Stocks Slightly Higher into Final Hour, Led by Tech

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi longs, Computer longs, Medical longs and Biotech longs. I have not traded today, thus leaving the Portfolio 100% 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 about average. The 10-year TIPS spread is falling again as inflation worries continue to diminish rapidly. It is now down to 2.27, falling 8 basis points from the Monday before the Fed lowered rates. Fed funds futures now imply an 88% chance that the Fed lowers its benchmark rate to 4.5% in October vs. only a 12% chance of no change. The JPMorgan Emerging Market Debt Index is now 0.93% higher the last five days, and the Bear Stearns High Yield Index is up 1.4% over that period. The speculative grade credit default swap index is down 13.7% over the last five days, as well. Oil is falling $1.47 per barrel, notwithstanding more dollar weakness. Oil looks like it has topped for the year finally, and I still expect it to fall meaningfully over the coming months, which should provide some relief to consumers. Once again today, many true growth stocks are posting meaningful gains today. I continue to believe that economic growth will remain modestly below trend over the intermediate-term, notwithstanding Fed cuts, which should continue to propel growth stock outperformance. Given today's news, the market's performance is very impressive. This is likely the result of far too many bulls still being underinvested and many bears being way too short, given the stabilization in the credit markets and that the Fed for once is ahead of the curve. P/E multiple expansion looks to be under way in the growth stock universe. However, the S&P 500 is now trading at 15.9x forward estimates, down from 16.1x at the beginning of the year. I hear many pundits say the market isn't cheap, focusing solely on the P/E. First of all, the market has never had to be cheap to rise. Moreover, inflation expectations have fallen substantially over the last year. Just a few months ago, many investors were talking as if a 6% yield on the 10-year was a given. It is now at 4.60%. Many other variables go into the market multiple that investors are will to pay, as well. While earnings growth is slowing, I see few signs that it is about to fall off a cliff, which in my opinion, makes many stocks cheap given the current macro backdrop. If earnings growth stabilizes around current levels, or even picks up a bit due to the Fed rate easing cycle, I expect to see meaningful P/E multiple expansion in the broad market next quarter. The NYSE reported recently that short interest on the exchange, from mid-August through mid-September, fell from 12.47 billion shares to 11.84 billion shares. The 5.0% decrease still leaves NYSE short interest up a stunning 23.4% since mid-February, the largest seven-month percentage jump since at least 1991, when Bloomberg began tracking. I continue to believe the recent parabolic rise in short interest was mainly the result of the avalanche of capital that had flowed into global market neutral funds, which help to pump air into the current U.S. "negativity bubble." Past poor 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. That process may already be beginning and could account for some of the recent decline in short interest. It is also noteworthy that public short sales exploded to record highs during the recent correction. Here are the 25 NYSE stocks with the largest percentage increase in their short interest relative to their float from mid-August through mid-September:

1. Jones Apparel Group (JNY, +18.4%)
2. PharMerica (PMC, +12.8%)
3. ExpressJet Holdings (XJT, +11.8%)
4. Rohm & Haas (ROH, +11.6%)
5. WCI Communities (WCI, +9.3%)
6. M/I Homes (MHO, +8.4%)
7. Beazer Homes USA (BZH, +8.1%)
8. Jones Lang Lasalle (JLL, +7.4%)
9. W.W. Grainger (GWW, +7.4%)
10. Deerfield Triarc Capital (DFR, +6.9%)
11. Anworth Mortgage Asset (ANH, +6.4%)
12. Arbor Realty Trust (ABR, +6.1%)
13. MetroPCS Communications (PCS, +5.1%)
14. Thornburg Mortgage (TMA, +4.8%)
15. Georgia Gulf (GGC, +4.7%)
16. Brookfield Homes (BHS, +4.5%)
17. Landry's Restaurants (LNY, +4.3%)
18. USG Corporation (USG, +4.2%)
19. Affiliated Managers Group (AMG, +3.8%)
20. Archstone-Smith Trust (ASN, +3.8%)
21. Marsh & Mclennan Companies (MMC, +3.8%)
22. Parker-Hannifin (PH, +3.7%)
23. Delta Air Lines (DAL, +3.6%)
24. Dillard's (DDS, +3.6%)
25. Marinemax (HZO, +3.6%)

I expect US stocks to trade modestly higher into the close from current levels on short-covering, lower energy prices, strength in the tech sector and investment manager performance anxiety.