Stocks Soaring into Final Hour on Unexpected 50 Basis Point Fed Rate Cut

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Biotech longs, Medical longs, Semi longs, Networking longs and Retail longs. I covered my (IWM)/(QQQQ) hedge 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, almost every sector is gaining and volume is above average. While Lehman's(LEH) pretax earnings may have been seen as a disappointment by some, they were far from the unmitigated disaster that the stock had been pricing in as it moved relentlessly lower during July and August. As well, Lehman said its liquidity position is stronger than ever and the worst of the credit correction was behind them. The CEO of Hovnanian (HOV) also made some positive comments today. He said that credit availability was "not an issue at this time" and "traffic has been holding up quite nicely." The UK’s Northern Rock also said this morning that it has seen a significant fall-off in withdrawals. European bourses are up 1.5%-2%. Best Buy(BBY) beat estimates and raised its outlook today. This is also a large positive as the imminent consumer collapse argument continues to be supported by little evidence. As well, weekly retail sales rose 2.5% this week vs. a 2.8% gain the prior week. This is still near average rates and up from 1.4% in early July. The retail sector is one of today's best performers, rising 5.0%. There are also several other positives today. The yen is weakening against the U.S. dollar. The three-month Libor rate is falling another basis point and has declined 14 basis points in seven days. The speculative grade credit default swap index is down 3.6% over the last five days. The JPMorgan Emerging Market Bond Index is up 1.0% over the last five days, and the Bear Stearns (BSC) high-yield index is 0.61% higher over the same period. The CBOE total put/call 50-day moving average is 1.09, the highest in history. The VIX was still near early 2003 levels at 25.0 this morning. The 50-day moving average of the ISE Sentiment Index is 118, near its historic low at 110. Moreover, short interest has gone parabolic this year and is just off records. Public short-selling is at record levels, and large equity index futures traders are positioned very bearishly. The Fed has unexpectedly cut the fed funds rate and discount rate by 50 basis points. This has resulted in a gap higher, leaving many large investors likely very underexposed and feeling trapped. The S&P 500 is breaking free from its 50-day. The Nikkei is indicating an up 460 open in Japan. The 10-year yield, the best long-term predictor of inflation, is only 2 basis points higher so far. Fed funds futures are now placing a 72% chance of another 25 basis point cut in October. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, performance anxiety, bargain-hunting and less economic pessimism.