Stocks Sharply Lower into Final Hour on Profit-taking, Shorting, Economic Pessimism

BOTTOM LINE: The Portfolio is slightly lower into the final hour as losses in my Software longs, Biotech longs and Semi longs are more than offsetting gains in my Commodity shorts, (EEM) short, Internet longs and Medical longs. I added to my (XLE) short, added to my (EEM) short and added (IWM)/(QQQQ) hedges today, thus leaving the Portfolio 75% net long. The overall tone of the market is negative as the advance/decline line is substantially lower, most sectors are declining and volume is about average. Investor anxiety is high again. Today’s overall market action is bearish. Financials are under pressure, despite the relative stability in bond insurer shares. Commodities are also registering significant losses on global growth worries and the jump in the US dollar. I sense an increasing number of global investors view Europe as falling substantially behind the curve as their economies weaken and the ECB continues to talk of the possibility of future rate hikes. This will likely lead to further US dollar strength and commodity weakness over the coming months. I continue to see the US Fed as now “ahead of the curve” and the odds of an intermeeting rate cut are rising meaningfully. The VIX is rising 8.0% today to a high 28.0. The ISE Sentiment Index hit a below average 102.0 and the total put/call is hitting an above average 1.12. Finally, the NYSE Arms has been running very high again all day at 2.47, which is also a positive. I still view the odds of a full retest or new lows in the market as unlikely and further weakness providing good entry points in favorite longs for investors. Google(GOOG) is finally outperforming today. I think it is very likely it has seen its lows for the year as investor fears over a possible (MSFT)/(YHOO) combination diminish and its growth picks up this quarter. Comscore said today that Google’s global search market share is 62.4% versus 15.7% for Yahoo/Microsoft combined. The stock is very cheap given its fundamentals and should be awarded a premium valuation based on its ability to grow at a very healthy rate despite an economic slowdown. Nikkei futures indicate a -400 open in Japan and DAX futures indicate an +8 open in Germany. I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting, rising rate cut odds and short-covering.