Stocks Soaring into Final Hour as Election Uncertainty Winds Down, Credit Angst Improves and Forced Selling Diminishes

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Medical longs, Computer longs, Internet longs, Retail longs and Biotech longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is bullish as the advance/decline line is slightly higher, almost every sector is rising and volume is above average. Investor anxiety is high. Today’s overall market action is bullish. The VIX is falling 8.6% and is very elevated at 49.08. The ISE Sentiment Index is below average at 111.0 and the total put/call is above average at 1.0. Finally, the NYSE Arms has been running below average most of the day, hitting .5 at its intraday trough, and is currently .55. The Euro Financial Sector Credit Default Swap Index is rising .72% today to 93.33 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 7.2% to 186.50 basis points. The TED spread is falling another 7.56% to 224 basis points. The TED spread is now down 240 basis points in about three weeks. The 2-year swap spread is falling 3.81% to 113.75 basis points. The Libor-OIS spread is falling 1.91% to 213 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 5 basis points to .91%, which is down 172 basis points in about four months and at the lowest level since January 1999. The (XLF) continues to trade well and even recent laggard (GS) is joining the party today. There is another massive decline in commercial paper yields today, which is a large positive, as well as the ongoing improvement in many gauges of credit market angst. The pullback in the US dollar likely has a bit further to go. I am seeing some conflicting moves today. The large decline in the 10-year yield is noteworthy and likely election related. An Obama victory and a Democratic filibuster-proof majority in the Senate will likely lead to a mixed-to-lower open in the morning for US stocks, with strength developing in the afternoon. An Obama victory, combined with no filibuster-proof majority for the Dems, would likely produce a strong open for stocks in the morning with gains maintained throughout the day. An unexpected McCain victory tonight would likely produce a massive rally for US stocks. In the event that the outcome of the election is not certain by tomorrow, stocks would likely see meaningful losses. As I said last week, I still expect the DJIA to test 10,000 before week’s end. Nikkei futures indicate an +460 open in Japan and DAX futures indicate an +38 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, optimism over an impending end to election uncertainty, less financial sector pessimism, diminishing forced selling, less credit market angst and bargain-hunting.