Stocks Soaring into Final Hour on Short-Covering, Diminishing Pessimism, Bargain-Hunting

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Computer longs, Biotech longs, Alternative Energy longs and Gaming longs. I added to my (ISRG) long and added to an existing short today, thus leaving the Portfolio 100% net long. The overall tone of the market is very bullish as the advance/decline line is substantially higher, almost every sector is rising and volume is above average. Investor anxiety is about average. Today’s overall market action is very bullish. The VIX is falling 2.8%, but remains above average at 19.8. The ISE Sentiment Index is a below average 120.0 and the total put/call is below average at .77. Finally, the NYSE Arms has been running below average most of the day and is currently .76. Yesterday before Google(GOOG) reported, I said that I thought there are few stocks in the world with Google’s massive opportunities, current market dominance and cheap valuation. I still consider the stock cheap, given its fundamentals, even after today’s 90 point rise. I suspect Google's stock will be substantially higher than current levels at year-end. Another one of my long positions, Intuitive Surgical(ISRG) is falling 16.1% today on its earnings report. I think this is a severe overreaction to conservative guidance. Since the stock’s IPO, management has given conservative guidance the overwhelming majority of the time. I still believe this company has the potential to be one of the greatest growth stocks over the coming years and I will accumulate more shares on any further meaningful weakness. The 10-year swap spread, which had been inching higher, is falling 2.6 basis points today to 69.2 basis points over Treasuries. This is down from a high of 92.75 in early March. The G-7 Currency Volatility Index is falling 3.5% today, breaking below its 50-day moving average, but remains high at 11.3. Finally, the 3-month T-bill yield is rising 7 basis points today to 1.35%, which is also a positive. This is up from a low of .39% during the later part of March. Nikkei futures indicate an +360 open in Japan and DAX futures indicate an +50 open in Germany on Monday. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, less economic pessimism, less earnings pessimism and bargain hunting.

Today's Headlines

Bloomberg:
- US stocks rose for a fourth day, poised for the best week since February, after companies from Citigroup(C) to Google Inc.(GOOG) to Caterpillar(CAT) reported results that exceeded analysts’ estimates.
- The US dollar rose the most against the euro in more than two weeks after Citigroup’s first-quarter results fueled speculation that financial firms will weather credit market losses.
- The debt of Fannie Mae and Freddie Mac, the largest US mortgage-finance companies, rallied to the lowest yields over government notes in more than two months amid buying by foreign central banks and other overseas investors. The difference between yields on Fannie Mae’s 5-year debt and benchmark 5-year US Treasuries fell today to about 68 basis points, the lowest since Feb. 4 and down from 82 basis points two days ago.
- The cost to protect US corporate bonds from default fell after Citigroup Inc.(C) posted a loss that was smaller than analysts’ most pessimistic estimates, fueling optimism that the credit-market contraction may be easing. Credit-default swaps on the benchmark Markit CDX North America Investment Grade Index dropped 9.25 basis points to 100.25. Contracts on NY-based Citigroup fell 22 basis points to 95, the lowest in more than two months.
- Options traders who predicted Google Inc.(GOOG) would beat estimates are earning as much as 17,530 percent on their investments today, the most profitable bet among all US equity derivatives.
- Crude oil rebounded to a record $116.19 a barrel in NY after investment fund speculation increased on concern that a 5.2-magnitude earthquake in Illinois affected refinery operations.
- John McCain, the presumptive Republican presidential nominee, reported $405,409 in income late year and paid $118,660 in federal taxes, according to tax returns made public today. He gave $105,467 to charity.
- Caterpillar Inc.(CAT) said first-quarter profit rose 13%, sending the shares 8% higher.

Wall Street Journal:
- The Bank of England is considering accepting up to $59.7 billion in bank mortgages as collateral for government-securities loans, in a plan to bail out banks that could be announced within a week. The banks could use the money to raise cash, as part of a step to ease the credit freeze.
- Climate Change Data Not Reliable, Michaels Writes.

InvestmentNews:
- Activist hedge fund manager Phillip Goldstein has plans to create a non-profit organization to help the hedge fund industry challenge what he described as regulatory injustices. Mr. Goldstein, principal of Bulldog Investors in Saddle Brook, NJ, led the fight two years ago to overturn a rule requiring hedge fund managers to register as investment advisers by suing the SEC.

NY Magazine:
- Robert Reich, who served as former President Bill Clinton’s secretary of labor, will endorse Illinois Senator Barack Obama for the Democratic presidential nomination today instead of Senator Hillary Rodham Clinton, his former boss’s wife.

