Stocks Lower into Final Hour on Financial Sector Pessimism, More Forced Selling, Rising Energy Prices

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Medical longs and Internet longs. I added (IWM)/(QQQQ) hedges and added to my (EEM) short this morning, thus leaving the Portfolio 75% net long. The tone of the market is bearish as the advance/decline line is substantially lower, most sectors are falling and volume is light. Investor anxiety is very high. Today’s overall market action is very bearish. The VIX is rising 10.3% and is very elevated at 61.89. The ISE Sentiment Index is low at 104.0 and the total put/call is above average at 1.07. Finally, the NYSE Arms has been running above average most of the day, hitting 1.35 at its intraday peak, and is currently 1.34. The Euro Financial Sector Credit Default Swap Index is falling 4.85% today to 102.0 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 2.3% to 186.25 basis points. The TED spread is rising 1.3% to 203 basis points. The TED spread is now down 261 basis points in about four weeks. The 2-year swap spread is falling 2.76% to 105.50 basis points. The Libor-OIS spread is falling 1.68% to 173 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 3 basis points to .95%, which is down 167 basis points in about four months and at the lowest level since January 1999. It is a big negative that US stocks are unable to mount a rally given recent losses, the Chinese stimulus plan and gains in overseas markets. Financials, REITs, Homebuilders and a number of market leaders are especially weak today. If a strong US stock rally doesn’t materialize over the next week as I expect, I would become concerned over the likelihood of a test of the lows before year-end. Nikkei futures indicate a -200 open in Japan and DAX futures indicate a -110 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on more forced selling, shorting, financial sector pessimism and rising energy prices.