Stocks Mixed into Final Hour Ahead of Tomorrow's Employment Report

BOTTOM LINE: The Portfolio is mixed into the final hour as losses in my Internet longs and Computer longs are offset by gains in my 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 positive today as the advance/decline line is mildly higher, most sectors are gaining and volume is below average. I suspect that tomorrow's jobs report will come in modestly below estimates of 100,000. As long as we don't see another negative number, investors will likely be OK with a mild disappointment. A negative number would likely produce a negative market reaction initially, but would ensure another Fed rate cut, in my opinion, which could boost stocks later in the day. A number above 175,000 may result in initial market strength, but would significantly lower the odds of a fed funds rate cut at the upcoming meeting. Fed fund futures now imply a 70% chance for a 25-basis-point cut at the upcoming meeting, down from 86% a week ago. I still think the Fed hasn't made up its mind yet and the odds are closer to 50/50. The AAII percentage of bulls rose to 51.8% last week from 49.4% the prior week. This reading is still modestly above average levels. The AAII percentage of bears fell to 25.3% last week from 34.2% the prior week. This reading is now modestly below average levels. However, the 10-week moving average of the percentage of bears is currently at 38.3%, 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 36.7%, 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. The S&P 500 is 110% higher from October 2002 lows and is only 0.4% lower from its recent record set in July. While bullishness has rebounded recently, I would have to see several readings in the high 50s/low 60s before becoming concerned. We are just now getting back to normal bull market levels in most gauges of investor sentiment. I 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; there has been an explosion in low correlation/negative correlation U.S. stock strategies; there have been huge spikes in gauges of investor anxiety over the last couple of years on relatively mild market pullbacks; permabear pundits are more popular than ever; 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 continues to set new records; index futures traders are positioned near historically net short levels; short interest on the major exchanges has exploded higher this year; the mainstream press obsesses with what is wrong and what could go wrong, 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 S&P 500 right near a record high, which bodes very well for further outsized gains. I expect US stocks to trade mixed-to-higher into the close from current levels on less economic pessimism and short-covering.