Friday, February 13, 2009

Stocks Slightly Lower into Final Hour on Financial Sector Pessimism Ahead of Three-day Weekend

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Retail longs and Financial longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is mildly negative as the advance/decline line is slightly lower, sector performance is mixed and volume is about average. Investor anxiety is above average. Today’s overall market action is mildly bearish. The VIX is rising 2.67% and is very high at 42.34. The ISE Sentiment Index is slightly below average at 134.0 and the total put/call is about average at .88. Finally, the NYSE Arms has been running above average most of the day, hitting 2.01 at its intraday peak, and is currently 1.15. The Euro Financial Sector Credit Default Swap Index is rising 2.75% today to 119.38 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 1.25% to 199.84 basis points. The TED spread is rising .33% to 95 basis points. The TED spread is now down 372 basis points in under four months. The 2-year swap spread is rising 1.17% to 66.25 basis points. The Libor-OIS spread is down .71% to 97 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 8 basis points to 1.25%, which is down 145 basis points in under 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 bears are unable to gain any traction today despite weakness in the bank and reit sectors. A number of sectors are gaining today. Homebuilding, education, hospital, semi, steel, oil service and alternative energy stocks are especially strong. “Growth” stocks continue to dramatically outperform “value” shares. This year’s best performing style is mid-cap growth(-.90% ytd), while this year’s worst performing style is small-cap value(-14.29% ytd). I still expect this trend to continue through year-end. One of my longs, (QSII), is 2.2% higher today and should be a big beneficiary of the coming digitization of US medical records. I still think the stock is very attractive at current levels. It appears the financials are holding the broad market back from a significant surge higher. A potential change in the mark-to-market rule could provide a substantial upside catalyst for the group over the coming weeks, which would push the broad market meaningfully higher. Nikkei futures indicate an +11 open in Japan and DAX futures indicate an +1 open in Germany on Monday. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering and less extreme economic pessimism.

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