Stocks Falling into Final Hour on Sovereign Debt Worries, Profit-Taking, Bank Tax Concerns

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Financial longs, Biotech longs and Technology longs. I added (IWM)/(QQQQ) hedges and added to my (EEM) short this morning, thus leaving the Portfolio 75% net long. The tone of the market is negative as the advance/decline line is substantially lower, almost every sector is declining and volume is above average. Investor anxiety is high. Today’s overall market action is bearish. The VIX is rising +5.56% and is around average at 18.63. The ISE Sentiment Index is around average at 139.0 and the total put/call is around average at .85. Finally, the NYSE Arms has been running very high most of the day, hitting 3.29 at its intraday peak, and is currently 1.76. The Euro Financial Sector Credit Default Swap Index is rising +6.52% to 64.40 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 +2.17% to 83.05 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is down -1 basis point to 20 basis points. The TED spread is now down 443 basis points since its all-time high of 463 basis points on October 10^th, 2008. The 2-year swap spread is rising +.56% to 26.25 basis points. The Libor-OIS spread is unch. at 11 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up +1 basis point to 2.36%, which is down -29 basis points since July 7^th, 2008. The 3-month T-Bill is yielding .05%, which is unch. today. Small-cap shares are underperforming. Hospital, Airline, Disk Drive, Semi, Steel, Gold and Alt Energy shares are especially weak, falling 2.5%+. (XLF) has undperformed throughout the day, despite a decent report from (JPM). As well, the tech sector’s reaction to Intel’s very strong report is a big negative. The Western Europe Sovereign CDS Index is rising another +2.74% to another 52-week high of 79.09 bps. On the positive side, several market leaders are substantially outperforming today. Many stocks are well off morning lows. Historically, January expirations days have been very weak over the last decade. Asia will likely come under pressure on Monday and more negative sovereign debt stories will likely materialize over the 3-day weekend, thus Tuesday morning could also open to the downside. Nikkei futures indicate a -99 open in Japan and DAX futures indicate an +13 open in Germany on Monday. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, lower long-term rates and declining energy prices.