Stocks Lower into Final Hour on Profit-taking

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Computer longs, Medical longs and Retail longs. I added to my (EEM) short and added (IWM)/(QQQQ) hedges today, thus leaving the Portfolio 75% net long. The overall tone of the market is slightly negative today as the advance/decline line is mildly lower, sector performance is mixed and volume is below average. My intraday gauge of investor angst is still above average. The NYSE reported that short interest on the exchange, from mid-July through mid-August, fell from an all-time high of 12.95 billion shares to 12.49 billion shares. The 3.5% decrease still leaves NYSE short interest up an astounding 30.2% since mid-February, the largest six-month percentage jump since at least 1991, when Bloomberg began tracking.

Countrywide Financial (CFC) saw its short interest jump from 51.42 million shares to 83.63 million shares during the month, making it the third-most heavily shorted security on the NYSE.

Short interest on the Amex, from mid-July through mid-August, jumped 10.8%, to another record, from 1.09 billion shares to 1.22 billion shares. The Financial Select Sector SPDR (XLF) saw short interest rocket 103.7% during the month, from 66.84 million shares to 136.17 million shares, leaving it the second-most heavily shorted security on the Amex. Over the past six months, Amex short interest is up a mind-boggling 62.1%, by far the largest increase on record.

I continue to believe the recent parabolic rise in short interest is mainly the result of the avalanche of capital that has flowed into global market neutral funds, which help to pump air into the current U.S. Past performance and recent events have likely ensured that a significant portion of the capital allocated to these funds will flow back into more positively correlated U.S. stock strategies going forward. It is also noteworthy that public short sales just exploded to record highs during the recent correction. "negativity bubble."

Here are the 25 NYSE stocks with the largest percentage increase in their short interest relative to their float from mid-July through mid-August:

1. Novastar Financial (NFI, +25.2%)
2. Beazer Homes USA (BZH, +16.2%)
3. RAIT Financial Trust (RAS, +14.0%)
4. ACA Capital Holdings (ACA, +12.2%)
5. Goodrich Petroleum (GDP, +11.4%)
6. Radian Group (RDN, +10.7%)
7. Redwood Trust (RWT, +10.4%)
8. Alesco Financial (AFN, +10.3%)
9. MGIC Investment (MTG, +10.2%)
10. FirstFed Financial (FED, +9.9%)
11. Capital Trust (CT, +9.7%)
12. Primus Guaranty (PRS, +9.3%)
13. McMoRan Exploration (MMR, +8.9%)
14. IndyMac Bancorp (IMB, +7.3%)
15. WCI Communities (WCI, +7.0%)
16. Federal Agricultural Mortgage (AGM, +6.6%)
17. Resource Capital (RSO, +6.4%)
18. Bluegreen (BXG, +6.1%)
19. Countrywide Financial (CFC, +5.9%)
20. Newcastle Investment (NCT, +5.8%)
21. iStar Financial (SFI, +5.8%)
22. Gramercy Capital (GKK, +5.7%)
23. Best Buy (BBY, +5.7%)
24. Fortress Investment Group (FIG, +5.6%)
25. Mueller Water Products (MWA, +5.4%)

I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, diminishing credit fears and bargain hunting.