Stocks Slightly Lower into Final Hour on Profit-Taking, More Shorting, Economic Concerns

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Technology longs. I covered all my (IWM)/(QQQQ) hedges and some of my (EEM) short this morning, thus leaving the Portfolio 100% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are declining and volume is slightly below average. Investor anxiety is very high. Today’s overall market action is mildly bearish. The VIX is falling -1.28% and is high at 22.35. The ISE Sentiment Index is below average at 124.0 and the total put/call is above average at .96. Finally, the NYSE Arms has been running above average most of the day, hitting 1.45 at its intraday peak, and is currently 1.08. The Euro Financial Sector Credit Default Swap Index is rising +9.01% to 73.30 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 +.98% to 103.24 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is unch. at 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 +1.79% to 31.94 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 unch. at 2.19%, which is down -46 basis points since July 7th. The 3-month T-Bill is yielding .00%, which unch. today. Homebuilding and oil service shares are the only real sources of meaningful weakness today. This rise in the financial sector CDS is a negative, but it remains stuck in the low trading range it has been in for two months. On the positive side, Defense, Utility, Ag, Steel, Drug, Hospital, HMO, Restaurant, Education and Road & Rail stocks are all rising on the day. A number of market leading stocks are at session highs and substantially outperforming the broad market. It is also a positive to see today’s market reversal, despite US dollar strength. I expect stocks to build on today’s reversal early next week before the Thanksgiving holiday. Nikkei futures indicate a -15 open in Japan and DAX futures indicate an +15 open in Germany on Monday. I expect US stocks to trade modestly higher into the close from current levels on short-covering, lower energy prices, buyout speculation and seasonal strength.