Stocks Rising into Final Hour on Lower Commodity Prices, Short-Covering, Less Financial Sector Pessimism

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Medical longs, Gaming longs, Alternative Energy longs and Commodity shorts. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, sector performance is mostly positive and volume is about average. Investor anxiety is above average. Today’s overall market action is bullish. The VIX is falling 4.45% and is still above-average at 20.57. The ISE Sentiment Index is low at 112.0 and the total put/call is below average at .81. Finally, the NYSE Arms has been running around average most of the day and is currently .95. The Euro Financial Sector Credit Default Swap Index is falling .69% today to 80.56 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 falling .39% today to 134.91 basis points. The TED spread is falling 2.89% to .94. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 2 basis point to 2.17%, which is the lowest since October 14, 2003 and down 46 basis points in less than six weeks. Given today’s perceived “bad” economic data and more evidence that Europe is weakening considerably, today’s broad market action is even more bullish. The Russell 2000 and Naz continue to lead. The US dollar index continues to slice through overhead resistance and has risen in 17 of the last 22 days. The index will likely pause around the 77.0-78.0 level, before another surge higher begins during 4Q. As well, Goldman Sachs is calling a bottom in the US dollar today. India’s Sensex appears to be rolling over again, falling another 2.4% last night on inflation concerns and slowing growth. Emerging market inflation will likely remain far more sticky than US inflation, despite falling commodity prices, as rising unit labor costs are much more of an issue in those markets. Despite the recent substantial decline in crude, it is interesting to note that the oil volatility index(OVX) has declined to 46.63 today from a high of 54.19 on July 21^st. Much like the VIX for stocks, I would expect to see this spike near a meaningful bottom in oil. Nikkei futures indicate an +4 open in Japan and DAX futures indicate an +30 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, lower commodity prices, less financial sector pessimism and bargain-hunting.