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Stocks Lower into Final Hour on Rise in Oil, Tech Share Weakness

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Semi longs and Computer longs. I added to my (IWM)/(QQQQ) hedges and took some profits in a few technically extended longs today, thus leaving the Portfolio 50% net long. The overall tone of the market is negative today as the advance/decline line is lower, most sectors are falling and volume is heavy. The dollar-based three-month LIBOR rate continues to plunge. It is down another 5 basis points today and has declined 72 basis points from its Sept. 7 high. It is also at the lowest level since March 2006. VMware (VMW) is jumping 10% today. While I'm not long the stock, I think its crazy that over 30% of the float is short. The days of shorts throwing darts at any stock with a "high valuation" and hitting a bull's-eye are long gone, in my opinion. The AAII percentage of bulls plunged to 31.25% this week from 41.96% the prior week. This reading is now approaching depressed levels. The AAII percentage of bears soared to 48.21% this week from 35.71% the prior week. This reading is now approaching elevated levels. Moreover, the 10-week moving average of the percentage of bears is currently at 36.8%, a high level. The 10-week moving average of the percentage of bears peaked at 43.0% at the major bear market low during 2002. The 50-week moving average of the percentage of bears is currently 37.0%, an elevated level seen during only two other periods since tracking began in the 1980s. Those periods were October 1990 to July 1991 and March 2003 to May 2003, both of which were near major stock market bottoms. The extreme readings in the 50-week moving average of the percentage of bears during those periods peaked at 41.6% on Jan. 31, 1991, and 38.1% on April 10, 2003. We are currently still close to eclipsing the peak in long-term bearish sentiment during the 2000 to 2003 market meltdown, which I find astonishing given that the S&P 500 is 105% higher from the October 2002 major bear market lows and recently made new record highs. Moreover, U.S. stock mutual funds have seen outflows for most of the past five years; domestic ETFs have just recently seen improved inflows; there has been an explosion in low correlation/negative correlation U.S. stock fund strategies; the quantity of research that caters to these funds has soared; the U.S. dollar is seen to have no bottom; U.S. equities are arguably the most hated securities by global portfolio managers; permabear pundits are more popular than ever; there have been huge spikes in gauges of investor anxiety over the last couple of years on relatively mild market pullbacks; a fairly large chunk of the public generally hates U.S. stocks and says it won't ever invest in them again; public short-selling continues to explode higher; short interest on the major exchanges has rocketed higher this year; S&P 500 index futures traders remain positioned near historically short levels; the mainstream press obsesses with what is wrong and what could go wrong; investors seem to always price in the worst case scenario immediately rather than the most likely scenario; money-market funds are at record levels; and long-term investors are denigrated, while day-trading is championed as a crash is always seen as just around the corner. I contend there has never been a time in U.S. history when more market participants actually wanted a stock crash or recession for both political and financial gain, which has helped to produce the current U.S. "negativity bubble." I still believe that overall investor sentiment regarding U.S. stocks has never been worse in history with the market near record highs, which bodes very well for further outsized gains. I expect US stocks to trade mixed into the close from current levels as bargain-hunting and rising fed rate cut odds offset the rise in energy prices and earnings worries.

Durable Goods Orders Decline on Falling Military Orders, Jobless Claims Fall, New Home Sales Rise, New Home Inventories Decline

- Durable Goods Orders for September fell 1.7% versus estimates of a 1.5% increase and a downwardly revised 5.3% decline in August.

- Durables Ex Transports for September rose .3% versus estimates of a .7% gain and a 1.8% decline in August.

- Initial Jobless Claims for last week fell to 331K versus estimates of 320K and 339K the prior week.

- Continuing Claims rose to 2530K versus estimates of 2528K and 2523K prior.

- New Home Sales for September rose to 770K versus estimates of 770K and a downwardly revised 735K in August.

BOTTOM LINE: Orders for US-made durable goods unexpectedly fell in September, restrained by a slump in demand for military equipment that overshadowed increases in business investment, Bloomberg said. Excluding the 39% decline in orders for defense equipment, orders rose .7%. International demand and rising business spending will continue to boost manufacturing, according to economists. Computer orders surged 1.1% in September and machinery bookings jumped 4.3%. I continue to believe manufacturing will remain healthy as companies gain confidence is the sustainability of the current expansion and rebuild depleted inventories.

