Tuesday, February 24, 2009

Stocks Surging into Final Hour on Bank "Stress Test" Details, Short-Covering, Bargain-Hunting

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Medical longs, Retail longs and Computer longs. I covered all of my (IWM)/(QQQQ) hedges and some of my (EEM) short today, thus leaving the Portfolio 100% net long. The tone of the market is very positive as the advance/decline line is substantially higher, almost every sector is rising and volume is above average. Investor anxiety is also above average. Today’s overall market action is very bullish. The VIX is falling 15.45% and is very high at 44.48. The ISE Sentiment Index is slightly below average at 122.0 and the total put/call is around average at .85. Finally, the NYSE Arms has been running low most of the day, hitting .39 at its intraday trough, and is currently .48. The Euro Financial Sector Credit Default Swap Index is rising .96% today to 161.0 basis points. This index is hitting a new record again today, eclipsing its high of 157.81 on Sept. 16th. The North American Investment Grade Credit Default Swap Index is rising 3.53% to 220.99 basis points. The TED spread is falling 2.98% to 95 basis points. The TED spread is now down 372 basis points in about four months. The 2-year swap spread is rising 4.40% to 65.25 basis points. The Libor-OIS spread is falling .71% to 100.0 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 11 basis points to 1.00%, which is down 170 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 .30%, which is up 3 basis points today. Fed Chairman Bernanke’s detailed comments regarding the forthcoming bank “stress tests” have alleviated some uncertainty surrounding this plan, which is a large positive. The most heavily-shorted groups are seeing the largest gains today. The MS Cyclical Index is rising 6.4%, as well. Inflation expectations have taken another meaningful fall over the last few days. Moreover, less safe-haven buying is also weighing heavily on gold again today. I suspect we will see another follow-through surge higher in US stocks at some point over the next few days, but it is too early to tell whether yesterday’s low was “the low.” Nikkei futures indicate an +270 open in Japan and DAX futures indicate an +88 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on diminishing financial sector pessimism, short-covering and less forced selling.

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