Stocks Sharply Lower into Final Hour on Financial Sector Pessimism and Global Deflation

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Internet longs and Medical longs. I added to my (IWM)/(QQQQ) hedges and to my (EEM) short this morning, thus leaving the Portfolio 50% net long. The tone of the market is very bearish as the advance/decline line is substantially lower, every sector is declining and volume is about average. Investor anxiety is extraordinarily high. Today’s overall market action is very bearish. The VIX is rising 8.1% and is historically elevated at 73.20. The ISE Sentiment Index is very low at 73.0 and the total put/call is very high at 1.35. Finally, the NYSE Arms has been running very high most of the day, hitting 3.0 at its intraday peak, and is currently 1.78. The Euro Financial Sector Credit Default Swap Index is up 6.46% today to 123.0 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 up 8.78% to 237.08 basis points. The TED spread is rising .27% to 211 basis points. The TED spread is now down 253 basis points in about five weeks. The 2-year swap spread is down .71% to 104.50 basis points. The Libor-OIS spread is falling 2.47% to 171 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is plunging 19 basis points to .36%, which is down 226 basis points in under five months and at the lowest level since Bloomberg record-keeping began in August 1998. The 10-year TIPS spread bottomed at .65% in October 1998 during the Asian financial crisis and at 1.24% in October 2001 during the technology bubble-bursting meltdown. The (XLF) trades terribly today and a positive catalyst must materialize very soon to prevent a meaningful break of the broad market lows. Credit spreads are widening significantly. The 3-month T-Bill is now yielding .06%. The market is starting to price in a sustained bout of deflation. Nikkei futures indicate a -318 open in Japan and DAX futures indicate a -4 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on financial sector pessimism, forced selling, more shorting and global growth worries.