Stocks Slightly Higher into Final Hour on Short-Covering, Less Financial Sector Pessimism, Falling Commodity Prices

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi longs, Medical longs, Retail longs and Commodity/Emerging Market shorts. I covered all my (IWM)/(QQQQ) hedges and took profits in some of my commodity shorts this morning, thus leaving the Portfolio 100% net long. The tone of the market is mildly negative as the advance/decline line is lower, sector performance is mixed and volume is above average. Investor anxiety is above average. Today’s overall market action is neutral. The VIX is falling 3.0% and is still above-average at 23.31. The ISE Sentiment Index is low at 108.0 and the total put/call is above average at 1.04. Finally, the NYSE Arms has been running high most of the day, hitting a peak of 1.57, and is currently .81. The Euro Financial Sector Credit Default Swap Index is rising 1.99% today to 97.67 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 +2.38% to 148.75 basis points. The TED spread is falling .93% to 1.13 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 1 basis point to 1.96%, which is down 66 basis points in about seven weeks and at the lowest level since August 2003. Despite more negative comments from Goldman Sachs this morning about Merrill Lynch(MER), the stock is trading at session high, rising .4%. As well, the (XLF) continues to trade very well given perceived headwinds, bouncing off its 50-day to session highs, rising 2%. Barton Biggs, of hedge fund Traxis Partners, just said on Bloomberg TV that he thinks the market is “pretty close” to a bottom from which it can mount a “powerful rally” and that falling energy prices will boost consumer spending. I agree with these statements. Oil continues to trade very poorly in the face of numerous potential upside catalysts. A test of $100/bbl. is likely next week barring any significant hurricane damage. I still think a clear break below $100/bbl. would be a big boost to the global economy, especially developed markets. Nikkei futures indicate a -27 open in Japan and DAX futures indicate a +63 open in Germany on Monday. I expect US stocks to trade modestly higher into the close from current levels on short-covering, bargain-hunting, less financial sector pessimism and falling commodity prices.