Stocks Falling into Final Hour on Profit-Taking, Inflation Concerns, More Shorting

Broad Market Tone:

• Advance/Decline Line: Lower
  
• Sector Performance: Most Sectors Declining
  
• Volume: Around Average
  
• Market Leading Stocks: Performing In Line
  

Equity Investor Angst:

• VIX 16.58 +4.01%
  
• ISE Sentiment Index 102.0 -36.25%
  
• Total Put/Call .85 -1.16%
  
• NYSE Arms 1.13 +35.05%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 81.03 +.46%
  
• European Financial Sector CDS Index 134.0 bps -2.0%
  
• Western Europe Sovereign Debt CDS Index 176.17 bps +1.44%
  
• Emerging Market CDS Index 222.56 +1.89%
  
• 2-Year Swap Spread 21.0 +1 bp
  
• TED Spread 19.0 -1 bp
  

Economic Gauges:

• 3-Month T-Bill Yield .12% +1 bp
  
• Yield Curve 278.0 +1 bp
  
• China Import Iron Ore Spot $190.60/Metric Tonne +.58%
  
• Citi US Economic Surprise Index +67.40 -1.0 point
  
• 10-Year TIPS Spread 2.29% -2 bps
  

Overseas Futures:

• Nikkei Futures: Indicating +14 open in Japan
• DAX Futures: Indicating +7 open in Germany

Portfolio:

• Slightly Lower: On losses in my Ag and Tech long positions
  
• Disclosed Trades: Took some profits in an Ag long, added (IWM)/(QQQQ) hedges, added to (EEM) short
  
• Market Exposure: Moved to 75% Net Long

BOTTOM LINE: Today's overall market action is mildly bearish as the S&P 500 trades slightly lower, despite gains in most overseas markets, lower energy prices and stable long-term rates. On the positive side, Airline, Retail, Steel, Utility, Insurance, Drug and Defense shares are higher on the day. The Transports are relatively strong again, rising +.25%. Oil is falling -1.31% and continues to trade very poorly. Lumber is gaining +1.3%. Moreover, the UBS-Bloomberg Spot Ag Index is falling -1.88%, which is also a positive. The 10-year yield is stable at 3.6% despite today's "hot" inflation readings and intensifying concerns over the US budget deficit. The Israeli sovereign cds is declining -3.36% to 139.99 bps. As well, the US Muni CDS Index is falling -2.03% to 177.21 bps. On the negative side, Education, Hospital, Networking, Disk Drive, Ag and Oil Tanker shares are under pressure, falling more than 1.0%. Copper is falling -2.07%. Shanghai copper inventories have surged +14.14% over the last 5 days. Weekly retail sales rose +2.4% this week versus a +2.7% gain the prior week. The Citi Eurozone Economic Surprise Index is falling another -34.6% today to +20.20. This is down from a reading of +76.0 on 1/6. The Egypt sovereign cds is rising +2.8% to 336.68 bps. The Western Europe Sovereign CDS Index has been trending higher over the past week, which is a big negative. The PPI, released tomorrow morning, could further raise inflation concerns. I will continue to closely monitor the 10-year yield's technical action. Any substantial rise in the yields from current levels back near 4% would likely have a negative impact on equities. One of my longs, (AAPL), continues to trade very well and looks poised for another surge higher. I expect US stocks to trade mixed-to-higher into the close from current levels on earnings optimism, US fund inflows, stable long-term rates, buyout speculation and falling energy prices.