Thursday, September 04, 2008

Stocks Sharply Lower into Final Hour on Forced Selling, More Shorting, Global Growth Worries

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Semi longs, Alternative Energy longs, Medical longs and Software longs. I added (IWM)/(QQQQ) hedges and added to my (EEM) short this morning, thus leaving the Portfolio 75% net long. The tone of the market is very negative as the advance/decline line is substantially lower, every sector is declining and volume is about average. Investor anxiety is above average. Today’s overall market action is bearish. The VIX is jumping 11.3% and is still above-average at 23.90. The ISE Sentiment Index is below-average at 129.0 and the total put/call is above average at 1.04. Finally, the NYSE Arms has been running extraordinarily high most of the day, hitting a peak of 2.80, and is currently 2.09. The Euro Financial Sector Credit Default Swap Index is rising 4.74% today to 95.83 basis points. This index is up from a low of 52.66 on May 5th, but down from 129.46 basis points on March 20th. The North American Investment Grade Credit Default Swap Index is +1.33% to 145.0 basis points. The TED spread is rising .12% to 1.13 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is dropping 5 basis points to 1.95%, which is down 67 basis points in about seven weeks and at the lowest level since August 2003. The forced selling that has characterized trading over the last few days has intensified. However, it is a positive that the NYSE Arms is soaring with volume only around average levels. This indicates to me that it won’t take much to send stocks higher as the forced selling subsides. Besides the forced selling, the main problem today is Europe. The ECB seems content to break inflation at any cost to the global economy. I still expect the ECB to change to a more dovish stance during 4Q. Several pundits on CNBC have insinuated that falling energy prices are a negative for stocks, which I believe couldn’t be further from the truth. The commodity bubble is the main reason for the end to the global economic boom that has occurred over the last several years. Runaway inflation in emerging markets and hesitant central bankers in developed markets are a direct result of the commodity bubble. As well, the commodity bubble is the driving force behind the current “US negativity bubble.” As of now, the overwhelming majority of investors and pundits think oil will bottom around current levels. Oil hasn’t moved much over the last 10 days and is still doing major economic damage at current levels. A clear break below $100/bbl. would be a big boost to the global economy, especially developed markets. Nikkei futures indicate a -287 open in Japan and DAX futures indicate a -30 open in Germany tomorrow. I expect US stocks to trade mixed into the close from current levels as falling commodity prices and bargain-hunting offset more shorting, forced selling and global growth worries.

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