Stocks Slightly Higher into Final Hour on Falling Credit Market Angst, Declining Economic Fear

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Retail longs and Technology longs. I added (IWM)/(QQQQ) hedges today, thus leaving the Portfolio 75% net long. The tone of the market is mixed as the advance/decline line is about even, sector performance is mixed and volume is above average. Investor anxiety is above average. Today’s overall market action is neutral. The VIX is rising 1.22% and is very high at 36.52. The ISE Sentiment Index is below average at 112.0 and the total put/call is about average at .85. Finally, the NYSE Arms has been running slightly above average most of the day, hitting 1.13 at its intraday peak, and is currently 1.04. The Euro Financial Sector Credit Default Swap Index is falling another 3.59% today to 145.0 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 another 6.09% to 158.51 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is falling 5.43% to 89 basis points. The TED spread is now down 374 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising 1.35% to 56.25 basis points. The Libor-OIS spread is falling .81% to 83 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down 6 basis points to 1.48%, which is down 116 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 .12%, which is up 3 basis points today. Today’s afternoon weakness is a bit disappointing, but not that surprising. Many short-term traders are likely taking long profits into month-end and the S&P 500 is right at a technical resistance zone. Considering the swine flu outbreak, bank stress test fears, automaker worries and large GDP decline, the broad market trades exceptionally well. I am still seeing many leading stocks experience technical breakouts on volume. As well, many of the bears’ favorite short ideas continue to explode higher. There has been another significant decline in credit market angst gauges over the last few days, which is another huge positive. The AAII % Bulls rose to 36.09%, while the % Bears rose to 43.61% this week, which remains a market positive. I expect stocks to consolidate recent gains again tomorrow before another push higher next week. Nikkei futures indicate an +75 open in Japan and DAX futures indicate a -35 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 and diminishing credit market angst.