Stocks Slightly Higher into Final Hour on Short-Covering, Less Economic Pessimism, Bargain-Hunting

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Technology longs and Medical longs. I have not traded today, thus leaving the Portfolio 75% net long. The tone of the market is mildly positive as the advance/decline line is higher, most sectors are rising and volume is about average. Investor anxiety is very high. Today’s overall market action is mildly bullish. The VIX is falling 5.62% and is high at 29.52. The ISE Sentiment Index is low at 109.0 and the total put/call is above average at 99. Finally, the NYSE Arms has been running slightly below average most of the day, hitting .54 at its intraday trough, and is currently .74. The Euro Financial Sector Credit Default Swap Index is falling .67% today to 110.33 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 falling .93% to 144.10 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is falling 4.29% to 35 basis points. The TED spread is now down 431 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising 2.28% to 36.44 basis points. The Libor-OIS spread is down 3.74% to 31 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 3 basis points to 1.55%, which is down 109 basis points since July 7th. The 3-month T-Bill is yielding .18%, which is unch. today. Cyclicals are bouncing back a bit today. Bank, Semi, Gaming, Homebuilding, Oil Service and Construction shares are especially strong. Given today’s decline in the dollar, cyclical outperformance, better-than-expected economic data and recent crude declines, oil’s inability to bounce is noteworthy. The AAII % Bulls dropped to 27.91 this week, while the % Bears jumped to 54.65, which is a big positive. On the negative side, I am surprised the broad market isn’t bouncing more today. (IYR) has been heavy throughout the day and it is beginning to weigh on (XLF). Moreover, several key stocks aren’t participating in today’s gains. Nikkei futures indicate an +104 open in Japan and DAX futures indicate an +3 open in Germany tomorrow. I expect US stocks to trade mixed into the close from current levels as short-covering, bargain-hunting and less economic pessimism offsets commercial real estate worries and higher long-term rates.