Thursday, January 28, 2010

Stocks Falling into Final Hour on Tax Hike Worries, Euro Sovereign Debt Fears, Tech Sector Pessimism

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Technology longs and Medical longs. I added to my (IWM)/(QQQQ) hedges and to my (EEM) short this morning and then covered some of those positions 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 declining and volume is heavy. Investor anxiety is very high. Today’s overall market action is bearish. The VIX is rising +1.51% and is above-average at 23.49. The ISE Sentiment Index is below average at 111.0 and the total put/call is around average at .83. Finally, the NYSE Arms has been running around average most of the day, hitting 1.54 at its intraday peak, and is currently .69. The Euro Financial Sector Credit Default Swap Index is rising +2.09% to 78.71 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 -1.80% to 95.34 basis points. This index is also well below its Dec. 5th record high of 285.99. The TED spread is unch. at 18 basis points. The TED spread is now down 445 basis points since its all-time high of 463 basis points on October 10th, 2008. The 2-year swap spread is rising +7.43% to 27.13 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 +1 basis point to 2.32%, which is down -33 basis points since July 7th, 2008. The 3-month T-Bill is yielding .06%, which is unch. today. Small-cap and cyclical stocks are underperforming again today. Large-cap tech stocks are also badly lagging. Computer, Semi, Wireless, Education and Road & Rail shares are especially weak, falling 2.5%+. Sovereign debt credit default swap indices are surging again. The Western Europe Sovereign CDS Index is +4.07% to 90.83 bps. On the positive side, bank, hmo, homebuilding, retail, telecom, steel, energy and defense shares are just slightly lower or even higher on the day. (XLF) has traded relatively well throughout the day. (AAPL) has held the psychologically important $200 level. I still believe the iPad will be a much bigger positive for the shares than is currently perceived. The market is trading the last few days like it is probing for a tradable bottom. If an imminent new downleg in China or sovereign debt crisis fails to materialize, we could see a fairly sharp short-covering rally. In the latest Investors Intelligence Survey, more advisers expect a 10% decline from current levels than at any other time since 1986. As well, AAII bears are surging. The % Bulls fell to 35.0 and the % Bears jumped to 36.7 this week, which is a large positive. Nikkei futures indicate a -104 open in Japan and DAX futures indicate an +55 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, less financial sector pessimism and bargain hunting.

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