Monday, March 30, 2009

Stocks Lower into Final Hour on Profit-taking, More Shorting and Financial Sector Pessimism

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Technology longs, Medical longs and Financial longs. I added to my (IWM)/(QQQQ) hedges, added to my (EEM) short this morning and then covered them, thus leaving the Portfolio 75% net long. The tone of the market is very negative as the advance/decline line is substantially lower, almost every sector is declining and volume is below average. Investor anxiety is high. Today’s overall market action is bearish. The VIX is rising 12.6% and is very high at 46.21. The ISE Sentiment Index is slightly below average at 137.0 and the total put/call is high at 1.17. Finally, the NYSE Arms has been running extraordinarily high most of the day, hitting 8.77 at its intraday peak, and is currently 3.63. The Euro Financial Sector Credit Default Swap Index is rising 5.82% today to 173.33 basis points. This index is down from its record March 10th high of 208.75. The North American Investment Grade Credit Default Swap Index is rising 5.65% to 191.73 basis points. This index is still below its Dec. 5th record high of 285.99. The TED spread is falling .68% to 109 basis points. The TED spread is now down 354 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising .23% to 55.25 basis points. The Libor-OIS spread is rising .82% to 99 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 6 basis points to 1.37%, which is down 127 basis points since July 7th. 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 .13%, which is up 1 basis point today. Volume is below average with high investor angst today, which usually indicates the bears are running low on firepower. As well, some market-leading stocks have diverged from the broad market this afternoon and are cutting losses into the close. If CNBC is any indication, the herd is overweight commodities. I continue to believe that it is too soon to enter the “reflation” trade. I still favor stocks that can grow earnings at a relatively healthy rate notwithstanding weak global economic activity. As, well, the US dollar still trades well, which is a headwind for commodities. The Citi US Economic Surprise Index is up to -6.60, while the European Economic Surprise Index is still -82.70. Nikkei futures indicate a -116 open in Japan and DAX futures indicate a -8 open in Germany tomorrow. I expect US stocks to trade higher into the close from current levels on short-covering, bargain-hunting and lower energy prices.

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