Stocks Surging into Final Hour on Less Economic Fear, Stability in Asia

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Technology longs, Financial longs and Biotech longs. I covered all my (IWM)/(QQQQ) hedges and some of my (EEM) short today, thus leaving the Portfolio 100% net long. The tone of the market is very positive as the advance/decline line is substantially higher, almost every sector is gaining and volume is below average. Investor anxiety is very high. Today’s overall market action is bullish. The VIX is falling 5.7% and is very high at 26.19. The ISE Sentiment Index is low at 85.0 and the total put/call is above average at .94. Finally, the NYSE Arms has been running low most of the day, hitting .49 at its intraday trough, and is currently .68. The Euro Financial Sector Credit Default Swap Index is falling 1.24% today to 90.0 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 rising .85% to 123.90 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is falling 5.83% to 25 basis points. The TED spread is now down 441 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising 4.73% to 42.94 basis points. The Libor-OIS spread is falling 3.10% to 23 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 6 basis points to 1.76%, which is down 90 basis points since July 7th. The 3-month T-Bill is yielding .18%, which is up 1 basis point today. The broad market continues to display resilience in the face of potential negative catalysts. Cyclicals are outperforming today, but aren’t recouping yesterday’s losses. Gaming, homebuilding and networking shares are especially strong. Weekly retail sales fell -4.4% this week versus a -4.2% decline the prior week. While there has been a slight improvement recently, a meaningful pick-up in consumer spending has yet to materialize. Healthcare stocks are weaker today on continuing uncertainty over the “public option” of the healthcare reform plan. Asia’s performance tonight will like dictate tomorrow’s open here as worries over China’s bubble still persist. Given that the major averages are technically extended, but so many investors expect a correction, it is very possible that equities just chop around over the near-term, frustrating both bulls and bears. Nikkei futures indicate an +55 open in Japan and DAX futures indicate an +9 open in Germany tomorrow. I expect US stocks to trade mixed into the close from current levels as more shorting, healthcare reform worries, higher energy prices and profit taking offset less economic fear and stability in Asian equities.