net long. The tone of the market is bearish as the advance/decline line is sharply lower, almost every sector is declining and volume is about average. Investor anxiety is above average. Today’s overall market action is neutral. The VIX is rising 3.16% and is very elevated at 61.72. The ISE Sentiment Index is around average at 159.0 and the total put/call is above average at 1.01. Finally, the NYSE Arms has been running very high most of the day, hitting 2.69 at its intraday peak, and is currently .91. The Euro Financial Sector Credit Default Swap Index is unch. today at 107.67 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 unch. at 199.87 basis points. The TED spread is rising 7.0% to 210 basis points. The TED spread is now down 254 basis points in just over four weeks. The 2-year swap spread is rising 2.15% to 112.75 basis points. The Libor-OIS spread is rising 5.45% to 172 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down 6 basis points to .78%, which is down 184 basis points in just over four months and at the lowest level since January 1999. Volume during this morning’s sell-off was below average with a very high NYSE Arms reading, which indicated the bears were running low on firepower. As well, this afternoon’s surge was on above-average volume. Considering we are still 860 Dow points off of yesterday’s low, today’s mild sell-off isn’t concerning. I suspect, given Asia’s relatively muted upside performance last night in response to our sharp rally yesterday and US stocks’ display of resilience today, we could see some upside fireworks in Asia on Monday. As well, I am hearing a number of funds are shorting ahead of what they perceive will be G-20 inaction. Thus, we could see some more short-covering here on Monday that could lead to further upside. Nikkei futures indicate an +300 open in Japan and DAX futures indicate an +100 open in Germany tomorrow. I expect US stocks to trade higher into the close from current levels on short-covering, bargain-hunting, less financial sector pessimism, less forced selling, lower energy prices and seasonal strength.

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