Stocks Soaring into Final Hour on Less Financial Sector Pessimism, Bargain-Hunting and Short-Covering

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Biotech longs, Internet longs, Computer longs and Medical longs. I took some profits in a few technically extended trading longs and added to some laggard longs today, thus leaving the Portfolio 100% net long. The tone of the market is very positive as the advance/decline line is substantially higher, almost every sector is rising and volume is above average. Investor anxiety is still very elevated. Today’s overall market action is very bullish. The VIX is falling 18.43%, but is still historically elevated at 57.48. The ISE Sentiment Index is low at 99.0 and the total put/call is around average at .90. Finally, the NYSE Arms has been running high most of the day, hitting 1.5 at its intraday peak, and is currently 1.16. The Euro Financial Sector Credit Default Swap Index is falling 10.15% today to 95.24 basis points. This index is up from a low of 52.66 on May 5^th, but down from 157.81 on Sept. 16^th. The North American Investment Grade Credit Default Swap Index is falling 3.8% to 186.0 basis points. The TED spread is falling 1.43% to 4.57 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 11 basis points to 1.04%, which is down 159 basis points in just over three months and at the lowest level since February 1999. Many growth stock leaders are up 12-20% today, significantly outperforming the broad market. The best growth stocks that can grow at a relatively high rate even during a recession have very likely already seen their lows and will be substantially higher over the next year. I also suspect the major averages have at the very least bottomed for this year. How quickly credit markets improve will likely determine if a retest of the broad market lows occurs at some point next year. As of now, I see a full retest as an unlikely scenario. We are getting very extended short-term, but another surge is likely deeper into earnings season as investors buy the bad news. Forward earnings guidance will be very poor, but an extreme amount of bad news has already been factored into most stock prices at current levels, in my opinion. Given extreme economic fears of late and so much talk of “re-inflating” the economy, gold trades very poorly. As credit markets return to more normal behavior and fear subsides, I expect gold to see a meaningful decline in gold over the intermediate-term as the US dollar continues to firm, demand falls and the secular trend of disinflation remains firmly in tact. Nikkei futures indicate an +725 open in Japan and DAX futures indicate an +157 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, less financial sector pessimism, diminished forced selling, bargain-hunting and technical buying.