Stocks Cutting Losses Substantially on Strength in Financial and Retail Shares

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Retail longs, Gaming longs and Semi longs. I took some more profits in my (TLT) long and added to my (GOOG), (AAPL) and (ISRG) longs 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 heavy. Investor anxiety is high again. My (TLT) long, which had been a large position several months ago, is now a small one. Today’s overall market action is bullish. Small-caps and cyclicals are substantially outperforming today. The total put/call hit a very high 1.57 and the VIX spiked to a very high 37.6(highest since October 2002) today. E*Trade Financial(ETFC) said customers logging into their accounts at any one time today hit a five year high. Mortgage rates continue to plunge with about 50% of conventional mortgages now able to be refinanced, according to CNBC. Plunging mortgage rates is a huge positive that continues to be mostly ignored by investors and the press. Despite today’s aggressive Fed move, the 10-year TIPS spread, a good gauge of inflation expectations, is falling to 2.2%, down from 2.38% one week ago. Fed fund futures now imply a 78.0% chance for another 50 basis point cut at the Jan. 30 meeting and a 22% chance for another 75 basis point cut. I strongly disagree with those that say the Fed’s actions don’t matter. We are going to see a significant amount of stimuli in a short period of time, which will move the Fed closer to being “ahead of the curve,” rather than behind it. With today’s market rebound and recent losses overseas, the S&P 500 is beginning to significantly outperform many global markets. I continue to believe developed markets will outperform emerging markets and commodities substantially over the next five years. It is very interesting to note that despite today’s key reversals in many stocks, almost nobody thinks today’s action marks an important low, which is another large positive. Nikkei futures are indicating a +500 open in Japan tonight. If we can hold onto today’s rebound or improve from current levels into the close I would expect to see significant gains in Asia tonight. I expect US stocks to trade modestly higher into the close from current levels on short-covering, lower energy prices, less economic pessimism and bargain hunting.