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

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Technology longs and Steel longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is mildly negative as the advance/decline line is slightly lower, sector performance is mixed and volume is below average. Investor anxiety is high. Today’s overall market action is neutral. The VIX is rising 2.3% and is very high at 25.33. The ISE Sentiment Index is about average at 140.0 and the total put/call is slightly below average at .77. Finally, the NYSE Arms has been running below average most of the day, hitting .36 at its intraday trough, and is currently .83. The Euro Financial Sector Credit Default Swap Index is falling 3.5% today to 77.50 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 1.54% to 105.17 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is rising 5.42% to 31 basis points. The TED spread is now down 435 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is falling 5.19% to 44.56 basis points. The Libor-OIS spread is falling .56% to 27 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 5 basis points to 1.95%, which is down 71 basis points since July 7th. The 3-month T-Bill is yielding .15%, which is down 2 basis points today. The bears remain unable to gain any meaningful downside traction. Cyclical shares that have experienced the sharpest gains of late are underperforming today. There are few stocks down on volume, several sectors in positive territory and overall breadth isn’t bad today. Restaurant, HMO, Hospital, Medical Equipment, Disk Drive and Alt Energy shares are all posting .5%+ gains today. It is also a big positive to see the Euro Financial Sector CDS Index to come in a bit after last week’s rebound. I still believe US stocks will tread water near-term, before another surge higher commences. Nikkei futures indicate an +31 open in Japan and DAX futures indicate a -7 open in Germany tomorrow. I expect US stocks to trade mixed into the close from current levels as profit-taking, more shorting and China worries offset lower long-term rates and diminishing healthcare reform concerns.