Monday, December 29, 2008

Stocks Lower into Final Hour on Rising Oil, REIT Sector Weakness, Geopolitical Concerns

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Retail longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is bearish as the advance/decline line is substantially lower, most sectors are declining and volume is extremely light. Investor anxiety is above average. Today’s overall market action is bearish. The VIX is rising 3.2% and is elevated at 44.77. The ISE Sentiment Index is above average at 196.0 and the total put/call is slightly above average at .95. Finally, the NYSE Arms has been running very high most of the day, hitting 1.67 at its intraday peak, and is currently 1.23. The Euro Financial Sector Credit Default Swap Index is rising 1.96% today to 112.07 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 .95% to 202.52 basis points. The TED spread is down 5.40% to 140 basis points. The TED spread is now down 326 basis points in just over ten weeks. The 2-year swap spread is up 2.84% to 68.13 basis points. The Libor-OIS spread is rising 2.15% to 127 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 1 basis point to .11%, which is down 250 basis points in just under six 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 .06%, which is up 7 basis points today. The US dollar is cutting meaningful morning losses sharply against the euro. I would be very surprised to see the euro rally substantially higher from current levels versus the US dollar. In my opinion, the region remains well behind the curve in dealing with their economic troubles. Market leading stocks have been relatively firm throughout the day today. The (XLF) is holding up well despite meaningful losses in the REIT sector today, which is a big positive. Today’s light volume, combined with a high NYSE arms reading, usually indicates a snapback rally is in the offing. Year-end short-covering by large funds with significant short profits could provide the catalyst. Nikkei futures indicate an +68 open in Japan and DAX futures indicate an +32 open in Germany on Monday. I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting, seasonal strength, less forced selling and short-covering.

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