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

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Biotech longs and Financial longs. I have not traded today, thus leaving the Portfolio 75% 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 slightly below average. Investor anxiety is very high. Today’s overall market action is slightly bearish. The VIX is rising .76% and is very high at 25.11. The ISE Sentiment Index is low at 95.0 and the total put/call is high at 1.09. Finally, the NYSE Arms has been running above average most of the day, hitting 1.87 at its intraday peak, and is currently 1.18. The Euro Financial Sector Credit Default Swap Index is rising .84% today to 81.66 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 1.19% to 115.61 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is rising .45% 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 plunging 15.21% to 35.19 basis points. The Libor-OIS spread is falling another 2.93% to 19 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is unch. at 1.74%, which is down 92 basis points since July 7th. The 3-month T-Bill is yielding .15%, which is unch. today. Computer, Semi, Networking, Homebuilding and Airline shares are substantially outperforming today, rising 1.25%+. Long-term rates are unch. despite recent supply and today’s better economic reports. The broad market is unable to rally again today on positive news. However, given its extended short-term technical state, the fact that the bears are unable to gain traction for the third day in a row after a morning reversal lower is noteworthy. As well, high levels of investor angst today, combined with below average volume, leads me to conclude the bears still lack conviction. Contrary to popular belief in the media, I do not see high levels of investor complacency. Given how much we have rallied and improving economic data, I am actually surprised at the lack of complacency in most of my sentiment gauges. On the negative side, some market leading stocks are underperforming today and worries over China’s bubble persist. Nikkei futures indicate a -20 open in Japan and DAX futures indicate an +10 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, less economic pessimism and lower energy prices.