Friday, December 18, 2009

Stocks Higher into Final Hour on Tech Sector Strength, Less Financial Sector Pessimism, Short-Covering

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Biotech longs, Technology longs and Financial longs. I covered all my (IWM)/(QQQQ) hedges and some of my (EEM) short today, thus leaving the Portfolio 100% net long. The tone of the market is mildly positive as the advance/decline line is higher, sector performance is mixed and volume is heavy. Investor anxiety is high. Today’s overall market action is bullish. The VIX is falling -2.27% and is high at 22.0. The ISE Sentiment Index is below average at 120.0 and the total put/call is above average at 1.0. Finally, the NYSE Arms has been running below average most of the day, hitting .32 at its intraday trough, and is currently .66. The Euro Financial Sector Credit Default Swap Index is falling -2.23% to 68.41 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 -2.24% to 89.39 basis points. This index is also well below its Dec. 5th record high of 285.99. The TED spread is down -1 basis point to 21 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 falling -3.04% to 33.71 basis points. The Libor-OIS spread is unch. at 10 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up +2 basis points to 2.28%, which is down -37 basis points since July 7th. The 3-month T-Bill is yielding .04%, which is unch. today. Small-cap and cyclical shares are outperforming. Restaurant, Biotech, Bank, I-Bank, Wireless, Software and Coal shares are especially strong, rising 1%+. (XLF) is trading much better today and (IYR) is at session highs. On the negative side, breadth is mediocre and a number of sectors are lower despite tech sector leadership. The Shanghai Composite fell another 2.05% last night and broke down through its 50-day moving average. Nikkei futures indicate an +40 open in Japan and DAX futures indicate an +52 open in Germany on Monday. I expect US stocks to trade mixed-to-higher into the close from current levels on less financial sector pessimism, short-covering, technical buying and seasonal strength.

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