Stocks Rising into Final Hour on Less Financial Sector Pessimism, Short-Covering, Lower Long-Term Rates, Falling Inflation Expectations

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Steel longs, Technology longs and Financial longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is mildly positive as the advance/decline line is slightly higher, most sectors are rising and volume is about average. Investor anxiety is high. Today’s overall market action is bullish. The VIX is falling 1.26% and is very high at 25.13. The ISE Sentiment Index is low at 109.0 and the total put/call is slightly below average at .77. Finally, the NYSE Arms has been running low most of the day, hitting .35 at its intraday trough, and is currently .59. The Euro Financial Sector Credit Default Swap Index is falling 1.03% today to 84.0 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 1.33% to 113.46 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is falling 2.02% to 27 basis points. The TED spread is now down 439 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is falling 4.59% to 37.69 basis points. The Libor-OIS spread is falling .65% to 26 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 8 basis points to 1.82%, which is down 84 basis points since July 7th. The 3-month T-Bill is yielding .17%, which is unch. today. Given the declines in weekly retail sales reported during July, today’s negative monthly number shouldn’t have been a surprise. I suspect retail sales will show decent improvement this month. It is a large positive to see inflation expectations and long-term rates coming in today. Cyclicals have traded well throughout the session. Coal, Oil Service, Networking, Steel, Gaming, Bank and Semi shares are especially strong, rising 2%+. Preliminary August Consumer Confidence should meet or exceed estimates tomorrow. Nikkei futures indicate an +43 open in Japan and DAX futures indicate an +7 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on lower long-term rates, diminishing financial sector pessimism, falling inflation expectations, investment manager performance anxiety and declining healthcare reform concerns.