Stocks Lower into Final Hour on Subprime Worries, Weakness in Europe

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my (TLT) long, Semi longs, Computer longs, Biotech longs and Commodity shorts. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is negative today as the advance/decline line is substantially lower, every sector is declining and volume is above average. Large speculators are the most net short the S&P 500 since June 2004. This also corresponds with SentimenTrader's All-Index, All-Product Dollar-Weighted Stochastic, which continued to move to an even more extreme reading this week at 99.2, which is right at the level seen during the trough of the February/March market pullback. Readings at or above 80 are historically followed by a 13.6% gain in the S&P 500 89% of the time on average over the next 12 months. This is especially noteworthy considering the major indices have moved back near highs, with a parabolic surge in short interest. I continue to believe that overall investor sentiment toward most U.S. stocks has never been this poor in history with the averages near records. This is a huge positive for stocks that continues to be underestimated by most market participants. I still believe this will eventually result in the "mother of all short-covering rallies" as large investors tire of the poor risk-adjusted returns associated with many low-correlation U.S. stock strategies and sentiment regarding the long-term prospects for U.S. equities improves. I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting, lower long-term rates and short-covering.