Stocks Sharply Lower into Final Hour on Higher Energy Prices, Rising Economic Pessimism

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Semi longs, Biotech longs and Software longs. I added (IWM)/(QQQQ) hedges and added to my (EEM) short today, thus leaving the Portfolio 75% net long. The overall tone of the market is negative today as the advance/decline line is substantially lower, most sectors are declining and volume is below average. Investor anxiety is elevated. Today’s overall market action is bearish. I do have an unusual amount of stocks on my monitor pages in positive territory given today’s headline losses. As well, very few stocks are falling on above-average volume. Volume is below average on the NYSE and Nasdaq and above average on the AMEX, where many ETFs trade. This likely indicates quite a bit of new shorting and selling by hedge funds which were already positioned very bearishly, according to most recent data. The VIX is surging 6% to 24, the total put/call is a high 1.25 and the ISE Sentiment Index hit a depressed 68.0 this morning. For the fifth day in a row, the NYSE Arms is high, hitting an elevated 2.58. The 30-day US asset backed commercial paper yield is plunging another 81 basis points today and is down 155 basis points in three weeks and down 170 basis points from September highs. Fed funds futures now imply a 58.8% chance for another 25 basis point rate cut at the upcoming Fed meeting, up from a 46.8% chance last week. The last time the DJIA fell this much on a percentage basis on the first day of the year was 1983. However, the DJIA finished the year 20.3% higher that year. I suspect Asia will trade lower again tonight which could pressure stocks here further in the morning. I still expect a decent rally to materialize in the broad market over the next few days. I expect US stocks to trade mixed into the close from current levels as more economic pessimism, increased shorting and higher energy prices offsets bargain hunting and seasonal strength.