Stocks Sharply Higher into Final Hour on Falling Credit Market Angst, Diminishing Economic Fear, Declining Financial Sector Pessimism, Short-Covering

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Biotech longs, Medical longs, Retail longs, Technology longs and Financial longs. I added to my (URBN) long 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, every sector is rising and volume is about average. Investor anxiety is above average. Today’s overall market action is very bullish. The VIX is falling 5.45% and is very high at 35.93. The ISE Sentiment Index is below average at 121.0 and the total put/call is slightly below average at .74. Finally, the NYSE Arms has been running about average most of the day, hitting .94 at its intraday peak, and is currently .61. The Euro Financial Sector Credit Default Swap Index is falling 3.81% today to 150.0 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 falling 5.17% to 168.79 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is rising 1.13% to 93 basis points. The TED spread is now down 370 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is unch. at 55.50 basis points. The Libor-OIS spread is falling 1.23% to 83 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 3 basis points to 1.54%, which is down 110 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 .09%, which is down 3 basis points today. The euro financial sector credit default swap index appears to be rolling over again technically, which is a large broad market positive. Moreover, the North American Investment Grade Credit Default Swap Index is breaking down to the lowest level since October 7^th of last year, which is a major positive. The S&P 500 is now only -2.3% lower for the year after this month’s 9.7% surge higher. I still see much evidence that many large funds are positioned net short or seriously underexposed to US stocks. A close above 880 in the S&P 500 would likely trigger another meaningful round of short-covering. Nikkei futures indicate an +400 open in Japan and DAX futures indicate an +25 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on less economic fear, short-covering, declining financial sector pessimism, investment manager performance anxiety and diminishing credit market angst.