Stocks Sharply Higher into Final Hour on Diminishing Credit Fears, More Economic Optimism

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Computer longs, Semi longs and Medical longs. I was stopped out of a short, covered some of my (EEM) short and exited my remaining (IWM)/(QQQQ) hedges today, thus leaving the Portfolio 100% net long. The overall tone of the market is very positive today as the advance/decline line is substantially higher, every sector is rising and volume is light. My intraday gauge of investor angst is at above-average levels, despite gains. There was a significant -$2.1 billion in outflows from the iShares Russell 1000 Value Index fund this week, which corresponds with meaningful “value” stock underperformance this year relative to “growth.” I expect global growth to move back toward more average rates from current booming levels over the intermediate term, which will likely result in even greater growth stock outperformance. It is also noteworthy, considering recent substantial outflows, that taxable bond funds saw inflows of $132 million this week. Bernanke's speech today basically reiterated what he has already said of late. I still think a 25-basis-point cut is likely at the next meeting if economic data for August shows more weakness. ISM reports, auto sales, retail sales and the employment report next week will provide much more color on the Fed's upcoming actions. I still believe the market is in a win-win situation. If data continue to show economic resiliency and the Fed doesn't cut, I believe stocks will rally from current levels. If the Fed does cut, I think stocks will rally in anticipation of faster growth in the future. Personal income/spending, PCE core, Chicago PMI, factory orders and consumer confidence were all encouraging today. As well, the average 30-year fixed rate mortgage fell another 7 basis points this week, to 6.45%. It has now declined 33 basis points from June 14 highs. It is also a positive that the three-month T-bill yield has risen 53 basis points from yesterday's lows. The Baltic Dry Index also hit another all-time high this week. Finally, Bloomberg is reporting that the ABX-HE-BBB-07-1 subprime index is rising 9.5% on today's news. While it is still too early to tell if this index has bottomed, its rate of decline has slowed dramatically over the last three weeks. The stabilization of this index in March preceded the stock market's strong advance that began shortly thereafter. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, diminishing credit fears, more economic optimism and bargain hunting.