Stocks Slightly Lower into Final Hour on Rising Financial Sector Pessimism, More Economic Worries, Higher Energy Prices

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Medical longs, Computer longs and Biotech longs. I covered some of my (IWM)/(QQQQ) hedges and then added them back today, thus leaving the Portfolio 50% net long. The tone of the market is slightly positive as the advance/decline line is modestly lower, sector performance is mostly positive and volume is above average. Investor anxiety is also above average. Today’s overall market action is neutral. The VIX is falling 6.67% and is elevated at 49.14. The ISE Sentiment Index is below average at 113.0 and the total put/call is about average at .91. Finally, the NYSE Arms has been running low most of the day, hitting .22 at its intraday trough, and is currently .51. The Euro Financial Sector Credit Default Swap Index is rising 4.38% today to 162.0 basis points. This index is still below its all-time high of 164.0 on Feb. 24^th. The North American Investment Grade Credit Default Swap Index is rising 4.99% to 240.74 basis points. This index is still well below its Dec. 5^th record high of 285.99. The TED spread is falling 2.76% to 100 basis points. The TED spread is now down 363 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising .54% to 69.63 basis points. The Libor-OIS spread is rising .93% to 103.0 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 1 basis point to .93%, which is down 171 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 .27%, which is up 4 basis points today. Today’s action is more disappointing given recent market losses. The low NYSE Arms reading is a negative. As well, some other gauges of investor angst are not at levels normally associated with meaningful broad market lows. Furthermore, credit default swaps continue to rise across the board. On the positive side, technology shares are trading very well today with the MS Tech Index up 1.66%. Many market leading stocks are substantially outperforming the major averages today. Finally, the major indices remain extremely oversold and could mount a vigorous rally at any time on any mildly bullish catalyst. Nikkei futures indicate a -89 open in Japan and DAX futures indicate a +41 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on rising economic worries, more shorting, increasing financial sector pessimism, higher energy prices and tax hike worries.