Stocks Reversing Higher into Final Hour on Heavy Volume, Boosted by Declining Credit Angst, Short-Covering and Bargain-Hunting

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Medical longs, Retail longs and Biotech longs. I covered all my (IWM)/(QQQQ) hedges, sold a trading long and added to my (GOOG) long this morning, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are gaining and volume is heavy. Investor anxiety is still very elevated. Today’s overall market action is very bullish. The VIX is rising 6.99% and is still historically elevated at 73.99. The ISE Sentiment Index is very low at 85.0 and the total put/call is very high at 1.21. Finally, the NYSE Arms has been running very high most of the day, hitting 3.44 at its intraday peak, and is currently .88. The Euro Financial Sector Credit Default Swap Index is falling 1.12% today to 94.33 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 rising 6.9% to 202.19 basis points. The TED spread is falling 6.25% to 407 basis points. The 2-year swap spread is falling 1.63% to 136.75 basis points. The Libor-OIS spread is dropping 1.34% to 339 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 5 basis points to .94%, which is down 169 basis points in just over three months and at the lowest level since February 1999. The fact that equities and commodities are decoupling today is a large positive. Investors may finally be acknowledging the hugely positive implications that rapidly decelerating inflation has for US equities. Gold continues to trade horrifically, in my opinion, given recent events. Gauges of credit angst continue to trend lower, which is also a large positive. Recent actions should be enough to meaningfully improve credit conditions given time. I still believe an extraordinary amount of bad news is factored into US stock prices at current levels. I suspect US stocks can build on today’s gains tomorrow as earnings reports after the close aren’t as bad as feared. Nikkei futures indicate an +220 open in Japan and DAX futures indicate an +207 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, decelerating inflation, diminishing credit angst and bargain-hunting.