Stocks Soaring into Final Hour on Diminishing Credit Market Angst, Less Financial Sector Pessimism and Lower Commodity Prices

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi longs, Computer longs, Gaming longs and Retail longs. I covered all my (IWM)/(QQQQ) hedges and some of my (EEM) short today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, almost every sector is rising and volume is about average. Investor anxiety is about average. Today’s overall market action is bullish. The VIX is falling 6.56% and is still above-average at 21.95. The ISE Sentiment Index is slightly below average at 138.0 and the total put/call is below average at .73. Finally, the NYSE Arms has been running slightly above average most of the day and is currently .92. The Euro Financial Sector Credit Default Swap Index is falling 4.75% today to 80.83 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 1.5% today to 131.50 basis points. The TED spread is falling 3.39% to 1.07. The 10-year TIPS spread, a good gauge of inflation expectations, is falling another 4 basis points to 2.25%, which is the lowest since May 1st and down 38 basis points in a month. Energy-sensitive Russian equities fell another 4.42% today and are now down 27.5% in less than three months. I think part of the reason US equities are lifting as much as they are today is due to the fact that the large fund or funds that were cutting risk across the board yesterday is done selling. The (XLF) is at session highs, rising 4.1%. I view the Fed’s policy statement as a positive for stocks. The US dollar is maintaining recent gains on the announcement, which is a large positive. I keep hearing investors on CNBC make the case that commodity stocks are cheap because of their “low p/e ratios.” However, historically commodity stocks always appear the cheapest before substantial declines as their earnings growth peaks. Weakening earnings and falling stocks prices then lead to substantial p/e multiple increases in these types of stocks. That is what makes the fertilizer stocks so dangerous, in my opinion. Potash Corp.(POT), an investor favorite, currently has a trailing p/e of 27.3 even after recent losses and as earnings growth is likely near a multi-year peak. This company carried a p/e of around 7.0 in 2001. The fertilizer stocks are getting very oversold on a short-term basis. However, as I said a couple of months ago, I still view these stocks as carrying the most downside risk of any group in the market over the intermediate-term. Nikkei futures indicate an +250 open in Japan and DAX futures indicate an +57 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on lower commodity prices, diminishing credit market angst, less financial sector pessimism and short-covering.