Tuesday, October 20, 2009

Stocks Lower into Final Hour on Economic Concerns, Healthcare Reform Worries, Profit-Taking, More Shorting

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Retail longs, Medical longs and Biotech longs. 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 substantially lower, most sectors are declining and volume is around average. Investor anxiety is very high. Today’s overall market action is mildly bearish. The VIX is falling -.74% and is high at 21.33. The ISE Sentiment Index is very low at 75.0 and the total put/call is above average at .92. Finally, the NYSE Arms has been running high most of the day, hitting 1.77 at its intraday peak, and is currently 1.75. The Euro Financial Sector Credit Default Swap Index is falling -1.65% today to 64.0 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 +.10% to 96.42 basis points. This index is also well below its Dec. 5th record high of 285.99. The TED spread is falling 1 basis point to 21 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 -2.04% to 35.94 basis points. The Libor-OIS spread is up +1 basis point to 12 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling -4 basis points to 2.0%, which is down 65 basis points since July 7th. The 3-month T-Bill is yielding .07%, which is up 1 basis point today. Small-caps are under pressure today, with the Russell 2000 falling 1.49%. I am still seeing signs that some of this small-cap weakness is related to liquidations at hedge fund Galleon Group. Healthcare reform worries are once again plaguing some healthcare-related shares. As well, today’s economic reports are helping to pressure commodity and homebuilding stocks. On the positive side, most credit default swap indices are mixed-to-lower and the bears have been unable, once again, to gain any meaningful traction. Several gauges of investor angst are very high today, given the muted nature of today’s decline, which is also a big positive. The ISE Sentiment Index, a gauge of retail options trader’s sentiment, hit 21.0 this morning, the lowest level since January 17th of 2008. While the major averages are extended, I continue to believe any pullbacks will be relatively mild and short-lived over the coming weeks. Nikkei futures indicate a -51 open in Japan and DAX futures indicate a -3 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, lower long-term rates, lower energy prices and earnings optimism.

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