Stocks Soaring into Final Hour on Less Financial Sector Pessimism, Less Extreme Economic Fear, Short-Covering, Buyout Speculation

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Technology longs, Education longs, Medical longs, Biotech longs and Retail longs. I added to my (ILMN) and (GILD) longs and took profits in another long 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 about average. Investor anxiety is about average. Today’s overall market action is very bullish. The VIX is falling 6.37% and is very high at 40.83. The ISE Sentiment Index is below average at 129.0 and the total put/call is below average at .74. Finally, the NYSE Arms has been running around average most of the day, hitting 1.35 at its intraday peak, and is currently .73. The Euro Financial Sector Credit Default Swap Index is rising 1.05% today to 192.66 basis points. This index is down from its record March 10th high of 208.75. The North American Investment Grade Credit Default Swap Index is rising 2.24% to 244.55 basis points. This index is still below its Dec. 5^th record high of 285.99. The TED spread is rising .84% to 112 basis points. The TED spread is now down 351 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is plunging 9.69% to 65.25 basis points. The Libor-OIS spread is falling .84% to 106.0 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 10 basis points to 1.0%, which is down 164 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 2 basis points today. The methodical grind higher today is much healthier than a gap and then flat-line. Breadth is very good. The action in financials remains a huge positive. Much of this rally is predicated on the assumption that mark-to-market will at the very least be relaxed and possibly even temporarily suspended. As well, talk of bringing back the uptick rule is a large psychological positive for investors. The AAII % Bulls rose to 27.64% this week, while the % Bears fell to 54.47%. Overall, investors remain overwhelmingly bearish. However, I would still like to see a few other technical indicators, such as the total put/call, display more investor angst. The 10-year T-note is trading as if it is about to break out again. Large specs are the most net short the 10-year since August of last year and much talk of a bond bubble still persists. We have had a large rally in stocks and some better economic data, yet the 10-year is firm. Asian equities should see sharp gains tonight. Nikkei futures indicate an +300 open in Japan and DAX futures indicate an +32 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, declining credit market angst, bargain-hunting, buyout optimism, better investor psychology, less extreme economic fear and diminishing financial sector pessimism.