Stocks Surging into Final Hour on Less Economic Pessimism, Diminishing Financial Sector Worries, Short-Covering, Bargain-Hunting

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Medical longs, Technology longs, Retail longs and Biotech longs. I covered all of my (IWM)/(QQQQ) hedges and some of my (EEM) short today, thus leaving the Portfolio 100% net long. The tone of the market is very positive as the advance/decline line is substantially higher, sector performance is mostly positive and volume is above average. Investor anxiety is also above average. Today’s overall market action is bullish. The VIX is falling 10.15% and is elevated at 45.77. The ISE Sentiment Index is low at 95.0 and the total put/call is high at 1.02. Finally, the NYSE Arms has been running high most of the day, hitting 1.64 at its intraday peak, and is currently 1.42. The Euro Financial Sector Credit Default Swap Index is falling 4.66% today to 156.33 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 .94% to 243.0 basis points. This index is still well below its Dec. 5^th record high of 285.99. The TED spread is rising .73% to 103 basis points. The TED spread is now down 360 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising 3.97% to 72.0 basis points. The Libor-OIS spread is falling .01% to 102.0 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 2 basis point to .95%, which is down 169 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 .25%, which is down 2 basis points today. Stocks globally are rising on optimism over the possibility of a rebound in the Chinese economy. As well, a few minutes ago Reuters reported that the House Financial Services Sub-committee is holding a hearing on March 12^th related to mark-to-market accounting. I have said in the past that revising this rule would result in a large financial sector rally. I am surprised the stocks aren’t up more on the news. If the rule isn’t revised, today’s gains will likely evaporate over the coming weeks. For today’s rally to have staying power, financials must at least participate. Nikkei futures indicate an +200 open in Japan and DAX futures indicate a +29 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on less economic pessimism, more shorting, diminishing financial sector worries, bargain-hunting and short-covering.