Stocks Reversing Sharply Higher into Final Hour on Bargain-Hunting, Less Financial Sector Pessimism, Lower Energy Prices and Short-Covering

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Retail longs, Biotech longs, Computer longs, Internet longs and Medical longs. I covered all of my (IWM)/(QQQQ) hedges, some of my (EEM) short, added (TBT) long and took profits in another trading long today, thus leaving the Portfolio 100% net long. The tone of the market is bullish as the advance/decline line is higher, almost every sector is rising and volume is about average. Investor anxiety is high. Today’s overall market action is very bullish. The VIX is falling 3.98% and is very elevated at 61.04. The ISE Sentiment Index is below average at 113.0 and the total put/call is slightly above average at .94. Finally, the NYSE Arms has been running high most of the day, hitting 1.49 at its intraday peak, and is currently .56. The Euro Financial Sector Credit Default Swap Index is rising 3.78% today to 150.52 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 5.4% to 285.98 basis points. The TED spread is falling .31% to 217 basis points. The TED spread is now down 247 basis points in about seven weeks. The 2-year swap spread is +6.9% to 123.75 basis points. The Libor-OIS spread is falling .36% to 188 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 11 basis points to .41%, which is down 221 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 3-month T-Bill is still yielding .01%, which is unch. today. Considering today’s news, stock gains are very impressive. As well, many individual stocks continue to rise as they announce negative news, which is a large positive and indicative of a market that wants to head higher. Market leading stocks are substantially outperforming the major averages again today. It is a large positive that investors finally seem to be thinking about the hugely positive ramifications of falling energy prices rather than only worrying about slowing demand. The insurance index is soaring 10.1% today, which is also helping to boost the (XLF). Given Asia’s relative strength last night, Europe’s dramatic underperformance today and US stocks’ large reversal higher, I would expect to see further gains early next week. The sectors with the largest losses for the year will likely outperform into year-end as shorts with large profits cover and bargain-hunters reposition for next year. There remains massive bull firepower on the sidelines and I still believe this recent rally will last longer and be bigger than most expect. Nikkei futures indicate an +33 open in Japan and DAX futures indicate an +145 open in Germany on Monday. I expect US stocks to trade modestly higher into the close from current levels on less financial sector pessimism, short-covering, bargain-hunting, lower energy prices and seasonal strength.