Stocks Lower into Final Hour on Profit-Taking, More Shorting, Commodity Stock Weakness

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Medical longs and Financial longs. I added (IWM)/(QQQQ) hedges and added to my (EEM) short today, thus leaving the Portfolio 75% net long. The tone of the market is very negative as the advance/decline line is substantially lower, most sectors are declining and volume is about average. Investor anxiety is very high. Today’s overall market action is mildly bearish. The VIX is rising +5.38% and is high at 24.28. The ISE Sentiment Index is below average at 120.0 and the total put/call is around average at .83. Finally, the NYSE Arms has been running above average most of the day, hitting 1.39 at its intraday peak, and is currently 1.26. The Euro Financial Sector Credit Default Swap Index is rising +4.69% today to 67.80 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 -.20% to 97.80 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is unch. at 22 basis points. The TED spread is now down 442 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is down -1.72% to 32.06 basis points. The Libor-OIS spread is unch. at 13 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down -7 basis points to 2.16%, which is down -49 basis points since July 7th. The 3-month T-Bill is yielding .06%, which is up +1 basis point today. Small-cap and “value” shares are underperforming today. Commodity, Homebuilding and Airline shares are especially weak, falling -2.5%+. (XLF) has also been “heavy” throughout the day. US dollar strength is pressuring commodities and most other sectors are experiencing mild profit-taking after the S&P 500 failed to convincingly break above technical resistance again at 1,100. On the positive side, market leading stocks are outperforming the major averages. Oil tanker, software, disk drive, networking, education and drug shares are all either higher or just slightly lower on the day. The North Amer. Inv. Grade CDS Index is down slightly, which is also a positive. Given the decline in commodities, Asian indices will likely come under pressure tonight, which could lead to further opening weakness in the US tomorrow. However, I don’t believe this is the start of another meaningful pullback and I expect dip buyers to emerge pretty soon. Nikkei futures indicate a -29 open in Japan and DAX futures indicate a -8 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, earnings optimism, buyout speculation, lower energy prices and falling long-term rates.