Fewer Americans filed first-time applications for state unemployment benefits last week, Bloomberg reported. The four-week moving-average of claims rose to 324,750 from 317,000 the prior week. The unemployment rate for those eligible to collect benefits, which tracks the US unemployment rate, held steady at a historically low 1.9%. I continue to believe the job market will remain healthy over the intermediate-term without generating substantial unit labor cost increases.

Sales of new US homes unexpectedly rose in September, prices gained and inventories fell, Bloomberg reported. New home prices rose 5% in September year-over-year to $238,000. As well, the number of new homes for sale fell 1.5%, to 523,000, the lowest number since January 2006. The inventory of new homes fell to 8.3 months worth at the current sales pace from nine months in August. This is just a start, but it is a big positive nonetheless, especially considering the credit market turmoil peaked in September. I expect New Home Sales to bounce back further this month.

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Thursday Watch

Late-Night Headlines
Bloomberg:
- Record overseas purchases that have stoked a “bubble” in Indian stocks may slow under new rules planned by regulators, investors and analysts say.
- The Bank of Japan may have to cut its forecast for economic growth and inflation in its twice-yearly outlook report next week, economists say, making it harder to justify an interest-rate increase soon.
- China’s economy expanded more than 11% for a third straight quarter, adding pressure for a stronger currency and higher borrowing costs to prevent overheating.

Wall Street Journal:
- Microsoft Bets On Facebook Stake And Web Ad Boom.

MarketWatch.com:
- Insiders picked up buying in wake of past week’s market drop.
- Poker stars push Congress to ease Internet gambling strictures.
- Analysts betting higher on Amazon.com. Brokers lift price targets despite sell-off; median now above $100.
- Buffett urges caution on Chinese stocks.

CNNMoney.com:
- Wal-Mart(WMT) CEO excited about holidays.
- Countrywide(CFC) wins over critics. The company extends foreclosure-preventive assistance for almost all its hybrid ARM borrowers.

BusinessWeek.com:
- Federal commodity regulators on Wednesday asked Congress to give them greater oversight of electronic exchanges as a way to deter potential price distortion and manipulation, and to protect consumers.
- Has the Mortgage Crisis Finally Peaked?

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (LM), target $108.
- Reiterated Buy on (NSC), target $62.

Night Trading
Asian Indices are -.25% to +1.25% on average.
S&P 500 futures -.03%.
NASDAQ 100 futures +.17%.

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Earnings of Note
Company/EPS Estimate
- (BDK)/1.44
- (BMY)/.37
- (CELG)/.28
- (CNX)/.28
- (CMI)/1.95
- (CMCSA)/.18
- (DO)/1.48
- (DOW)/.91
- (EMC)/.17
- (EL)/.10
- (GR)/.90
- (ICE)/.89
- (LLL)/1.48
- (MBI)/1.59
- (NWL)/.49
- (HOT)/.65
- (TRV)/.150
- (XMSR)/-.43
- (AET)/.92
- (MOT)/.04
- (HET)/1.01
- (RTN)/.82
- (APA)/1.97
- (KLAC)/.76
- (BIDU)/4.78
- (GNW)/.77
- (IM)/.39
- (KCP)/.17
- (MFE)/.40
- (WFR)/.80
- (MSFT)/.39
- (SNCR)/.18
- (VSEA)/.67
- (WEN)/.33
- (DECK)/1.20
- (BEN)/1.86
- (IMCL)/.31
- (MSTR)/1.18

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Durable Goods Orders for September are estimated to rise 1.5% versus a 4.9% decline in August.
- Durables Ex Transports for September are estimated to rise .7% versus a 1.8% decline in August.

8:30 am EST
- Initial Jobless Claims for last week are estimated to fall to 320K versus 337K the prior week.
- Continuing Claims are estimated to fall to 2528K versus 2534K prior.

10:00 am EST
- New Home Sales for September are estimated to fall to 770K versus 795K in August.

