Wednesday, December 24, 2008

Stocks Higher into Final Hour on Falling Credit Market Angst, Less Financial Sector Pessimism and Short-Covering

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Financial longs, Retail longs, Internet longs and Medical longs. I covered all my (IWM)/(QQQQ) hedges and some of my (EEM) short today, thus leaving the Portfolio 100% net long. The tone of the market is mildly bullish as the advance/decline line is slightly higher, most sectors are gaining and volume is very light. Investor anxiety is above average. Today’s overall market action is mildly bullish. The VIX is falling 1.5% and is elevated at 44.36. The ISE Sentiment Index is about average at 140.0 and the total put/call is below average at .81. Finally, the NYSE Arms has been running around average most of the day, hitting .99 at its intraday peak, and is currently .95. The Euro Financial Sector Credit Default Swap Index is falling 2.01% today to 111.94 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 1.40% to 207.89 basis points. The TED spread is rising 1.27% 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 another 3.58% to 67.25 basis points. The Libor-OIS spread is plunging 9.55% to 112 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down 1 basis point to .10%, which is down 251 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 -.01%, which is down 1 basis point today. The plunge in the Libor-OIS spread, Greenspan’s favorite gauge of credit market health, is a big positive. As well, the yen is beginning to give up morning gains and has been trending lower over the last week, which is a positive. Oil is getting oversold again short-term, but will very likely see lower lows next year. I expect this to finally be viewed as the big positive that it is next year. Those that say the market can’t rise without oil rising are ignoring the long-term history between the two. Inflation should be non-existent next year and as the economy stabilizes those stocks that can grow earnings at a relatively healthy rate despite sluggish growth should see their multiples expand dramatically. I still expect another push higher in the major averages before year-end. Nikkei futures indicate an +128 open in Japan and DAX futures indicate an +37 open in Germany on Friday. I expect US stocks to trade modestly higher into the close from current levels on lower energy prices, diminishing credit market angst, bargain-hunting, less financial sector pessimism and short-covering.

No comments: