Stocks Slightly Higher into Final Hour as Long-term Rates Continue to Plunge

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Medical longs, I-Banking longs and Biotech 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 slightly higher, sector performance is mostly positive and volume is about average. A recent JPMorgan client survey shows bullishness on US Treasuries, which some well-known US stock market bears are pointing to as evidence that yields are heading higher. I follow that survey, but don't find it that useful. It showed bullishness on treasuries in September 2003, right before the 10-year yield dropped from 4.47% in mid-October 2003 to 3.68% in mid-March 2004. Moreover, there are many other gauges that show very muted sentiment toward long-term US treasuries. For example, the put/call open interest ratio on the 10-year futures is a very high 1.47, the highest in at least a year. As well, 10-year large specs have trimmed their long positions in half over the last couple of months, while commercial hedgers have cut their short positions in half. I continue to believe that long-term yields have peaked for this year as growth slows again in the third quarter and inflation measures decelerate further before year-end. As well, an emerging markets sell-off could fuel increased demand for U.S. treasuries. Weekly retail sales rose 1.9% this week vs. a 1.7% gain the prior week, however, they remain below average levels. Once again, there are many true growth stocks rising meaningfully today, despite the mixed performance of the major averages. I expect US stocks to trade mixed-to-higher into the close from current levels on falling long-term rates, short-covering and investment manager performance anxiety.