Stocks Slightly Lower into Final Hour on Profit-Taking, More Shorting, Diminishing QE2 Expectations

Broad Market Tone:

• Advance/Decline Line: Lower
  
• Sector Performance: Mixed
  
• Volume: Above Average
  
• Market Leading Stocks: Performing In Line
  

Equity Investor Angst:

• VIX 23.68 +1.85%
  
• ISE Sentiment Index 77.0 -46.53%
  
• Total Put/Call .85 +7.59%
  
• NYSE Arms .91 -31.80%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 106.88 bps -.84%
  
• European Financial Sector CDS Index 125.37 bps -4.14%
  
• Western Europe Sovereign Debt CDS Index 156.0 bps -1.89%
  
• Emerging Market CDS Index 224.58 bps -.43%
  
• 2-Year Swap Spread 18.0 +2 bps
  
• TED Spread 14.0 +1 bp
  

Economic Gauges:

• 3-Month T-Bill Yield .15% unch.
  
• Yield Curve 208.0 +2 bps
  
• China Import Iron Ore Spot $141.10/Metric Tonne +.21%
  
• Citi US Economic Surprise Index -7.90 +7 points.
  
• 10-Year TIPS Spread 1.81% unch.
  

Overseas Futures:

• Nikkei Futures: Indicating +65 open in Japan
• DAX Futures: Indicating +22 open in Germany

Portfolio:

• Slightly Higher: On gains in my Retail, Biotech and Medical long positions
  
• Disclosed Trades: Added to my (IWM)/(QQQQ) hedges, then covered them
  
• Market Exposure: 75% Net Long

BOTTOM LINE: Today's overall market action is mildly bearish as the S&P 500 trades slightly lower despite gains in commodities, less sovereign debt angst and better economic data. On the positive side, Education and Homebuilding shares are especially strong, rising 1.0%+. The Portugal sovereign cds is dropping 6.22% to 406.67 bps and the UK sovereign cds is dropping -6.58% to 65.73 bps. On the negative side, Oil Tanker, Ag, Gold, Computer, Disk Drive, Semi, Computer Service, Drug and Oil Service shares are under pressure, falling more than .75%. Cyclicals are underperforming. DRAM prices continue to weaken, falling another -5.71% this week. The S&P GSCI Ag Spot Index, which led the recent stock rally, is declining -1.69% today and may be rolling over technically. Despite better economic data and recent declines, the 10-year yield is flat on the day at 2.51%. If tomorrow's economic data comes in better than estimates, I would expect to see a meaningful ratcheting down in QE2 expectations, which should boost the dollar. This could pressure stocks later in the day after an initial bump higher. Weak economic data tomorrow would likely have a muted impact. I expect US stocks to trade mixed-to-lower into the close from current levels on profit-taking, more shorting, diminishing QE2 expectations and China worries.