Stocks Soaring into Final Hour on Falling Energy Prices, Less Financial Sector Pessimism, Short-Covering, Bargain-Hunting

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Computer longs, Medical longs, Alternative Energy longs, Biotech longs and Commodity shorts. I covered all my (IWM)/(QQQQ) hedges and some of my (EEM) short this morning, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is substantially higher, most sectors are rising and volume is below average. Investor anxiety is slightly above average. Today’s overall market action is very bullish. The VIX is falling 5.41% and is still above-average at 22.93. The ISE Sentiment Index is below-average at 131.0 and the total put/call is about average at .88. Finally, the NYSE Arms has been running around average most of the day and is currently .92. The Euro Financial Sector Credit Default Swap Index is falling 1.72% today to 77.58 basis points. This index is up from a low of 52.66 on May 5^th, but down from 129.46 basis points on March 20^th. The North American Investment Grade Credit Default Swap Index is -1.3% today to 134.22 basis points. The TED spread is falling 1.7% to 1.09. The euro is very close to breaking down through its intermediate-term uptrend line that has been in place since August of last year versus the US dollar. I suspect the euro will break this technical support over the coming days, which should further pressure commodities. A move towards the $1.50 level versus the euro is likely over the coming months, in my opinion. Much of the parabolic move higher in commodities over the last couple of years was a result of “investors,” such as pension funds, making a long-term decision to hedge against a perceived future inflation problem by pouring money into commodity index, commodity hedge and commodity exchange-traded funds. Since the bubble in commodities has been the main source of inflation fears, this became a vicious cycle. If inflation expectations continue to fall rapidly, as they have of late, a virtuous cycle could take hold, whereby less demand for inflation hedging products results in lower commodity prices, which then further lowers inflation expectations. This would be a major positive for the broad US stock market. Nikkei futures indicate an +181 open in Japan and DAX futures indicate an +47 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, diminishing credit angst, less financial sector pessimism, lower energy prices and bargain-hunting.