Wednesday, October 28, 2009

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

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Technology longs, Biotech longs and Financial longs. I added to my (IWM)/(QQQQ) hedges this morning, thus leaving the Portfolio 50% net long. The tone of the market is very negative as the advance/decline line is substantially lower, almost every sector is declining and volume is above average. Investor anxiety is very high. Today’s overall market action is bearish. The VIX is rising +8.78% and is very high at 27.01. The ISE Sentiment Index is below average at 126.0 and the total put/call is high at 1.13. Finally, the NYSE Arms has been running above average most of the day, hitting 1.82 at its intraday peak, and is currently 1.13. The Euro Financial Sector Credit Default Swap Index is rising +6.62% today to 67.0 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 +4.36% to 106.48 basis points. This index is also well below its Dec. 5th record high of 285.99. The TED spread is unch. at 22 basis points. The TED spread is now down 442 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is falling -15.28% to 31.88 basis points. The Libor-OIS spread is up +1 basis point to 13 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down -3 basis points to 1.97%, which is down 68 basis points since July 7th. The 3-month T-Bill is yielding .06%, which is unch. today. Cyclicals are getting pounded today with the MS Cyclical Index dropping another 4.3%. This index is down almost 9% in four trading days and is breaking convincingly below its 50-day moving average. Small-caps are also displaying relative weakness. Coal, Alt Energy, Oil Tanker, Oil Service, Gold, Steel, Hospital, Homebuilding, Gaming, Education and Airline shares are especially weak today, falling 4%+. (IYR)/(XLF) have been heavy throughout the day. The US dollar continues to trade well. It is also a negative to see the jumps in various CDS indices. On the positive side, gauges of investor angst are very high today given a -1.0% DJIA decline. Road & Rail, Restaurant, Drug, Telecom and Computer Service shares are all just slightly lower or even higher on the day. Some market leaders are finding support around current levels. Part of today’s decline is likely due to Goldman’s call for a below expectations GDP report tomorrow. I expect 3Q GDP to come in at or slightly below estimates of a 3.2% gain. Investors shouldn’t be too surprised by tomorrow’s report. Given how much the S&P is up this quarter, profit-taking by bulls and bears putting out new shorts isn’t that surprising at quarter’s end. This pressure should subside by day’s end tomorrow or Friday morning. I am closing a few of my hedges into this latest weakness. Nikkei futures indicate a -155 open in Japan and DAX futures indicate a -6 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, bargain-hunting, lower energy prices and declining long-term rates.

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