Stocks Lower into Finaly Hour as Profit-taking Offsets Short-covering

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Semi longs and Internet 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, most sectors are declining and volume is light. Investor anxiety is above average again. Today’s overall market action is slightly bearish. The VIX is surging 7% to 22.2 and the ISE Sentiment Index remains low at 129.0. For the fourth day in a row, the NYSE Arms hit a high 1.74 this morning. It appears to me many short-term trading oriented funds are taking profits in winners today, both long and short. The NYSE short interest ratio just hit another new record high. The (XLF) is at session highs, rising 1.3%. As well, broad market weakness over the last few days looks more like a function of a year-end “buyers strike” rather than meaningful selling as volume has remained very light with high NYSE Arms readings. Gauges of credit market angst continue to decline. The TED spread is falling another 12 basis points to 147 basis points today, which is down 74 basis points in less than 3 weeks and down 93 basis points from August highs. As well, the 30-day US asset backed commercial paper yield is plunging 38 basis points today and is down 74 basis points in less than three weeks and down 89 basis points from September highs. I wouldn’t be surprised to see many of the beaten up and heavily shorted stocks continue to rise through week’s end, which should boost the broad market. I still believe market leading growth stocks will substantially outperform the broad market again next year as economic growth remains modestly below trend, interest rates remain low and inflation decelerates. I expect US stocks to trade modestly higher into the close from current levels on diminishing credit market angst, a firmer US dollar, seasonal strength, bargain-hunting and short-covering.