Stocks Slightly Lower into Final Hour on Profit-Taking, More Shorting, Financial Sector Pessimism

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Technology longs and Financial longs. I have not traded today, thus leaving the Portfolio 75% net long. The tone of the market is mildly negative as the advance/decline line is slightly lower, sector performance is mixed and volume is below average. Investor anxiety is very high. Today’s overall market action is mildly bearish. The VIX is rising +4.8% and is high at 22.27. The ISE Sentiment Index is around average at 134.0 and the total put/call is above average at .91. Finally, the NYSE Arms has been running high most of the day, hitting 1.69 at its intraday peak, and is currently 1.47. The Euro Financial Sector Credit Default Swap Index is falling -.35% to 69.15 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 +.33% 97.81 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is +2 basis points to 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 rising +.83% to 38.19 basis points. The Libor-OIS spread is +1 basis point to 11 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is -1 basis point to 2.17%, which is down -48 basis points since July 7th. The 3-month T-Bill is yielding .02%, which is down -2 basis points today. A number of sectors are substantially outperforming today. Retail, HMO, Hospital, Wireless, Telecom, Steel, Alt Energy, Utility and Defense shares are all rising .5%+ on the day. The bears have once again been unable to take meaningful advantage of another reversal lower. The S&P 500 is holding above 1,100 despite (XLF)/(IYR) weakness. Investor angst has been relatively high today on low volume, which is also a positive. Consumer Credit for October also came in better than estimates. On the negative side, some market leading stocks are still underperforming the broad market. As well, recent good news has still failed to propel the major averages from their two-month trading ranges. Nikkei futures indicate a -87 open in Japan and DAX futures indicate a -11 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short covering, technical buying, less economic fear, lower energy prices, declining long-term rates and seasonal strength.