Wednesday, February 25, 2009

Stocks Reversing Higher into Final Hour on Less Financial Sector Uncertainty, Diminishing Economic Fear, Short-Covering, Bargain-Hunting

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Internet longs, Medical longs, Retail longs and Computer longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are declining and volume is above average. Investor anxiety is also above average. Today’s overall market action is bullish. The VIX is falling 3.52% and is very high at 43.76. The ISE Sentiment Index is below average at 110.0 and the total put/call is around average at .83. Finally, the NYSE Arms has been running around average most of the day, hitting 1.56 at its intraday peak, and is currently .70. The Euro Financial Sector Credit Default Swap Index is falling 8.01% today to 149.0 basis points. This index is now back below its high of 157.81 on Sept. 16th. The North American Investment Grade Credit Default Swap Index is falling .99% to 218.80 basis points. The TED spread is rising .98% to 96 basis points. The TED spread is now down 371 basis points in about four months. The 2-year swap spread is falling .78% to 63.75 basis points. The Libor-OIS spread is falling .17% to 100.0 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 1 basis point to 1.00%, which is down 171 basis points in about seven months. 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 .29%, which is down 1 basis point today. The sharp reversal higher in the (XLF), on volume, after investors heard more details on the bank “stress tests” is a large broad market positive. The Bank Index(BKX) is jumping 6.7%. Semi, Telecom, REIT, Education, Disk Drive and Energy stocks are also posting strong gains. Market leading stocks have been relatively strong throughout the day. Another large decline in gold and jump in the 10-year yield indicates fear is diminishing. Asia should see gains tonight. Nikkei futures indicate an +30 open in Japan and DAX futures indicate an +54 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on diminishing financial sector pessimism, short-covering, bargain-hunting and less extreme economic fear.

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