Stocks Higher into Final Hour on Lower Long-Term Rates, Short-Covering, Less Financial Sector Pessimism

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Technology longs, Financial longs and Biotech Longs. I covered all my (IWM)/(QQQQ) hedges and added to my (QSII) long today, thus leaving the Portfolio 100% net long. The tone of the market is mildly positive as the advance/decline line is slightly higher, most sectors are rising and volume is around average. Investor anxiety is above average. Today’s overall market action is mildly bullish. The VIX is falling 1.58% and is very high at 31.85. The ISE Sentiment Index is slightly below average at 134.0 and the total put/call is slightly below average at .79. Finally, the NYSE Arms has been running above average most of the day, hitting 2.62 at its intraday peak, and is currently .85. The Euro Financial Sector Credit Default Swap Index is rising 1.37% today to 120.67 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 1.64% to 145.61 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is rising 2.32% to 53 basis points. The TED spread is now down 410 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is falling 1.18% to 42.0 basis points. The Libor-OIS spread is falling 2.88% to 46 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 8 basis points to 1.84%, which is down 80 basis points since July 7th. The 3-month T-Bill is yielding .14%, which is down 2 basis points today. Breadth is disappointing today, despite headline gains. Commodity stocks are especially strong today with more US dollar weakness. However, I suspect the recent interest rate rise, euro strength and gas price surge will slow Europe’s recovery, which should boost the US dollar from current levels over the coming months. As well, I believe the 10-Year T-Note made a tradable low today, which is a positive for stocks. The AAII % Bulls rose to 40.4% this week, while the % Bears rose to 48.6%. Overall, sentiment remains a broad market positive. I expect stocks to build on today’s gains tomorrow. Nikkei futures indicate an +94 open in Japan and DAX futures indicate an +41 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, less financial sector pessimism and lower long-term rates.