Monday, May 11, 2009

Stocks Falling into Final Hour on Profit-Taking, Rising Financial Sector Pessimism

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Biotech longs, Technology longs, Medical longs and Commodity/Emerging Market shorts. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are declining and volume is heavy. Investor anxiety is above average. Today’s overall market action is mildly bearish. The VIX is rising 1.34% and is very high at 32.48. The ISE Sentiment Index is slightly above average at 155.0 and the total put/call is above average at .94. Finally, the NYSE Arms has been running high most of the day, hitting 4.19 at its intraday peak, and is currently 1.64. The Euro Financial Sector Credit Default Swap Index is rising 2.70% today to 120.79 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 2.82% to 147.94 basis points. This index is also well below its Dec. 5th record high of 285.99. The TED spread is falling .17% to 76 basis points. The TED spread is now down 387 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising .54% to 46.75 basis points. The Libor-OIS spread is falling 2.63% to 72 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 5 basis points to 1.52%, which is down 112 basis points since July 7th. The 3-month T-Bill is yielding .16%, which is down 1 basis point today. Today’s losers are mainly concentrated in shares that saw the sharpest gains last week, which is a large positive. This is the type of action that is necessary to keep the recent uptrend in tact. The MS Tech Index is unch. on the day, with gains seen in Software, Semi, Telecom and Computer Service shares. As well, Education, Gaming, Hospital and Biotech stocks are all rising on the day, despite losses in the major averages. Many other “growth” stocks are also rising today. I suspect retail and technology shares could lead the major averages higher later this week. Nikkei futures indicate a -96 open in Japan and DAX futures indicate an +6 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, investment manager performance anxiety and lower long-term rates.

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