Other Potential Market Movers
- The weekly EIA natural gas inventory data and the Help Wanted Index could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by commodity stocks in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

Stocks Finish at Session Highs on Fed Rate Cut Speculation

Indices
S&P 500 1,515.88 -.24%
DJIA 13,675.25 -.01%
NASDAQ 2,774.76 -.88%
Russell 2000 810.85 -.94%
Wilshire 5000 15,266.57 -.29%
Russell 1000 Growth 623.84 -.18%
Russell 1000 Value 834.41 -.30%
Morgan Stanley Consumer 735.35 +.25%
Morgan Stanley Cyclical 1,046.32 +.07%
Morgan Stanley Technology 666.94 -2.54%

Transports 4,895.79 -.94%
Utilities 505.05 +.61%
MSCI Emerging Markets 155.68 -.43%

Sentiment/Internals
Total Put/Call .99 +2.06%
NYSE Arms .94 -1.75%
Volatility(VIX) 20.80 +1.91%
ISE Sentiment 125.0 -8.76%

Futures Spot Prices
Crude Oil $87.60 +2.73%
Reformulated Gasoline 215.51 +2.19%
Natural Gas 7.0 +3.61%
Heating Oil 234.90 +2.14%
Gold 767.80 +.62%
Base Metals 245.65 -1.95%
Copper 345.65 -1.62%

Economy
10-year US Treasury Yield 4.33% -7 basis points
US Dollar 77.50 -.10%
CRB Index 336.13 +.24%

Leading Sectors
Construction +1.07%
Defense +.97%
Oil Service +.86%

Lagging Sectors
Semis -2.41%
Networking -2.54%
HMOs -2.71%

Evening Review
Market Performance Summary
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Sector Performance
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Market Wrap CNBC Video(bottom right)
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In Play

Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- VMware Inc.(VMW), reporting its first results since making the year’s biggest technology IPO, said third-quarter profit more than tripled on demand for software that makes computers more efficient. The stock is surging 8% in after-hours trading.
- Monster Worldwide Inc.(MNST), owner of the largest network of job-hunting Web sites, reported a $33.3 million third-quarter profit as international sales jumped 57%. The stocks rose 4% in after-hours trading.
- Symantec Corp.(SYMC) said profit fell 60% and gave forecasts for this quarter that missed analysts’ estimates as orders from large companies slowed, driving down the shares 10% in extended trading.
- Corn and soybeans fell as supplies from the US harvest inundated grain elevators and storage facilities.

CNNMoney.com:
- Merrill Lynch(MER) may sell Bloomberg stake.

globeandmail.com:
- It looks like Apple’s(AAPL) iPhone may soon be headed to Canada.

BOTTOM LINE: The Portfolio finished lower today on losses in my Semi longs, Retail longs and Medical longs. I did not trade in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was negative today as the advance/decline line finished lower, most sectors fell and volume was heavy. Measures of investor anxiety were above average into the close. Today's overall market action was just mildly bearish given the sharp reversal from morning lows. Rumors of an imminent Fed discount rate cut seemed to have helped propel shares to session highs into the close. While I doubt the validity of these rumors, I think the heavy-volume reversal shows how easily stocks can lift and how much bull firepower is still on the sidelines. Energy, defense, software, construction and homebuilding shares actually finished in positive territory. Tech shares underperformed throughout the day, but cut losses in half from session lows. A number of leading growth tech stocks -- such as Apple (AAPL), Intuitive Surgical (ISRG) and Google (GOOG) -- only fell slightly, or actually rose, as well. My intraday gauge of investor angst finished at an above-average level. I want to see how stocks react tomorrow as imminent rate cut rumors subside and more negative housing data comes in. I still think the major averages will see another meaningful push higher into year-end. Thirty-day asset-backed commercial paper yields continue to plunge, falling another 9 basis points today. They are down 135 basis points since Sept. 7. As well, the average 30-year fixed rate jumbo mortgage rate is falling another 13 basis points today, to 6.78%, down from 7.34% on Sept. 5. Fed fund futures now imply an 86% chance for a 25-basis-point cut at the upcoming Fed meeting. The Fed's recent silence during rising expectations for another rate cut at the month-end meeting leads me to believe that one is coming. In addition to technology, financial shares were under pressure again. While I don't see these shares outperforming anytime soon, I wouldn't be shorting them at current levels either.