Stocks Falling into Final Hour on Rising Economic Worries, Profit-Taking, More Shorting

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Steel longs, Biotech longs and Technology longs. I have not traded today, thus leaving the Portfolio 100% 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 below average. Investor anxiety is very high. Today’s overall market action is bearish. The VIX is rising 2.02% and is very high at 25.21. The ISE Sentiment Index is very high at 256.0 and the total put/call is above average at .97. Finally, the NYSE Arms has been running very high most of the day, hitting 2.44 at its intraday peak, and is currently .65. The Euro Financial Sector Credit Default Swap Index is rising 4.17% today to 87.26 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 3.31% to 117.21 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is falling 3.15% to 26 basis points. The TED spread is now down 440 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising 6.4% to 39.50 basis points. The Libor-OIS spread is falling 2.62% to 25 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling another 9 basis points to 1.73%, which is down 93 basis points since July 7th. The 3-month T-Bill is yielding .17%, which is unch. today. Considering recent stock market gains, a better-than-expected July jobs report and an uptick in auto sales, today’s consumer confidence reading was even more disappointing. Healthcare reform fears are likely weighing heavily on the American psyche right now. As well, deflation concerns and the ongoing correction in Chinese equities are pressuring stocks today. Cyclical shares are especially weak, falling 3.23%. On the positive side, the NYSE Arms has been very high most of the day on below average volume. Bank stocks, led by (BAC), are hugging the flat line, which is a big positive. Rumors are circulating that Monday’s Master Trust data will show that credit card losses are improving more rapidly than analysts’ had estimated. As of now, there does not seem to be much bearish conviction behind today’s pullback. Nikkei futures indicate a -112 open in Japan and DAX futures indicate an +21 open in Germany on Monday. I expect US stocks to trade modestly higher into the close from current levels on lower long-term rates, declining energy prices, diminishing financial sector pessimism and short-covering.