Stocks Sharply Lower into Final Hour on Economic Concerns

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Computer longs, Semi longs and Medical longs. I have not traded today, thus leaving the Portfolio 75% net long. The overall tone of the market is negative today as the advance/decline line is substantially lower, every sector is falling and volume is about average. I wrote several times earlier in the week about the likelihood of a weaker-than-expected jobs report, however I am surprised that the market's reaction is this harsh to something that many were expecting. I think this report solidifies a 25-basis-point cut at the upcoming Fed meeting and puts the possibility of a 50-basis-point cut on the table. A 50-basis-point cut would likely require more significant economic data weakness over the next 10 days and a move in the 10-year yield below 4.25%. I think that is unlikely and still expect a 25-basis-point cut at the Sept. 18 meeting. BMW, Audi and Mercedes all said August sales were healthy today. The High Yield Index and Emerging Market Debt Index are 0.4% and 0.6% higher, respectively, over the last five days. Also, the 10-year swap rate is falling 6%, to 65.1 basis points over Treasuries, which is also positive. The AAII percentage of bulls fell to 38.4% this week from 40.3% the prior week. This reading is still below average levels. The AAII percentage of bears fell to 42.4% this week from 46.3% the prior week. This reading is still approaching elevated levels. Moreover, the 10-week moving average of the percentage of bears is currently at 39.3%, a high level. The 10-week moving average of the percentage of bears peaked at 43.0% at the major bear-market low during 2002. The 50-week moving average of the percentage of bears is currently 37.1%, an elevated level seen during only two other periods since tracking began in the 1980s. Those periods were October 1990-July 1991 and March 2003-May 2003, both of which were near major stock market bottoms. The extreme readings in the 50-week moving average of the percentage of bears during those periods peaked at 41.6% on Jan. 31, 1991, and 38.1% on April 10, 2003. We are currently very close to eclipsing the peak in bearish sentiment during the 2000-2003 market meltdown, which I still find astonishing, notwithstanding the recent correction. The S&P 500 is still 101.3% higher from October 2002 lows and is only 5.9% lower from its recent record set in July. I expect US stocks to trade modestly higher into the close from current levels on more Fed rate cut speculation, short-covering and bargain-hunting.