Monday, December 22, 2008

Stocks Falling into Final Hour on Forced Selling, Global Growth Concerns and More Shorting

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Internet longs, Retail longs and Computer longs. I added (IWM)/(QQQQ) hedges and added to my (EEM) short today, thus leaving the Portfolio 75% net long. The tone of the market is very bearish as the advance/decline line is substantially lower, every sector is declining and volume is light. Investor anxiety is above average. Today’s overall market action is bearish. The VIX is rising .5% and is elevated at 45.19. The ISE Sentiment Index is below average at 113.0 and the total put/call is below average at .72. Finally, the NYSE Arms has been running very high most of the day, hitting 3.03 at its intraday peak, and is currently 2.75. The Euro Financial Sector Credit Default Swap Index is falling 5.82% today to 115.10 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 2.21% to 213.50 basis points. The TED spread is falling 2.07% to 148 basis points. The TED spread is now down 318 basis points in just over two months. The 2-year swap spread is down 6.34% to 77.50 basis points. The Libor-OIS spread is dropping 2.89% to 125 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down 2 basis points to .08%, which is down 253 basis points in just 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 yielding .00%, which is unch. today. 1-month US Dollar-based Libor is dropping another basis point to .46% today. It has declined 414 basis points since October 10th. Today’s action has many characteristics associated with “forced selling.” After failing to meaningfully break above their 50-day moving averages, many stocks are now rolling over. On the positive side, volume is very light and the NYSE Arms is very high, which usually indicates a sharp snapback rally will materialize over the next few days. As well, credit angst gauges continue to improve significantly. Nikkei futures indicate a -175 open in Japan and DAX futures indicate a -29 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on lower energy prices, diminishing credit market angst, short-covering and bargain-hunting.

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