Stocks Falling Sharply into Final Hour on Rising Economic Fears, China Bubble Concerns, Profit-Taking, More Shorting

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Steel longs, Financial longs and Technology longs. I added (IWM)/(QQQQ) hedges, added to my (EEM) short, took profits in a Financial long and sold my (AKS) long today, 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 below average. Investor anxiety is very high. Today’s overall market action is very bearish. The VIX is rising 14.01% and is very high at 27.67. The ISE Sentiment Index is below average at 119.0 and the total put/call is above average at .99. Finally, the NYSE Arms has been running very high most of the day, hitting 4.14 at its intraday peak, and is currently 1.69. The Euro Financial Sector Credit Default Swap Index is rising 2.60% today to 89.67 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 4.30% to 122.25 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is rising .33% 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 3.48% to 40.88 basis points. The Libor-OIS spread is falling 2.47% to 24 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling another 3 basis points to 1.70%, which is down 96 basis points since July 7th. The 3-month T-Bill is yielding .17%, which is unch. today. Investors are ignoring more positive US economic data and are focusing intensely on the recent precipitous decline in Chinese stocks. This is a negative change in psychology. Cyclical shares are especially weak, with the MS Cyclical Index dropping 4.5%. Shanghai copper inventories have soared 39.4% over the last five days. (XLF) had been holding up relatively well, considering recent gains, but has weakened considerably over the last hour and is now at session lows, falling 4.3%. Chinese stocks fell another 5.8% last night and the index broke down convincingly through its 50-day moving average. Until the Shanghai Composite finds its footing, US equities will likely remain under near-term pressure. Nikkei futures indicate a -78 open in Japan and DAX futures indicate an unch. open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on more shorting, rising economic fear, China asset bubble worries and profit taking.