Stocks Mixed into Final Hour as Short-Covering, Bargain-Hunting Offsets Higher Oil, Rising Credit Angst

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Medical longs and Internet longs. I haven’t traded today, thus leaving the Portfolio 75% net long. The tone of the market is slightly negative as the advance/decline line is mildly lower, most sectors are declining and volume is very light. Investor anxiety is slightly above average. Today’s overall market action is mildly bearish. The VIX is falling .67% and is still above-average at 20.89. The ISE Sentiment Index is below average at 123.0 and the total put/call is above average at .90. Finally, the NYSE Arms has been running high most of the day, hitting 1.31 at its peak, and is currently 1.14. The Euro Financial Sector Credit Default Swap Index is rising 5.2% today to 91.34 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 +2.0% to 144.50 basis points. The TED spread is falling 2.8% to 1.11 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 2 basis points to 2.17%, which is still down about 46 basis points in about six weeks. Given escalating tensions with Russia and the fact that analysts expect Hurricane Gustav to hit energy infrastructure in the Gulf, oil’s muted upside reaction is very surprising. While crude would likely temporarily spike higher on any direct hit to this infrastructure, lower lows in oil look likely thereafter as the US dollar continues to rise, supplies hit new records and global demand continues to meaningfully weaken. The Citi eurozone economic surprise index is now -172.30 versus a reading of +50.50 for the US economic surprise index. The (XLF) is trading pretty well, holding support at around $20, given recent concerns. If this doesn’t break lower soon, I suspect we will see some significant short-covering. Nikkei futures indicate an +27 open in Japan and DAX futures indicate an +4 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering and bargain-hunting.