Monday, February 23, 2009

Stocks Sharply Lower into Final Hour on More Economic Pessimism, Shorting, Forced Selling

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Internet longs, Medical longs and Computer longs. I added to my (IWM)/(QQQQ) hedges and to my (EEM) short today, thus leaving the Portfolio 50% net long. The tone of the market is very negative as the advance/decline line is substantially lower, sector performance is mostly negative and volume is about average. Investor anxiety is above average. Today’s overall market action is very bearish. The VIX is rising 5.42% and is elevated at 51.99. The ISE Sentiment Index is below average at 117.0 and the total put/call is slightly above average at .94. Finally, the NYSE Arms has been running low most of the day, hitting .38 at its intraday trough, and is currently .51. The Euro Financial Sector Credit Default Swap Index is rising 8.73% today to 159.67 basis points. This index is hitting a new record today, eclipsing its high of 157.81 on Sept. 16th. The North American Investment Grade Credit Default Swap Index is falling .42% to 213.45 basis points. The TED spread is falling .52% to 97 basis points. The TED spread is now down 370 basis points in about four months. The 2-year swap spread is falling 2.72% to 62.50 basis points. The Libor-OIS spread is falling .49% to 101.0 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 5 basis points to 1.11%, which is down 159 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 up 1 basis point today. Market leading stocks are even weaker than the broad market. It is a large negative to see the financial sector cds index take out its record high from last year. As well, the NYSE Arms has been extremely low today given the damage. On the positive side, banks, airlines and homebuilders are actually up today. Nikkei futures indicate a -221 open in Japan and DAX futures indicate a -51 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on more economic sector pessimism, shorting and forced selling.

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