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

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Biotech longs, Financial longs and Medical longs. I covered all of my (IWM)/(QQQQ) hedges and added to my (ASEI) long 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, most sectors are rising and volume is heavy. Investor anxiety is above average. Today’s overall market action is very bullish. The VIX is falling 5.17% and is very high at 31.73. The ISE Sentiment Index is about average at 140.0 and the total put/call is slightly above average at .91. Finally, the NYSE Arms has been running around average most of the day, hitting 1.73 at its intraday peak, and is currently .80. The Euro Financial Sector Credit Default Swap Index is dropping another 2.71% today to 119.17 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 1.77% to 143.88 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is falling another 1.50% to 77 basis points. The TED spread is now down 386 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising 1.64% to 46.50 basis points. The Libor-OIS spread is falling 1.37% to 74 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 3 basis point to 1.57%, which is down 107 basis points since July 7th. The 3-month T-Bill is yielding .17%, which is unch. today. Given the run the financials had already had ahead of the stress test results, today’s 6.3% jump in the heavily-shorted (XLF) is even more impressive. Tech stocks are significantly underperforming the last few days as investor rotation into other formerly lagging sectors has intensified. If this tech underperformance were to persist it would become a red flag for the broad market. However, the fact that the broad market can move meaningfully higher as tech consolidates recent gains is a net positive right now. I suspect some of tech’s recent weakness is related to US dollar weakness, which should reverse over the coming weeks. The Citi US economic surprise index is now up to +37.0 versus +9.0 in the euro region. The S&P 500 is now +3.59% for the year. Investment manager performance anxiety is likely spiking right about now. It is also Nikkei futures indicate an +108 open in Japan and DAX futures indicate an +40 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, investment manager performance anxiety, less financial sector pessimism, diminishing economic fear and lower long-term rates.