Thursday, February 26, 2009

Stocks Reversing Lower into Final Hour on Tax Hike Worries, Rising Economic Pessimism, More Shorting

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Medical longs and Biotech longs. I added (QQQQ)/(IWM) hedges and added to my (EEM) short today, thus leaving the Portfolio 75% 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 very bearish. The VIX is falling .09% and is very high at 44.66. The ISE Sentiment Index is about average at 151.0 and the total put/call is low at .66. Finally, the NYSE Arms has been running below average most of the day, hitting .25 at its intraday trough, and is currently 1.0. The Euro Financial Sector Credit Default Swap Index is falling 4.88% today to 143.55 basis points. This index is still below its high of 157.81 on Sept. 16th. The North American Investment Grade Credit Default Swap Index is falling 2.71% to 212.88 basis points. The TED spread is rising .99% to 99 basis points. The TED spread is now down 368 basis points in about four months. The 2-year swap spread is falling 2.92% to 62.25 basis points. The Libor-OIS spread is falling .05% to 100.0 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 2 basis points to .98%, which is down 173 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 .27%, which is down 2 basis points today. This morning’s very low put/call and high ISE readings were negative tells. As well, sector breadth was poor, overall breadth was mediocre and there were an unusual number of stocks falling on volume given morning gains. Education, REIT, HMO, Hospital, Biotech, Medical and Oil Tanker shares are under significant pressure today. President Obama’s budget seems to be more damaging to many companies than investors had already anticipated. Asia will likely come under pressure tonight. On the positive side, the AAII % Bulls is still very low at 24.3%, while the % Bears is still very high at 55.14%. Construction, Insurance, Bank, Telecom, Computer Service, Oil Service and Energy Shares are still higher on the day despite the afternoon swoon. Nikkei futures indicate a -52 open in Japan and DAX futures indicate an -62 open in Germany tomorrow. I expect US stocks to trade modestly lower into the close from current levels on rising economic pessimism, more shorting, higher energy prices and tax hike worries.

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