Stocks Soaring into Final Hour on Falling Credit Market Angst, Less Economic Pessimism, Short-Covering and Bargain-Hunting

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Retail longs, Computer longs, Internet longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is very bullish as the advance/decline line is substantially higher, almost every sector is rising and volume is above average. Investor anxiety is high. Today’s overall market action is very bullish. The VIX is falling 3.24% and is very elevated at 57.99. The ISE Sentiment Index is very low at 71.0 and the total put/call is about average at .86. Finally, the NYSE Arms has been running very low most of the day, hitting .27 at its intraday trough, and is currently .60. The Euro Financial Sector Credit Default Swap Index is falling 6.57% today to 140.67 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 9.11% to 259.92 basis points. The TED spread is rising .17% to 218 basis points. The TED spread is now down 246 basis points in two months. The 2-year swap spread is down 4.65% to 118.0 basis points. The Libor-OIS spread is falling .88% to 188 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 11 basis points to .30%, which is down 232 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. Market leading stocks are substantially outperforming the major averages again today, with many surging 2-3x as much as the major indices. The (XLF) continues to trade very well. The Morgan Stanley Cyclical Index is 7.3% higher on the day. Natural gas(UNG), on the other hand, trades very poorly given today’s potential upside catalysts. It is noteworthy that the ISE Sentiment Index has been very low throughout the day, which is a positive. It is a major positive to see the credit default swap indices reversing meaningfully lower today. I still see few signs that the massive mountain of capital parked in safe government securities is starting to flow back into equities. We are getting extended short-term again as the S&P 500 approaches its 50-day moving average. However, the market is still very oversold on an intermediate/long-term basis and I expect pullbacks through year-end to be short-lived. Nikkei futures indicate an +255 open in Japan and DAX futures indicate an +50 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on less financial sector pessimism, short-covering, bargain-hunting, declining credit market angst and seasonal strength.