Wednesday, December 31, 2008

Stocks Surging into Final Hour on Less Financial Sector Pessimism, Short-Covering, Bargain-Hunting and Seasonal Strength

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Biotech longs, Technology longs, Financial longs, Retail longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is bullish as the advance/decline line is substantially higher, almost every sector is rising and volume is light. Investor anxiety is above average. Today’s overall market action is bullish. The VIX is falling 5.4% and is very high at 39.38. The ISE Sentiment Index is below average at 124.0 and the total put/call is around average at .86. Finally, the NYSE Arms has been running above average most of the day, hitting 1.72 at its intraday peak, and is currently .72. The Euro Financial Sector Credit Default Swap Index is rising 3.64% today to 113.65 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 rising .74% to 197.24 basis points. The TED spread is up .01% to 135 basis points. The TED spread is now down 331 basis points in just over ten weeks. The 2-year swap spread is up 1.43% to 71.0 basis points. The Libor-OIS spread is falling 2.85% to 121 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 7 basis points to .13%, which is down 248 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 .08%, which is down 1 basis point today. The (XLF) is trading very well again today, rising 3.5%. This news from the Treasury Dept. is helping. Today's overall stock gains are broad-based. The sell-off in long-term Treasuries is a positive development. Oil is surging over 10% today, which is most likely the result of year-end hedge fund activity. Traders are the most net long crude oil futures since May, even as commercials increase their short position in the commodity, which is another bearish development for oil. I suspect we will see an extension of recent positive US stock market action on Friday. Nikkei futures indicate an +340 open in Japan on Friday. DAX futures aren't trading. I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting, diminishing credit market angst, less financial sector pessimism, seasonal strength, less forced selling and short-covering.

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