Stocks Lower into Final Hour on Profit-taking, Weakness in Tech, ECB Comments

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Internet longs, Medical longs, Semi longs and Computer longs. I added (IWM)/(QQQQ) hedges and added to my (EEM) short and (BHP) short today, thus leaving the Portfolio 100% net long. The overall tone of the market is negative today as the advance/decline line is lower, most sectors are declining and volume is above average. As I cautioned earlier in the week, September retail sales were disappointing, rising 1.7% vs. estimates of a 2.5% gain. The ICSC said that weather subtracted 0.5% from sales. There remains little evidence of an impending recession. Intrade.com is still showing the chances of a recession next year at 43%. However, this is down from 59% last month. The AAII percentage of bulls rose to 54.6% this week from 51.8% the prior week. This reading is above average levels. The AAII percentage of bears rose to 25.8% this week from 25.3% the prior week. This reading is still modestly below average levels. However, the 10-week moving average of the percentage of bears is currently at 36.9%, 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 36.6%, 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 long-term bearish sentiment during the 2000-2003 market meltdown, which I find astonishing given that the S&P 500 is 115% higher from the October 2002 major bear market lows and is making new record highs daily. While bullishness has rebounded recently, I would have to see a string of readings in the high 50s-low 60s before becoming concerned. We are just now getting back to more normal bull market levels in most gauges of investor sentiment. I still see no signs of excessive optimism in our market, outside of the Chinese ADRs. Moreover, U.S. stock mutual funds have seen outflows for most of the past five years; domestic ETFs have just recently seen improved inflows, and there has been an explosion in low correlation/negative correlation U.S. stock strategies; the quantity of research that caters to these funds has soared; permabears pundits are more popular than ever; there have been huge spikes in gauges of investor anxiety over the last couple of years on relatively mild market pullbacks; a fairly large chunk of the public generally hates U.S. stocks and says it won't ever invest in them again; public short-selling is more popular than ever; short interest on the major exchanges has exploded higher this year; S&P futures traders remain positioned near historically short levels; the mainstream press obsesses with what is wrong and what could go wrong; investors seem to always price in the worst case scenario immediately rather than the most likely scenario; and long-term investors are denigrated, while day-trading is championed as a crash is always seen as just around the corner. I continue to believe that overall investor sentiment regarding U.S. stocks has never been worse in history with the market at record highs, which bodes very well for further outsized gains. I expect US stocks to trade mixed-to-lower into the close from current levels on profit-taking and more shorting.