Stocks Lower into Final Hour on Economic Fears, Rising Financial Sector Pessimism, Higher Long-Term Rates, Higher Energy Prices

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Technology longs, Biotech longs and Medical 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 mixed as the advance/decline line is about even, most sectors are declining and volume is below average. Investor anxiety is very high. Today’s overall market action is neutral. The VIX is rising +1.99% and is high at 21.57. The ISE Sentiment Index is below average at 124.0 and the total put/call is around average at .81. Finally, the NYSE Arms has been running high most of the day, hitting 1.73 at its intraday peak, and is currently 1.70. The Euro Financial Sector Credit Default Swap Index is rising +5.3% to 73.99 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 declining -.85% to 91.20 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is down -2 basis points to 21 basis points. The TED spread is now down 445 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising 2.01% to 35.89 basis points. The Libor-OIS spread is down -1 basis point to 8 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up +5 basis points to 2.28%, which is down -37 basis points since July 7th. The 3-month T-Bill is yielding .04%, which is up +2 basis points today. Small-Cap and Cyclical shares are outperforming again today. The Russell 2000 is +.1% and the MS Cyclical Index is flat. “Growth” is outperforming “value.” Hospital, HMO, Construction, Oil Service, Education, Energy, Alt Energy and Coal shares are all higher on the day. The North Amer. Inv. Grd. CDS Index remains near its Sept lows, which is a large positive. Considering the amount of supply of stock that is hitting the market from banks, the market is holding up very well at the upper end of its trading range. On the negative side, some market leaders are displaying relative weakness today and (XLF) still trades “heavy.” I suspect the Fed will maintain the status quo tomorrow, but will likely increase the “hawkish” rhetoric. Nikkei futures indicate an +10 open in Japan and DAX futures indicate an +4 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short covering, buyout speculation and seasonal strength.