Stocks Surging into Final Hour on Rising Earnings Optimism

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Telecom longs, Semi longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is mildly positive as the advance/decline line is mildly higher, almost every sector is rising and volume is about average. The chance of a U.S. recession beginning this year on Intrade.com has plunged to 16.5% from a high of 35% in January. It is also down from 28% during the spike in subprime fears and Greenspan's recession talk in March. Moreover, the ECRI Weekly Leading Index rose again and is just off cycle highs. The 10-week moving-average is just off highs, as well. The growth rate of this index is currently 3.8%, while the growth rate of the future inflation gauge is falling at a -3.1% rate. I continue to believe that the 10-year yield will average around 4.75% this year and the Fed will remain on hold, while making both dovish and hawkish comments depending on current market perceptions. After a likely sluggish first quarter, I still expect U.S. economic growth to re-accelerate and begin moving back to more average levels this quarter, which should help companies beat lowered earnings' expectations. I suspect diminishing recession fears are the main reason for the recent modest rise in long-term rates. Considering the historically extreme readings in many gauges of investor angst over the last six weeks, the fact that earnings expectations have been lowered dramatically, that short interest is at record highs and that even most bulls hate earnings season and have raised cash, I wonder if upcoming earnings reports will provide another upside catalyst for stocks. As well, the large "sell in May" crowd has likely already sold ahead of these reports. Hmmm ...I expect US stocks to trade mixed-to-higher into the close on short-covering, rising earnings optimism and bargain-hunting.