Stocks Soaring into Final Hour on Plunging Energy Prices, Bargain-Hunting and Short-Covering

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Computer longs, Biotech longs, Medical longs, Semi longs and commodity shorts. I covered some of my (EEM) short and all of my (IWM)/(QQQQ) hedges today, thus leaving the Portfolio 100% net long. The overall tone of the market is neutral today as the advance/decline line is slightly lower, most sectors are higher and volume is heavy. My intraday gauge of investor angst is still elevated. This weekend's financial headlines were almost universally gloom and doom. While scary credit market stories will continue to dominate headlines for another couple of months, I suspect that the worst of the equity market downturn is over and we are very close to or at the bottom for the year in the major averages. An imminent recession is being partially priced into stocks at current levels, even as this proposition remains an unlikely outcome, in my opinion. Having said that, I am keeping a close eye on emerging market economies as a significant deterioration in growth there would likely lead to another downleg in U.S. stocks. I do not expect that to occur this year, but I do believe the overowned and hyped emerging market stocks have likely already begun a multiyear period of underperformance relative to developed markets. As well, I continue to believe commodity and the most economically sensitive U.S. stocks will underperform over the intermediate term. Stocks that can grow at relatively high rates, notwithstanding slower global growth, will finally be awarded higher valuations for the first time in years. This new trend is likely just in its infancy. Oil is falling almost $4 per barrel, and gasoline futures are dropping to a 16-month low. It is very likely oil has put in place a major double-top, even if we get a Gulf hurricane over the coming weeks. I suspect funds that are historically long crude would use any temporary fear spike to unload long positions. If you trade futures and you are worried by the possibility of a hurricane heading into the Gulf causing a temporary spike in oil, natural gas looks like a good long hedge over the next few weeks. According to my analysis, natural gas is despised almost as much as oil is loved. I would exit the natural gas part of the trade on any break of its recent lows or closer to the peak in hurricane season as I still think it heads lower over the intermediate-term on declining industrial demand and record inventories. The VIX rose to the highest level since April 2003 this morning. Moreover, the 10-day put/call hit 1.31, right at the historic record set in March of this year. Finally, the ISE Sentiment index is a very depressed 68.0. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, lower energy prices and bargain hunting.