NY Post:
- On the heels of billionaire investor Wilbur Ross announcing on Wednesday that he was raising some $4 billion to gobble up hobbled banks, one prominent Wall St. analyst is aiming to do the same thing. Outspoken bank analyst Richard Bove at Punk Ziegel, who scores regular face time on CNBC and Fox Business Network, wants to put his money where his mouth is. The 67-year old veteran analyst is attempting to raise a series of funds to purchase regional banks and thrifts that could top $15 billion over the next few years.

Forbes.com:
- Banks See A Bright Side In Dour Numbers.

AP:
- Al-Qaeda’s No. 2, Ayman al-Zawahiri, said the US occupation of Iraq has brought only “failure and defeat,” citing an audio recording posted on an Islamic militant Web site.

Bear Radar

Style Underperformer:

Mid-cap Value +1.45%

Sector Underperformers:

Gold (-2.56%), Oil Tankers (-.29%) and Utilities (+.24%)

Stocks Falling on Unusual Volume:

ICUI, GFIG, HMSY, ISRG, USTR, CRBC and ACO

Stocks With Unusual Put Option Activity:

1) TPX 2) ISRG 3) CFC 4) CTSH 5) ESLR

50-Week Moving Average of AAII % Bears Hits New Record High

* Notwithstanding historical individual and professional investor pessimism, corporate insiders continue to buy their own stocks.

The AAII percentage of bulls fell to 30.4% this week from 45.8% the prior week. This reading is still at a depressed level. The AAII percentage of bears rose to 48.7% this week from 37.3% the prior week. This reading is still at an elevated level. Moreover, the 10-week moving average of the percentage of bears is currently at 45.6%, an extraordinarily elevated level, but down from its peak of 51.3% in mid-March. It has only been higher than its current reading two other periods in history, which were September 1990-December 1990 and July 2006-August 2006. Moreover, the 10-week moving average of the percentage of bears peaked at 43.0% right near the major bear market low during 2002. It is astonishing that the 10-week moving average of the % Bears is currently still 2.6 percentage points greater now than at any time during the bubble bursting meltdown of 2000-2003 when the Nasdaq plummeted 77.2%. That was arguably the worst broad stock market decline since the Great Depression, yet individual investor bearishness is higher right now, notwithstanding the recent rally off the lows.

Furthermore, the 50-week moving average of the percentage of bears is currently 42.9%, an extraordinarily elevated level never before seen since tracking began in the 80s. The prior peak in the 50-week moving average of the % Bears was 41.7%, hit in January 1991 after Iraq’s invasion of Kuwait, during the Gulf War and in the middle of a bad recession. Since January 1991, when the future looked so bleak to investors and consumers, the S&P 500 has risen about 450%. Moreover, the current reading of 42.9% is 4.8 percentage points above the peak in the % Bears during the 2000-2003 bear market, which was 38.1% on April 10, 2003. I find this even more astonishing, notwithstanding the recent correction, given that the S&P 500 is currently 76.6% higher from the October 2002 major bear market lows and only 10.2% off its all-time high.

Individual and professional investor pessimism towards US stocks remains deep-seated and historical in nature. It is also noteworthy that short interest continues to soar to new record highs, corporate insiders continue to display downright giddy behavior, domestic mutual funds continue to see significant outflows, hedge funds remain net short, the equity put/call 20-day moving average recently hit an extreme, a massive mountain of money market cash on the sidelines continues to grow and according to Google Trends the use of the word “depression” in the news media has recently spiked over the last year. This is just some of the evidence of the current “US negativity bubble.”

I still expect US stocks to rise sharply from current levels later this year as economic growth improves, investors’/consumers’ historically extreme pessimism recedes, credit market angst subsides, energy prices drop, interest rates remain relatively low, inflation decelerates, election uncertainty lifts, the US dollar rallies, international/domestic demand for US stocks rises and meaningful short-covering commences. I continue to believe US investor/consumer sentiment has never before in history been this bad given the current macro backdrop, which is a necessary ingredient for the creation of a new strong secular bull move higher in US stocks.

Bull Radar

Style Outperformer:

Large-cap Growth (+2.39%)

Sector Outperformers:

Internet (+5.71%), I-Banks (+3.1%) and Oil Service (+2.95%)

Stocks Rising on Unusual Volume:

GOOG, DOX, SINA, PGI, C, TKC, WB, OMTR, SLB, CLF, CSG, OSTK, VIVO, UTEK, CVBF, CATY, ZION, FEED, TITN, RICK, PLCM, CMCO, AVCT, MBLX, MKSI, ROST, HSIC, SNDA, MPEL, HNBC, ACC, STL, MAN, CYT and GBL

Stocks With Unusual Call Option Activity:

1) KEY 2) CMI 3) EP 4) ISRG 5) DOX

Economic Releases

- None of note