Wednesday, December 16, 2009

Stocks Slightly Higher into Final Hour on Less Economic Pessimism, Short-Covering, Technical Buying

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Technology longs and Financial longs. I have not traded today, thus leaving the Portfolio 75% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are rising and volume is around average. Investor anxiety is very high. Today’s overall market action is mildly bullish. The VIX is falling -2.75% and is high at 20.90. The ISE Sentiment Index is below average at 126.0 and the total put/call is slightly above average at .89. Finally, the NYSE Arms has been running high most of the day, hitting 2.30 at its intraday peak, and is currently 1.32. The Euro Financial Sector Credit Default Swap Index is rising +1.21% to 71.50 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 declining -.94% to 90.34 basis points. This index is also well below its Dec. 5th record high of 285.99. The TED spread is up +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 -.38% to 36.25 basis points. The Libor-OIS spread is up +1 basis point to 9 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up +3 basis points to 2.31%, which is down -34 basis points since July 7th. The 3-month T-Bill is yielding .03%, which is down -1 basis point today. Small-Cap shares are outperforming again today. Airline, Homebuilder, HMO, Hospital, I-Banking, Disk Drive and Coal stocks are especially strong, rising 1.75%+ on the day. The broad market continues to tread water at the upper end of its trading range, despite huge new equity supply from banks and mixed economic data, which is a positive. The high NYSE Arms, combined with lackluster volume, continue to indicate low levels of bearish conviction. A number of small/mid-caps are already breaking to new 52-week highs. On the negative side, banks continue to underperform. The jump in oil is resulting in some weakness in consumer discretionary stocks. I suspect the (C) secondary will help to eliminate a big drag on the (XLF) and lead to a broad market breakout early next week. Nikkei futures indicate an +103 open in Japan and DAX futures indicate a -10 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short covering, stable energy prices, buyout speculation, less economic fear, technical buying and seasonal strength.

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