Stocks Lower into Final Hour on Profit-Taking, Emerging Market Worries, More Shorting

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Retail longs and Financial longs. I have not traded today, thus leaving the Portfolio 75% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are declining and volume is below average. Investor anxiety is very high. Today’s overall market action is bearish. The VIX is rising +6.43% and is high at 23.51. The ISE Sentiment Index is below average at 121.0 and the total put/call is around average at .87. Finally, the NYSE Arms has been running very high most of the day, hitting 2.83 at its intraday peak, and is currently 2.14. The Euro Financial Sector Credit Default Swap Index is falling -3.33% to 67.57 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 +.06% 97.87 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is unch. at 24 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 falling -2.82% to 36.63 basis points. The Libor-OIS spread is unch. at 11 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down -4 basis points to 2.13%, which is down -52 basis points since July 7th. The 3-month T-Bill is yielding .02%, which is unch. today. Several sectors are substantially outperforming again today. Education, HMO, Bank, Semi and Networking stocks are all higher on the day. Several other sectors are just posting modest losses. The Transports are just -.14% lower. Market leaders are also outperforming today despite mostly negative macro news. It is also a positive that credit default swap indices are flat/lower on the day. The NYSE Arms is very high on below average volume, which indicates the bears are expending quite a bit of firepower again. On the negative side, I am seeing a number of commodity-related stocks with technically weak patterns. Homebuilders are also weighing on the major averages today. I suspect much of the recent weakness is related to year-end positioning by hedge funds and that this will likely run its course pretty soon, which could pave the way for a strong year-end finish. Nikkei futures indicate a -180 open in Japan and DAX futures indicate a -17 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short covering, bargain hunting, lower energy prices, declining long-term rates and seasonal strength.