Stocks Slightly Lower into Final Hour on Profit-taking, China Bubble Worries and Higher Long-term Rates

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is slightly negative as the advance/decline line is mildly lower, sector performance is mixed and volume is above average. The major averages and breadth have pulled back from session highs. Traders are pointing to Alan Greenspan's comments on China as the negative catalyst. Greenspan basically said the recent parabolic move higher in Chinese stocks is unsustainable and there will be a dramatic decline at some point. Here is an updated chart of the Shanghai Stock Exchange Composite. Predicting that this move is unsustainable isn't a bold prediction, in my opinion. While momentum traders may continue to profit from this in the short run, longer-term investors should prepare now for the eventual bursting of the bubble in Chinese shares and its ramifications. Commodity and deep cyclical stocks that are trading at valuations associated with "new era" thinking are the most at risk in the U.S. The largest beneficiary of a substantial decline in Chinese shares will be true U.S. "growth" stocks. I expect US stocks to trade mixed into the close from current levels as investment manager performance anxiety, buyout speculation and more economic optimism offset worries over China’s bubble and higher long-term rates.