Stocks Sharply Lower into Final Hour on Rising Financial Sector Worries, Increasing Economic Pessimism, Surging Credit Market Angst, More Shorting

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Internet longs, Retail longs and Biotech longs. I added (IWM)/(QQQQ) hedges, added to my (EEM) short and exited by (GME) long this morning, thus leaving the Portfolio 50% net long. The tone of the market is very negative as the advance/decline line is substantially lower, almost every sector is declining and volume is about average. Investor anxiety is above average. Today’s overall market action is very bearish. The VIX is rising 6.0% and is elevated at 50.39. The ISE Sentiment Index is below average at 107.0 and the total put/call is above average at 1.00. Finally, the NYSE Arms has been running low most of the day, hitting .49 at its intraday trough, and is currently .63. The Euro Financial Sector Credit Default Swap Index is soaring 17.25% today to 187.33 basis points. This index is making a new record high at 187.33. The North American Investment Grade Credit Default Swap Index is rising 3.44% to 251.35 basis points. This index is still below its Dec. 5^th record high of 285.99. The TED spread is rising 5.14% to 108 basis points. The TED spread is now down 355 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising 4.18% to 74.75 basis points. The Libor-OIS spread is rising .79% to 104.0 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is dropping 7 basis points to .88%, which is down 176 basis points since July 7th. 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 .20%, which is down 5 basis points today. Many gauges of investor angst still remain stubbornly low given the carnage that is taking place. The 10-year TIPS spread is rolling over again. I suspect another meaningful surge higher in long-term US govt. treasuries is underway given how bearish the crowd is on these securities. Barney Frank reiterated again today that Congress shouldn’t do away with the market-to-market rule. Asia will likely come under significant pressure tonight. On the positive side, the AAII % Bulls fell to 18.92% and the % Bears jumped to 70.27% this week. The % Bears is now at a new record high, eclipsing the 67.1% seen the week of Oct. 18^th 1990. Some market leading stocks are holding up relatively well today. Nikkei futures indicate a -260 open in Japan and DAX futures indicate a -8 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on more economic pessimism, more shorting, rising financial sector pessimism and tax hike worries.