Thursday, December 18, 2008

Stocks Lower into the Final Hour on Global Growth Fears, Shorting, Profit-Taking

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Retail longs and Financial 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 bearish as the advance/decline line is lower, most sectors are falling and volume is below average. Investor anxiety is above average. Today’s overall market action is bearish. The VIX is falling 5.1% and is elevated at 47.30. The ISE Sentiment Index is below average at 127.0 and the total put/call is slightly below average at .86. Finally, the NYSE Arms has been running high most of the day, hitting 2.28 at its intraday peak, and is currently 2.28. The Euro Financial Sector Credit Default Swap Index is plunging 11.2% today to 119.0 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 6.33% to 217.62 basis points. The TED spread is rising .53% to 158 basis points. The TED spread is now down 308 basis points in just over two months. The 2-year swap spread is up 2.54% to 85.88 basis points. The Libor-OIS spread is dropping 4.81% to 132 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down 16 basis points to .18%, which is down 243 basis points in about 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 -.05%, which is down 6 basis points today. 1-month US Dollar-based Libor is dropping another 7 basis points to .51% today. It has declined 409 basis points since October 10th. The recent plunge in gauges of credit angst remain a big positive. Healthcare-related stocks are displaying significant relative strength today. I think these stocks will be one of the best-performing groups next year. The (XLF), while 2.6% lower, is holding up relatively well considering (GE), (UBS) and (HBC). I suspect that the US dollar has made another tradable low against the yen and euro. This could present another headwind for commodities over the coming weeks. Nikkei futures indicate an +7 open in Japan and DAX futures indicate a -69 open in Germany tomorrow. I expect US stocks to trade modestly lower into the close from current levels on more shorting, profit-taking and global growth fears.

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