Stocks High into the Final Hour on Diminishing Credit Market Angst, Bargain-Hunting and Short-Covering

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Medical longs, Internet longs and Biotech longs. 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, almost every sector is gaining and volume is heavy. Investor anxiety is still very elevated. Today’s overall market action is bullish. The VIX is falling 1.23% and is still historically elevated at 66.68. The ISE Sentiment Index is below average at 125.0 and the total put/call is very high at 1.19. Finally, the NYSE Arms has been running high most of the day, hitting 3.38 at its intraday peak, and is currently .95. The Euro Financial Sector Credit Default Swap Index is rising 2.1% today to 96.33 basis points. This index is up from a low of 52.66 on May 5^th, but down significantly from 157.81 on Sept. 16^th. The North American Investment Grade Credit Default Swap Index is falling 1.2% to 200.63 basis points. The TED spread is falling 11.03% to 363 basis points. The 2-year swap spread is falling 10.07% to 122.75 basis points. The Libor-OIS spread is dropping 3.79% to 327 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 12 basis points to 1.06%, which is down 157 basis points in just over three months and at the lowest level since February 1999. The meaningful decline in gauges of credit angst is a large positive. I am getting a clear technical sell signal on the TED spread for the first time since July. I am surprised US stocks aren’t up more given credit market improvement. Today’s muted upside reaction could be due to options expiration. I suspect the herd of professional and individual investors that panicked recently, selling near last week’s lows, are getting a bit worried. There is a historic mountain of cash on the sidelines right now. Nikkei futures indicate an +207 open in Japan and DAX futures indicate an +107 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, diminishing credit angst and bargain-hunting.