Stocks Higher into Final Hour on Less Financial Sector Pessimism, Diminishing Credit Market Angst, Short-Covering

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Medical longs, Retail longs, Gaming longs and Commodity/Emerging Market shorts. I added (IWM)/(QQQQ) hedges this morning and then covered them, thus leaving the Portfolio 100% net long. The tone of the market is slightly positive as the advance/decline line is higher, sector performance is mixed and volume is heavy. Investor anxiety is high. Today’s overall market action is mildly positive. The VIX is rising 1.82% and is still above-average at 23.46. The ISE Sentiment Index is low at 93.0 and the total put/call is around average at .91. Finally, the NYSE Arms has been running extremely high most of the day, hitting a peak of 10.97, and is currently 1.17. The Euro Financial Sector Credit Default Swap Index is falling -10.1% today to 87.83 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 -7.4% to 137.0 basis points. The TED spread is rising 7.1% to 1.11 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 3 basis point to 1.99%, which is down 63 basis points in just over seven weeks and at the lowest level since September 2003. I think this morning’s gap higher in the heavily-shorted financials likely caused more forced selling in the hedge fund community, which is further pressuring a number of market-leading stocks, despite broad market gains. The fact that (CSCO), which has significant US dollar/overseas exposure, is 5.1% higher, yet several other leading tech stocks are substantially lower provides some evidence of this. Many of these leading stocks are now at very attractive entry points for both long and short-term investors, in my opinion. Also, the extreme spike in the NYSE Arms this morning is further evidence of forced selling. Nikkei futures indicate a -100 open in Japan and DAX futures indicate a +23 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on less financial sector pessimism, diminishing credit angst, short-covering and bargain-hunting.