Stocks Higher into Final Hour on Short-Covering, Bargain-Hunting, Falling Credit Market Angst, Investment Manager Performance Anxiety

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Technology longs, Financial longs, Retail longs and Medical longs. I covered all my (IWM)/(QQQQ) hedges 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 about average. Investor anxiety is above average. Today’s overall market action is very bullish. The VIX is falling 6.18% and is very high at 31.57. The ISE Sentiment Index is around average at 141.0 and the total put/call is slightly above average at .90. Finally, the NYSE Arms has been running around average most of the day, hitting 1.62 at its intraday peak, and is currently .61. The Euro Financial Sector Credit Default Swap Index is rising .61% today to 128.19 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 1.06% to 154.44 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is falling another 2.59% to 70 basis points. The TED spread is now down 393 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising 2.66% to 43.38 basis points. The Libor-OIS spread is rising 8.74% to 65 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is unch. at 1.48%, which is down 116 basis points since July 7th. The 3-month T-Bill is yielding .16%, which is down 1 basis point today. REITs, Financials and Insurers are propelling the major averages higher today. Technology shares are also outperformers. I suspect many funds that had covered their financial shorts ahead of the bank stress test results reloaded upon their release, thus today’s gains are likely quite painful for many. Tomorrow is option expiration. The Dow has been up 5 of the last 7 May option expiration days. I suspect we will extend today’s gains tomorrow on better-than-expected economic data. Nikkei futures indicate an +107 open in Japan and DAX futures indicate an +24 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, diminishing credit market angst, investment manager performance anxiety and bargain-hunting.