Stocks Rebounding Sharply into Final Hour on Short-Covering, Bargain-Hunting, Diminishing Credit Market Angst

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Computer longs, Biotech longs and Medical longs. I covered all of my (IWM)/(QQQQ) hedges and some of my (EEM) short today, thus leaving the Portfolio 100% net long. The overall tone of the market is mildly bullish as the advance/decline line is higher, most sectors are rising and volume is heavy. Investor anxiety is high despite gains in the major averages. Today’s overall market action is very bullish. The VIX is falling slightly to 26.9, but remains high. The ISE Sentiment Index is a low 100.0 and the total put/call is a high 1.31 today. Finally, the NYSE Arms is around average at .96. The 10-year swap spread is falling to 72.0 basis points over Treasuries, down from a high of 92.75 five days ago. Today’s market gains are even more impressive considering the heavy losses in Asian markets overnight, mostly negative news flow and .42% drop in the dollar index. Cyclicals, especially small-caps, are outperforming substantially today. As well, growth stocks are significantly outperforming value stocks. The Shanghai Composite fell another 2.4% last night and is down 35.1% from its high set in October of last year. Moreover, India’s Sensex Index fell another 4.8% last night and is now down 27.6% from its high set in January of this year. The DJIA is down 13.1% from its high. It is likely we are finally beginning to see a shift in some money flows away from emerging markets and back into developed markets for the first time in years. This could be a catalyst for a US dollar rebound over the intermediate-term. The AAII % Bulls fell to a depressed 20.4% this week, while the AAII % Bears jumped to an elevated 59.1%. Longer-term gauges of investor sentiment remain at historically depressed levels, which is a major positive. Nikkei futures indicate an +200 open in Japan and DAX futures indicate an +60 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, bargain-hunting and less credit market angst.