Stocks Reverse Higher on Above-Average Volume, Led by Homebuilding, Semi, Restaurant, HMO, Biotech and Commodity Shares

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Stocks Rebounding Sharply into Final Hour on Short-Covering, Bargain-Hunting, Diminishing Credit Market Angst

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Computer longs, Biotech longs and Medical longs. I covered all of my (IWM)/(QQQQ) hedges and some of my (EEM) short today, thus leaving the Portfolio 100% net long. The overall tone of the market is mildly bullish as the advance/decline line is higher, most sectors are rising and volume is heavy. Investor anxiety is high despite gains in the major averages. Today’s overall market action is very bullish. The VIX is falling slightly to 26.9, but remains high. The ISE Sentiment Index is a low 100.0 and the total put/call is a high 1.31 today. Finally, the NYSE Arms is around average at .96. The 10-year swap spread is falling to 72.0 basis points over Treasuries, down from a high of 92.75 five days ago. Today’s market gains are even more impressive considering the heavy losses in Asian markets overnight, mostly negative news flow and .42% drop in the dollar index. Cyclicals, especially small-caps, are outperforming substantially today. As well, growth stocks are significantly outperforming value stocks. The Shanghai Composite fell another 2.4% last night and is down 35.1% from its high set in October of last year. Moreover, India’s Sensex Index fell another 4.8% last night and is now down 27.6% from its high set in January of this year. The DJIA is down 13.1% from its high. It is likely we are finally beginning to see a shift in some money flows away from emerging markets and back into developed markets for the first time in years. This could be a catalyst for a US dollar rebound over the intermediate-term. The AAII % Bulls fell to a depressed 20.4% this week, while the AAII % Bears jumped to an elevated 59.1%. Longer-term gauges of investor sentiment remain at historically depressed levels, which is a major positive. Nikkei futures indicate an +200 open in Japan and DAX futures indicate an +60 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, bargain-hunting and less credit market angst.

Today's Headlines

Bloomberg:
- S&P Says End in Sight for Writedowns on Subprime.
- The SEC abandoned a tactic for ferreting out potential insider trading at hedge funds, after the nation’s biggest business lobby called the method “unduly burdensome.”
- House Financial Services Committee Chairman Barney Frank and Senate Banking Committee Chairman Chris Dodd unveiled plans to increase government efforts to prevent foreclosures.
- Carlyle Group said creditors plan to seize the assets of its mortgage-bond fund after it failed to meet more than $400 million of margin calls on mortgage-backed collateral that plunged in value.
- Markit Group shelved plans to create an index that would have allowed investors to bet on the $200 billion market for securities backed by auto loans.
- Hillary Clinton and Barack Obama both propose significant changes to the tax code that would add to its complexity. His plan emphasizes income redistribution, while hers seeks to change Americans’ behavior.
- Brazil’s currency and local bonds tumbled after the government imposed a tax on foreigners’ purchases of local debt to slow a rally that has driven the currency up 61% in the past three years.
- Miners Top MBAs as Metal Boom Makes Geologists Scarce.

Wall Street Journal:
- EA’s(ERTS) Take-Two(TTWO) Saga Turns Hostile. Offer Is Made to Holders Of ‘Grand Theft’ Maker; Other Bidders Playing?
- DirecTV to Start On-Demand.
- Google(GOOG) to Unveil New Ad Service for Web Publishers.
- Goldman(GS) to Join the SPAC Field. Move to Underwrite Blank-Check IPOs Comes With Twist.
- How US Beat 1970s by Lowering Capital-Gains Taxes.

Social Science Research Network:
- Do hedge funds profit from mutual fund distress?

AppleInsider:
- Apple TV DVR interface revealed in patent filings.

Reuters:
- Nokia(NOK) has paid Qualcomm(QCOM) around $1 billion over 15 years for full access to the US chip maker’s early mobile technology patents.

Interfax:
- Russian economic growth could slow as global money markets tighten and Russia’s banks and companies find it harder to borrow and refinance their debts. Net capital outflows from Russia may have reached $15 billion to $20 billion in the first two months of the year, Russian Finance Minister Alexei Kudrin said.

Xinhua:
- China’s textile and garment exports in February dropped 32.9% from the previous month, largely due to weakening US and European demand and the severe winter storms, customs authorities said.

Arab News:
- Assistant Secretary-General for Economic Affairs at the Arab League Dr. Mohammed Ibrahim Al-Tuwaijri has dismissed the idea that any GCC state, except Kuwait, would cut its currency link with the US dollar.

Bear Radar

Style Underperformer:

Large-cap Value -.28%

Sector Underperformers:

Foods (-.74%), Insurance (-.66%) and Hospitals (-.60%)

Stocks Falling on Unusual Volume:

GEOY, GLBC, NOVN, SIGM, HMIN, PPDI, TBSI, GLP, BSC and DPM

Smart Money Flow Index Graph

(click on image to enlarge)

BOTTOM LINE: Three days ago the S&P 500 made a new closing low and came very close to its intraday low of 1,270.05 on January 23. However, the Smart Money Flow Index, pictured in the graph above, is well above levels seen in January. This is a noteworthy positive divergence.

Bull Radar

Style Outperformer:

Large-cap Growth (-1.53%)

Sector Outperformers:

HMOs (+1.45%), Energy (-.24%) and Biotech (-.24%)

Stocks Rising on Unusual Volume:

BNE, GRS, HUM, SIL, TI, UB, EFUT, AIRM, AIXG, ATPG, GILT, NVEC, STAN, COIN, MLNM, SAM and GCO