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

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Technology longs, Retail longs, Medical longs and Financial longs. I covered all of my (IWM)/(QQQQ) hedges and some of my (EEM) short this morning, 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 above average. Investor anxiety is above average. Today’s overall market action is very bullish. The VIX is falling 5.23% and is very high at 37.13. The ISE Sentiment Index is low at 95.0 and the total put/call is around average at .82. Finally, the NYSE Arms has been running high most of the day, hitting 2.32 at its intraday peak, and is currently .60. The Euro Financial Sector Credit Default Swap Index is falling 2.66% today to 156.33 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 3.16% to 191.11 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is falling 2.24% to 96 basis points. The TED spread is now down 367 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising 9.18% to 66.88 basis points. The Libor-OIS spread is falling .68% to 90 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 2 basis points to 1.24%, which is down 140 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 .14%, which is up 2 basis points today. The abrupt rebound today in financial and reit shares after recent sharp gains and yesterday’s swoon, is a large positive. I think it is indicative of how many large hedge funds are trapped short in these shares. As well, the most economically sensitive stocks are significantly outperforming today with the MS Cyclical Index surging 4.1%. Most news continues to be interpreted in a positive light. (CAT), for example, lowered its 2009 operating eps guidance significantly from $1.77 to $1.25, yet the stock is near session highs, rising 3%. After 22 consecutive weeks of declines, weekly retail sales gained for the second week in a row, rising .5%. This remains a big positive. Nikkei futures indicate an +159 open in Japan and DAX futures indicate an +38 open in Germany tomorrow. I expect US stocks to trade modestly mixed-to-higher into the close from current levels on short-covering, diminishing economic fear, less financial sector pessimism and bargain-hunting.