Stocks Lower into Final Hour on China Bubble Worries, Profit-Taking, More Shorting

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Technology longs and Medical 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 about average. Investor anxiety is high. Today’s overall market action is bearish. The VIX is rising 5.82% and is very high at 26.18. The ISE Sentiment Index is below average at 114.0 and the total put/call is slightly above average at .87. Finally, the NYSE Arms has been running high most of the day, hitting 2.81 at its intraday peak, and is currently 1.76. The Euro Financial Sector Credit Default Swap Index is rising 2.42% today to 83.64 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 3.76% to 119.28 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is rising 2.89% to 22 basis points. The TED spread is now down 444 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is down .53% to 35.06 basis points. The Libor-OIS spread is falling another 1.76% to 17 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down 6 basis points to 1.65%, which is down 101 basis points since July 7th. The 3-month T-Bill is yielding .13%, which is unch. today. Considering worries that financials are the most technically overbought group, declines in recent speculative financial leaders and China’s plunge last night, the (XLF) is holding up very well. A number of banks are actually higher on the day. As well, the high Arms reading and mediocre volume indicate the bears continue to lack real conviction. Cylicals and small-caps are under the most pressure today, but tomorrow’s economic data could boost the most economically sensitive shares. On the negative side, Chinese shares likely have further downside and the S&P 500 is continuing its recent trend of mostly ignoring good news. Nikkei futures indicate a -47 open in Japan and DAX futures indicate an +6 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, diminishing financial sector pessimism, lower energy prices and lower long-term rates.