Stocks Lower into Final Hour on Profit-Taking, Earnings Jitters, More Shorting

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Medical longs, Financial longs and Technology 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, almost every sector is declining and volume is about average. Investor anxiety is very high. Today’s overall market action is bearish. The VIX is rising +6.93% and is high at 23.13. The ISE Sentiment Index is below average at 130.0 and the total put/call is above average at 1.01. Finally, the NYSE Arms has been running very high most of the day, hitting 3.39 at its intraday peak, and is currently 1.75. The Euro Financial Sector Credit Default Swap Index is rising +2.25% to 67.87 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 +3.01% to 102.23 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 26 basis points. The TED spread is now down 438 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising +7.25% to 31.44 basis points. The Libor-OIS spread is up +1 basis point to 14 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling -1 basis point to 2.19%, which is down -46 basis points since July 7th. The 3-month T-Bill is yielding .00%, which is down -3 basis points today. Small-cap and cyclical shares are substantially underperforming today. Oil Service, Semi and Gaming stocks are especially weak, falling -3.25%+. The market’s poor reaction to today’s mixed news, is a negative. The US sovereign debt CDS is rising 3 basis points to 31.0 basis points, which is the highest level since Aug., but still well off a high of 100.50 basis points on Feb. 25. Semis are weak on a BofA Merrill downgrade. I think they are too early on their call to sell these shares. I will add to my positions in the group on any meaningful further pullback from current levels. On the positive side, volume is only around average today and investor angst is spiking. Retail shares have traded relatively well throughout the day. I will closely monitor the market’s internal reaction to tomorrow’s economic data and likely weakness in Asia tonight before further shifting market exposure. Nikkei futures indicate a -99 open in Japan and DAX futures indicate an +16 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, lower energy prices, lower long-term rates and seasonal strength.