Stocks Lower into Final Hour on Higher Energy Prices, Profit-taking

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Internet longs, Medical longs and Software longs. I added back (IWM)/(QQQQ) hedges and added to my (EEM) short. I also was stopped out of my (USO) short and took profits in a trading long 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, most sectors are falling and volume is about average. Thompson Financial now expects third-quarter S&P 500 earnings growth to come in slightly negative. I will be very surprised if earnings growth doesn't handily beat that expectation. The S&P 500 is now 11.7% higher year-to-date and technically overbought near term. I still expect a total return of about 17% for the S&P 500 by year-end. As well, the Russell 1000 Growth Index is 15.8% higher year-to-date, and I still expect it to return a total of about 25% this year. Fed fund futures now imply a 32% chance for a 25-basis-point cut at the upcoming meeting. This is down from 40% on Friday and 48% one week ago. I anticipate Fed commentary this week to continue to be somewhat more hawkish to lower expectations for a cut further. This should provide support for the much-hated U.S. dollar. According to Intrade.com, the percentage chance of the U.S. heading into recession next year has fallen to 35.5%. This is down from 58.9% just last month. As I said back when recession fears were peaking, I continue to believe that an imminent recession is highly unlikely. The drag from U.S. housing problems, combined with booming global growth, will continue to result in modestly below-trend U.S. growth over the intermediate term, in my opinion. I think this is one of the main reasons for recent growth stock multiple expansion. Overall, I still see housing as a net positive for all U.S. stocks. Without housing, investors would have faced above-average inflation, higher long-term rates and multiple Fed rate hikes, which would have greatly increased the odds of a hard landing. That said, given housing, long-term rates should remain relatively low, inflation should stay below average rates, and the Fed is, at the very least, on hold indefinitely and may even cut again. The macro backdrop for investing in U.S. stocks is still very good. I expect US stocks to trade mixed into the close from current levels as higher energy prices and profit-taking offset less economic pessimism.