Stocks Mixed into Final Hour as Rising Rate Cut Odds Offset Higher Energy Prices

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Software 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 mildly negative today as the advance/decline line is slightly lower, sector performance is mixed and volume is around average. The 10-year yield is falling 5 basis points, to 4.5%, on today's news. The odds of another imminent rate cut rise significantly on a further decline in this yield, in my opinion. Fed fund futures now imply a 70% chance for a 25-basis-point cut at the upcoming meeting, up from 54% yesterday and 40% one week ago. I have heard many pundits wonder how in the world Google (GOOG) can post earnings that justify its recent gains. That isn't the proper question, in my opinion. The real questions are, Why were the shares egregiously undervalued, and what took investors so long to begin to recognize Google's true value? I don't even think the shares are fairly valued yet, much less overvalued. Recent across-the-board "growth" stock multiple expansion makes it even more attractive at current levels. Moreover, how many investors took profits recently or plan to initiate a new long in the shares given the much-anticipated "sell the news" earnings reaction? I think quite a few given its short interest ratio just hit an all-time high and its put/call open interest ratio just skyrocketed to a record 1.20. As well, the company said today that video ads are taking off faster than anticipated, which is going to be huge for the future growth of the company. I still expect an initial kneejerk sell-off in the shares after-hours, however, I anticipate a higher stock price by the close of trading tomorrow. Google, which I have been long since the IPO, remains my largest equity long position, just ahead of Apple (AAPL). The AAII percentage of bulls plunged to 41.9% this week from 54.6% the prior week. This reading is now below average levels. The AAII percentage of bears jumped to 35.7% this week from 25.8% the prior week. This reading is now above average levels. Moreover, the 10-week moving average of the percentage of bears is currently at 36.5%, 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 still 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 114% higher from the October 2002 major bear market lows and recently made new record highs. I still see few 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; there has been an explosion in low correlation/negative correlation U.S. stock fund strategies; the quantity of research that caters to these funds has soared; the U.S. dollar is seen to have no bottom; U.S. equities are arguably the most hated securities by global portfolio managers; permabear 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 continues to explode higher; short interest on the major exchanges has rocketed higher this year; S&P 500 index 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; money-market funds are at record levels; and long-term investors are denigrated, while day-trading is championed as a crash is always seen as just around the corner. I contend there has never been a time in U.S. history when more market participants actually wanted a stock crash or recession for both political and financial gain, which has helped to produce the current U.S. "negativity bubble." Thus, I still believe that overall investor sentiment regarding U.S. stocks has never been worse in history with the market near record highs, which bodes very well for further outsized gains. I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting, rising fed rate cut odds and short-covering.