Monday, September 28, 2009

Stocks Higher into Final Hour on Less Financial Sector Pessimism, Short-Covering, Window Dressing, Less Economic Fear

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Medical longs, Technology longs, Financial longs and Biotech longs. I covered all my (IWM)/(QQQQ) hedges this morning, 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 slightly below average. Investor anxiety is very high. Today’s overall market action is bullish. The VIX is falling 2.19% and is very high at 25.05. The ISE Sentiment Index is below average at 123.0 and the total put/call is above average at .97. Finally, the NYSE Arms has been running below average most of the day, hitting .54 at its intraday trough, and is currently .74. The Euro Financial Sector Credit Default Swap Index is falling 2.11% today to 65.25 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 1.53% to 96.50 basis points. This index is also well below its Dec. 5th record high of 285.99. The TED spread is unch. at 19 basis points. The TED spread is now down 444 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising 5.91% to 31.38 basis points. The Libor-OIS spread is rising 1 basis point to 12 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is unch. at 1.75%, which is down 92 basis points since July 7th. The 3-month T-Bill is yielding .09%, which is unch. today. Considering the meaningful losses in Asia overnight, some weaker US manufacturing data today and the Iranian missile tests, the market’s broad-based advance is more impressive. It is also very encouraging to see a rise in the US dollar, coupled with US stock strength. Cyclical and small-caps shares are especially strong today. REIT, Insurance, Hospital, I-Bank, Networking, Disk Drive, Internet and Coal stocks are all surging 2.75%+. Oil’s muted rise today is noteworthy, considering the strength in stocks and Iranian tensions. Oil fell 8.6% last week, despite a 36.6% surge in oil net speculative longs. Oil net spec longs are now at the highest level since the week of January 6th. Oil is basically at the same price it was on May 29th despite a 16.4% rise in the S&P 500 and a 3% decline in the US Dollar Index over that period. As well, there has been a major increase in Iranian tensions, huge ETF commodity inflows, rising hedge fund long speculation and v-shaped recovery talk over the last few weeks, yet oil is down about $9/bbl. in less than two months. Asian shares should recoup some of today’s losses tonight. Nikkei futures indicate an +231 open in Japan and DAX futures indicate an unch. open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, lower long-term rates, quarter-end window dressing, less financial sector pessimism, investment manager performance anxiety, diminishing economic fear and bargain-hunting.

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