Stocks Mixed into Final Hour as Profit-taking Offsets Lower Energy Prices Ahead of Tomorrow's Fed Announcement

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Medical longs, Computer longs, Internet longs and Commodity shorts. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is neutral as the advance/decline line is slightly lower, most sectors are rising and volume is below average. Investor anxiety is slightly above average. Today’s overall market action is mildly bullish. The VIX is rising 1.4% and remains above average at 19.9. The ISE Sentiment Index is around average at 160.0 and the total put/call is above average at 1.06. Finally, the NYSE Arms has been running about average most of the day and is currently .99. The US dollar continues to trade as if, at the very least, an intermediate-term bottom is in place and quite possibly a major bottom. The EIA said today that US oil demand fell 7% in February. This is a substantial decline. Global energy demand destruction remains much greater than perceived as the bubble in commodities grows ever larger. True “growth” stock leaders are especially strong today with many substantially outperforming the broad market. Fed fund futures currently imply an 80% chance for a 25 basis point rate cut and a 20% chance for no rate cut tomorrow. While a 25 basis point cut is still likely, I believe the odds of no cut are higher than the market currently perceives. The TED spread is falling 12 basis points today to 141 basis points, which is the lowest since April 8^th. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 4 basis points today to 2.28% on the decline in commodity prices. This spread is down 40 basis points from a high of 2.68% on March 13^th. Weekly retail sales rose 1.7% this week. Weekly retail sales averaged a gain of 1.7% during the entire month of April, up from a .6% average weekly gain during February and a .9% average weekly gain during March. I suspect tomorrow’s 1Q GDP growth will come in below estimates of a .5% gain as the deflator subtracts more from growth than expected, which could pressure stocks modestly in the morning. I still believe two consecutive quarters of US GDP contraction, the technical definition of a recession, are unlikely and expect GDP to grow slightly this quarter before a more meaningful acceleration towards year-end. Nikkei futures indicate an +56 open in Japan and DAX futures indicate an +65 open in Germany tomorrow. I expect US stocks to trade mixed into the close from current levels as lower energy prices, less earnings pessimism and diminishing credit market angst offset profit-taking and commodity stock weakness.