Thursday, September 24, 2009

Stocks Lower into Final Hour on Rising Financial Sector Pessimism, Economic Worries, Profit-Taking, More Shorting

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Technology longs, Financial longs and Biotech longs. I added to my (IWM)/(QQQQ) hedges this morning and then covered some of them this afternoon, 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 falling and volume is heavy. Investor anxiety is very high. Today’s overall market action is bearish. The VIX is rising 6.56% and is very high at 25.03. The ISE Sentiment Index is below average at 110.0 and the total put/call is above average at .99. Finally, the NYSE Arms has been running high most of the day, hitting 3.01 at its intraday peak, and is currently 2.06. The Euro Financial Sector Credit Default Swap Index is falling 1.5% today to 63.0 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 3.41% to 94.72 basis points. This index is also well below its Dec. 5th record high of 285.99. The TED spread is rising 1 basis point to 20 basis points. The TED spread is now down 443 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is falling 2.70% to 29.31 basis points. The Libor-OIS spread is rising 1 basis point to 11 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 6 basis points to 1.76%, which is down 91 basis points since July 7th. The 3-month T-Bill is yielding .09%, which is down 1 basis point today. Cyclical shares are especially weak today, with the MS Cyclical Index falling 2.5%. Copper is breaking convincingly below its 50-day moving average. Oil is also breaking down from its recent trading range. Chinese Hot Rolled Steel Sheet is down another 3.5% over the last five days. The Citi Asian Economic Surprise Index has fallen to +29.70 from a high of +67.0 on June 17th. As I cautioned a few days ago, the bounce in the US dollar is pressuring commodity-oriented stocks. As well, financials have been heavy throughout the day, which is always a negative. On the positive side, Utility, Software, Restaurant, Airline, Telecom, Computer Service and Drug shares are just barely lower or even higher on the day. Some market leaders are also holding in very well, considering recent gains. As well, the bears have expended quite a bit of energy just to push the DJIA down 40 points. Overseas shares also held in well after our late-day reversal yesterday. Given the market's recent reaction to positive news, I will closely monitor the action in the tech sector after (RIMM)’s likely positive earnings report after the close. Nikkei futures indicate a -154 open in Japan and DAX futures indicate a -3 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on profit-taking, financial sector pessimism, rising economic worries and more shorting.

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