Stocks Lower into Final Hour on Profit-Taking, China Worries, Economic Concerns

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Technology longs, Medical longs and Biotech longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is mildly negative as the advance/decline line is lower, most sectors are declining and volume is below average. Investor anxiety is high. Today’s overall market action is neutral. The VIX is falling -3.45% and is high at 20.43. The ISE Sentiment Index is above average at 194.0 and the total put/call is above average at .90. Finally, the NYSE Arms has been running above average most of the day, hitting 1.66 at its intraday peak, and is currently 1.08. The Euro Financial Sector Credit Default Swap Index is rising +7.13% to 74.63 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 +2.10% to 102.78 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is falling -1 basis point to 23 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 falling -13.29% to 28.13 basis points. The Libor-OIS spread is down -1 basis point to 13 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down -6 basis points to 2.15%, which is down -50 basis points since July 7th. The 3-month T-Bill is yielding .03%, which is up +1 basis point today. The S&P 500 is consolidating yesterday’s surge above the key 1,100 level well today, after the bears were unable to gain morning traction despite a larger than expected downward revision to 3Q personal consumption, a -3.4% decline in China overnight, weakness in (IYR) and falling commodity prices. Large-cap growth stocks are outperforming. Many market leading stocks are substantially outperforming the broad market. HMO, Education, Drug, Biotech, Medical, Telecom, Semi, Steel, Oil Service, Energy and Utility shares are all higher on the day. Johnson Redbook weekly retail sales rose +2.1% this week vs. a +1.8% gain the prior week. This is the best showing since the week of Aug. 5^th, 2008. I still expect retail sales to exceed estimates this holiday shopping season on pent-up demand, rising stock prices, a stabilizing housing market and less fear. I suspect China will come under further pressure tonight. Nikkei futures indicate a -40 open in Japan and DAX futures indicate an +18 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, diminishing healthcare reform worries, lower long-term rates, falling energy prices, technical buying, investment manager performance anxiety and seasonal strength.