Stocks Mostly Higher into Final Hour on Bank Stress Test Results, Less Economic Fear, Short-Covering, Declining Credit Market Angst

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Financial longs, Semi longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is mildly positive as the advance/decline line is higher, sector performance is mixed and volume is above average. Investor anxiety is above average. Today’s overall market action is neutral. The VIX is falling 2.46% and is very high at 32.54. The ISE Sentiment Index is around average at 149.0 and the total put/call is slightly below average at .79. Finally, the NYSE Arms has been running around average most of the day, hitting .94 at its intraday peak, and is currently .75. The Euro Financial Sector Credit Default Swap Index is falling another 4.15% today to 136.33 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 dropping 3.15% to 151.75 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is falling another 1.30% to 80 basis points. The TED spread is now down 383 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is plunging another 11.0% to 46.50 basis points. The Libor-OIS spread is falling 1.60% to 77 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 3 basis point to 1.47%, which is down 117 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 .18%, which is down 1 basis point today. The (XLF) is jumping another 5.4% today. The most heavily-shorted financials are seeing the largest gains on the stress test results. Gauges of credit market angst continue to meaningfully improve. The 2-year swap spread is breaking down to the lowest level since June 2007, which is a major positive. The US sovereign debt credit default swap is plunging 18.0% today to 41.0 basis points, which is also a big positive. Cisco Systems(CSCO) reports after the close today. Short interest is a near-record 75.1 million shares. The put/call open interest ratio for (CSCO) is .84, which is at the high-end of its 2-year range. While they may only meet or slightly miss 3Q revenue estimates, I wouldn’t be surprised to see a slightly more optimistic outlook from the company, which could help boost tech shares tomorrow. As well, economic data could slightly exceed estimates tomorrow. Nikkei futures indicate an +483 open in Japan and DAX futures indicate an +57 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on less economic fear, short-covering, technical buying, declining financial sector pessimism, investment manager performance anxiety and diminishing credit market angst.