Stocks Surging into Final Hour on Earnings Optimism, Short-Covering, Technical Buying, Less Financial Sector Pessimism

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Technology longs, Biotech longs, Medical longs, Retail longs and Financial longs. I covered all my (IWM)/(QQQQ) hedges this morning, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are rising and volume is above average. Investor anxiety is high. Today’s overall market action is very bullish. The VIX is falling -7.74% and is high at 20.53. The ISE Sentiment Index is around average at 143.0 and the total put/call is around average at .82. Finally, the NYSE Arms has been running around average most of the day, hitting 1.36 at its intraday peak, and is currently .68. The Euro Financial Sector Credit Default Swap Index is falling -.12% today to 63.67 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 rising +3.0% to 100.55 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is rising +2 basis points to 24 basis points. The TED spread is now down 440 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is falling -.35% to 35.81 basis points. The Libor-OIS spread is up +1 basis point to 13 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down -3 basis points to 1.97%, which is down 68 basis points since July 7th. The 3-month T-Bill is yielding .04%, which is down -2 basis points today. Small-cap and Cyclical shares are substantially outperforming today. Semi, Financial, HMO, Insurance, Homebuilding, REIT, Gaming and Restaurant shares are especially strong, rising 2%+. (XLF) and (IYR) have traded very well throughout the day, which is always a big positive. The AAII % Bulls fell to 40.5% this week, while the % Bears rose to 35.7%, which is also a positive. Given the news today, which could have been construed as mostly negative, today’s advance is even more impressive. On the negative side, Nasdaq leaders are substantially underperforming and the Transports are slightly lower on the day. The whippy action over the last 2 days has likely left many aggressive funds poorly positioned again, which could lead to further near-term stock market gains. Nikkei futures indicate an +83 open in Japan and DAX futures indicate an +59 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, less financial sector pessimism, investment manager performance anxiety, technical buying and earnings optimism.