Stocks Lower into Final Hour on Government Worries, Rising Economic Angst, More Shorting

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Technology longs, Medical longs, Index hedges and Commodity/Emerging Market shorts. I added (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, most sectors are declining and volume is above average. Investor anxiety is very high. Today’s overall market action is bearish. The VIX is rising 4.15% and is very high at 32.13. The ISE Sentiment Index is low at 105.0 and the total put/call is high at 1.11. Finally, the NYSE Arms has been running high most of the day, hitting 2.27 at its intraday peak, and is currently 1.44. The Euro Financial Sector Credit Default Swap Index is rising 3.49% today to 106.67 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 2.65% to 145.45 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is falling 2.36% to 35 basis points. The TED spread is now down 429 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is falling 3.15% to 36.25 basis points. The Libor-OIS spread is down 3.74% to 32 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down 10 basis points to 1.52%, which is down 112 basis points since July 7th. The 3-month T-Bill is yielding .18%, which is unch. today. Small-cap and the most economically sensitive shares are under meaningful pressure again today. As well, (XLF) has been heavy throughout the day. However, the bears have been unable to gain downside traction in the broad market. Defense, coal, oil service, software, biotech, drug, retail and restaurant shares are all higher on the day. Moreover, a number of market leaders have been firm throughout the day. Investor angst is pretty high, which is also a positive. If energy prices/long-term rates remain subdued and the odds for draconian healthcare reform and a cap and trade scheme fall, stocks should resume their recent uptrend. Nikkei futures indicate a -100 open in Japan and DAX futures indicate an +6 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on lower energy prices, lower long-term rates, short-covering and bargain-hunting.