Stocks Lower into Final Hour on More Financial Sector Pessimism, Rising H1N1 Flu Fear, More Shorting, Profit-Taking

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Technology longs and Financial longs. I added (IWM)/(QQQQ) hedges and added to my (EEM) short today, thus leaving the Portfolio 75% net long. The tone of the market is mildly negative as the advance/decline line is slightly lower, most sectors are declining and volume is slightly around average. Investor anxiety is high. Today’s overall market action is mildly bearish. The VIX is rising 1.2% and is very high at 25.31. The ISE Sentiment Index is below average at 128.0 and the total put/call is below average at .72. Finally, the NYSE Arms has been running low most of the day, hitting .26 at its intraday trough, and is currently .73. The Euro Financial Sector Credit Default Swap Index is plunging another 8.15% today to 79.67 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 falling 2.60% to 112.39 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is falling 1.35% to 23 basis points. The TED spread is now down 443 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising 1.20% to 41.63 basis points. The Libor-OIS spread is rising 2.42% to 20 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 6 basis points to 1.83%, which is down 83 basis points since July 7th. The 3-month T-Bill is yielding .15%, which is down 1 basis point today. Despite the market’s short-term overbought state, a market reversal lower from morning highs and some potential negative catalysts, the bears have been unable to gain any meaningful traction thus far. Energy, Oil Service, HMO, Disk Drive, Software and Steel shares are all substantially outperforming today. The large decline in the Euro Financial Sector CDS Index is a large positive. On the negative side, the Banks have reversed early gains and are trading at session lows on comments from (STI). As well, H1N1 fears are surging on the White House report, which could become a problem. Nikkei futures indicate a -6 open in Japan and DAX futures indicate a -46 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on more shorting, rising financial sector pessimism, more H1N1 flu fear and profit-taking.