Stocks Sharply Lower into Final Hour on More Shorting, Rising Financial Sector Angst, More Economic Pessimism, Profit-Taking

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Technology longs, Financial longs and Medical longs. I added to my (IWM)/(QQQQ) hedges this morning and then covered them, thus leaving the Portfolio 75% net long. The tone of the market is very negative as the advance/decline line is substantially lower, almost every sector is declining and volume is above average. Investor anxiety is above average. Today’s overall market action is very bearish. The VIX is rising 5.85% and is very high at 33.66. The ISE Sentiment Index is below average at 139.0 and the total put/call is about average at .87. Finally, the NYSE Arms has been running high most of the day, hitting 2.48 at its intraday peak, and is currently 1.32. The Euro Financial Sector Credit Default Swap Index is rising 4.48% today to 127.44 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 .75% to 152.82 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is falling 1.0% to 72 basis points. The TED spread is now down 391 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is falling 9.04% to 42.75 basis points. The Libor-OIS spread is plunging 13.94% to 61 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 5 basis points to 1.48%, which is down 116 basis points since July 7th. The 3-month T-Bill is yielding .17%, which is down 1 basis point today. Economically-sensitive shares are under the most pressure today with the MS Cyclical Index declining 6.3%. REITs and Banks are also under significant pressure. Copper appears to be rolling over after failing at its 200-day moving average. The US dollar index is likely at another tradable low around current levels. I am closely watching the tech sector for signs that the current pullback has run its course. These stocks should continue to outperform over the intermediate-term. On the positive side, gauges of credit angst continue to improve at a very rapid rate. Nikkei futures indicate a -250 open in Japan and DAX futures indicate a -16 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, lower energy prices and bargain-hunting.