Stocks Surging into Final Hour on Short-Covering, Less Economic Pessimism, Bargain-Hunting, Falling Energy Prices

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Biotech longs, Medical longs and Internet longs. I covered some of my (IWM)/(QQQQ) hedges today, thus leaving the Portfolio 75% net long. The tone of the market is positive as the advance/decline line is higher, almost every sector is rising and volume is above average. Investor anxiety is slightly above average. Today’s overall market action is bullish. The VIX is falling 6.5% and remains above average at 21.80. The ISE Sentiment Index is below average at 121.0 and the total put/call is slightly above average at .92. Finally, the NYSE Arms has been running about average most of the day and is currently .87. The Shanghai Composite fell another 3.0% last night and is now down 53.2% from its record October high and is down 45.5% just this year. It is noteworthy that Brazil’s Bovespa, everyone’s favorite emerging stock market, was unable to rally today, despite sharp gains in US stocks this morning. On the positive side, the Euro Financial Sector Credit Default Swap Index is falling 4.2% today to 76.41 basis points. This is up from a low of 52.66 on May 5^th, but still down from 129.46 basis points on March 20^th. The 10-year swap spread is down 6.7% this week to 69.0 basis points over Treasuries. The Broker/Dealer Index(XBD) is jumping 4.5% and the Bank Index(BKX) is rapidly trimming meaningful morning losses. Lehman Brothers(LEH), the source of much recent angst, is soaring 13.4% today. The US Dollar Index is breaking out of its trading range, rising .42% to 74.15, that has been in place since February. The next level of resistance appears to be around the 200-day moving average at 75.16. I still think the US dollar has substantial upside from current levels over the intermediate-term. This should help to puncture the commodities bubble. Growth stocks are especially strong today, substantially outperforming the broad market and value stocks. Mid-cap growth remains this year’s best performing style and is now down 2.2% ytd. Given the recent parabolic surge in short interest, action in the financial sector and spike in bearish sentiment, I suspect this rally has some legs, as long as commodities behave. Nikkei futures indicate an +207 open in Japan and DAX futures indicate an +1 open in Germany on Monday. I expect US stocks to trade mixed-to-higher into the close from current levels on falling energy prices, less economic pessimism, bargain-hunting and short-covering.