Stocks Mostly Higher into Final Hour on Falling Energy Prices, Less Economic Pessimism

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Software longs, Biotech longs, Internet longs and Commodity shorts. I covered my (IWM)/(QQQQ) hedges and then added them back today, thus leaving the Portfolio 75% net long. The tone of the market is slightly bullish as the advance/decline line is mildly higher, sector performance is mixed and volume is above average. Investor anxiety is above average. Today’s overall market action is mildly bearish. The VIX is rising 4.8% and remains above average at 21.2. The ISE Sentiment Index is below average at 126.0 and the total put/call is above average at 1.04. Finally, the NYSE Arms has been running above average most of the day and is currently 1.12. I am very surprised at the severe negative investor reaction to the (MBI)/(ABK) news, which should have been mostly priced in. The (XLF) is down .74%, despite an upside reversal in (LEH) shares. A government official just said the Fed, SEC are not ordering Lehman to raise capital and that the co. is not facing a Bear Stearns-type bank run. He also said that the Fed, SEC are in daily contact with Lehman and that the Fed loan program helps avoid a Bear-type run. This should help calm fears. The European Financial Sector Credit Default Swap Index is increasing another 4.4% today to 75.27 basis points. On the positive side, growth stocks are substantially outperforming value stocks, with tech shares especially firm. As well, considering the 2-3% losses in many major emerging markets last night and this morning, our major averages are holding well. The US dollar continues to trade very well and oil remains very “heavy.” I still expect a substantial increase in demand for US stocks from the global “herd” of underweight portfolio managers over the intermediate-term. Nikkei futures indicate a -5 open in Japan and DAX futures indicate a -14 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on lower and short-covering.