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

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Retail longs, Medical longs, Financial longs, Internet longs and Computer longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is very positive as the advance/decline line is substantially higher, almost every sector is rising and volume is above average. Investor anxiety is above average. Today’s overall market action is very bullish. The VIX is falling -2.04% and is very high at 42.85. The ISE Sentiment Index is about average at 153.0 and the total put/call is below average at .71. Finally, the NYSE Arms has been running low most of the day, hitting .22 at its intraday trough, and is currently .52. The Euro Financial Sector Credit Default Swap Index is falling 5.10% today to 109.0 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 2.77% to 193.49 basis points. The TED spread is falling .21% to 97 basis points. The TED spread is now down 370 basis points in under four months. The 2-year swap spread is falling 2.75% to 62.25 basis points. The Libor-OIS spread is rising .97% to 98 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 10 basis points to 1.20%, which is down 150 basis points in under seven months. 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 yielding .27%, which is unch. today. The large decline in the financial sector credit default swap index is a big positive. The Bank Index is +11.8% today, which is boosting the (XLF) 7.2%. Economically sensitive shares are today’s outstanding performers with the MS Cyclical Index jumping 4.0%. The MS Tech Index is now +8.44% ytd versus a -3.83% loss for the S&P 500. Given recent gains in copper and other economically sensitive commodities, oil’s recent relative weakness is noteworthy. I still view the commodity as significantly overvalued anywhere near current levels. There is a lot of talk this afternoon of a large “sell the news” reaction next week on the details of Geithner’s financial rescue plan and passage of the economic stimulus plan. I suspect many large hedge funds are getting substantially more short into today’s strength. While the broad market is getting a bit extended short-term, I expect any pullback from current levels to be relatively short-lived and mild in nature. The heavily-shorted (XLF) is still well below its 50-day moving average and substantially below its 200-day. These stocks can likely rally longer and further than most investors currently perceive. Nikkei futures indicate a +243 open in Japan and DAX futures indicate an +16 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, bargain-hunting, diminishing financial sector pessimism, falling credit market angst and less extreme economic pessimism.