Thursday, April 16, 2009

Stocks Soaring into Final Hour on Less Economic Fear, Diminishing Credit Market Angst, Less Financial Sector Pessimism, Short-Covering

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Technology longs, Medical longs, Retail longs and Financial longs. I have not traded 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 above average. Today’s overall market action is very bullish. The VIX is falling 2.52% and is very high at 35.27. The ISE Sentiment Index is slightly below average at 137.0 and the total put/call is slightly below average at .78. Finally, the NYSE Arms has been running around average most of the day, hitting 1.60 at its intraday peak, and is currently .72. The Euro Financial Sector Credit Default Swap Index is falling 4.12% today to 144.33 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 falling 3.01% to 175.18 basis points. This index is also well below its Dec. 5th record high of 285.99. The TED spread is rising .57% to 98 basis points. The TED spread is now down 365 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising 2.22% to 57.50 basis points. The Libor-OIS spread is falling 1.10% to 91 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down 4 basis points to 1.28%, which is down 136 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 down 1 basis point today. Technology, Real Estate and Financial shares are propelling today’s rally. Given the news, the 6.5% surge in the heavily-shorted REIT Index is especially impressive today. I suspect many net short or market neutral portfolio managers are starting to get very nervous as the S&P 500 approaches flat ytd. The Nasdaq is now 6.4% higher for the year. One of my longs, (GOOG), reports after the close today. While the stock has risen substantially off its lows, I wouldn’t be a seller around current levels and will look to accumulate more shares on any meaningful pullback. Considering its stature as one of the leading technology growth stocks in the world and somewhat recession resistant biz, its 18.7x forward p/e is very cheap, in my opinion. As well, any sign of traction with Google’s monetization of YouTube should be viewed as a major positive. Finally, Google’s put/call open interest ratio is right near a record high at 1.12, which is also a positive. Nikkei futures indicate an +240 open in Japan and DAX futures indicate an +44 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, less economic fear, diminishing credit market angst, portfolio manager performance anxiety and less financial sector pessimism.

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