Thursday, December 11, 2008

Stocks Sharply Lower into Final Hour on More Economic Pessimism, Profit-taking and REIT Sector Worries

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Retail longs, Biotech longs, Internet longs, Computer longs and Medical longs. I added (IWM)/(QQQQ) hedges today, thus leaving the Portfolio 75% net long. The tone of the market is bearish as the advance/decline line is substantially lower, almost every sector is declining and volume is below average. Investor anxiety is above average. Today’s overall market action is bearish. The VIX is rising .54% and is very elevated at 56.13. The ISE Sentiment Index is below average at 118.0 and the total put/call is slightly above average at .97. Finally, the NYSE Arms has been running above average most of the day, hitting 1.74 at its intraday peak, and is currently 1.35. The Euro Financial Sector Credit Default Swap Index is falling 2.14% today to 128.33 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 4.42% to 258.24 basis points. The TED spread is falling 4.91% to 199 basis points. The TED spread is now down 267 basis points in two months. The 2-year swap spread is down 4.32% to 105.25 basis points. The Libor-OIS spread is falling 6.49% to 172 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is unch. at .23%, which is down 239 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 .01%, which is unch. today. Banks and REITs are especially weak today and have helped drag down the broad market on light volume. Small-caps and cyclicals, which have been recent winners, are also under meaningful pressure. I would anticipate meaningful weakness in Asia tonight, which could further pressure US share tomorrow morning. The ongoing improvement in gauges of credit angst remains a big positive. I suspect this light volume stock sell-off will be short-lived and the rally will resume into year-end. Nikkei futures indicate a -90 open in Japan and DAX futures indicate a -44 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on more economic pessimism, REIT sector worries, shorting and profit-taking.

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