Stocks Mixed into Final Hour as Healthy Profit-taking Offsets Less Economic Pessimism

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi longs, Computer longs, Software longs, Retail longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is mildly positive today as the advance/decline line is about even, most sectors are rising and volume is around average. Investor anxiety is slightly above average. Today’s overall market action is bullish, considering recent gains. Then yen is falling again today versus the US dollar and is down about 4% over the last 10 days, which is a positive. Moreover, the G-7 currency volatility index is falling again today to 9.43, down from a peak of 11.75 three weeks ago, which is also a positive. The total put/call hit a high 1.23 this morning. As well, the ISE Sentiment Index hit a depressed 75.0. Retail options traders remain very skeptical of any meaningful move higher in stocks. Moreover, the “smart money” OEX put/call is a low .89. The NYSE reported yesterday that short interest on the exchange, over the last two weeks of November, rose from 12.39 billion shares to 12.77 billion shares, which is just off the all-time high of 12.95 billion shares in July. Moreover, the 3.1% increase leaves NYSE short interest up an astounding 33.2% since mid-February, the largest percentage jump since at least 1991, when Bloomberg began tracking. This is just more evidence, in my opinion, that the many bears continue to party like it's 2000-2003, despite the S&P 500's 105% gain from that period's lows. Short interest was basically flat from mid-2002 through first quarter 2005, which is what I would expect considering the extraordinary number of new hedge funds created during the aftermath of the bursting of the internet bubble, combined with a large stock rally off the bottom in October 2002. The recent parabolic rise in short interest is stunning and is symptomatic of the current “U.S. negativity bubble”, in my opinion. Moreover, the only ETF that is ranked in the top 40 NYSE short positions is the iShares Russell 2000 Index (IWM). The rest are all equities. I think this is a direct result of the massive capital that has been allocated to low correlation U.S. stock strategies and the undying belief by the herd that the U.S. will continue to underperform all other global markets indefinitely. As well, many investors continue to see a 2000-type market meltdown lurking around every corner. I suspect, given their risk-adjusted underperformance over the last few years, that many low-correlation U.S. stock strategies will see significant redemptions at year-end and that a large percentage of this capital will move into more positively correlated U.S. stock strategies. As well, I think a chain reaction of events has already begun that will eventually lead to a dramatic positive change in perception by global portfolio managers regarding the prospects for U.S. stocks vs. most other global markets. The parabolic rise in short interest this year is unsustainable and only brings the "mother of all short-covering rallies" closer, in my opinion.

Here are the 25 NYSE stocks with the largest percentage increase in their short interest relative to their float over the last two weeks of November:

1) LNY +14.2%

2) ZLC +9.0%

3) AVX +8.0%

4) MYL +6.9%

5) KNX +6.6%

6) PZN +6.5%

7) PBY +6.0%

8) MWV +5.7%

9) BWY +5.6%

10) PII +5.3%

11) TPX +5.3%

12) JRT +5.0%

13) FRT +5.0%

14) FMD +4.7%

15) DW +4.7%

16) PPS +4.6%

17) ESS +4.6%

18) IN +4.3%

19) MIM +4.2%

20) LEN +4.2%

21) TWB +4.2%

22) MTX +4.1%

23) SUP +4.1%

24) TRN +3.9%

25) TER +3.8%

I expect US stocks to trade mixed-to-higher into the close from current levels on less economic pessimism, lower energy prices, bargain-hunting and short-covering.