Stocks Soaring into Final Hour on Less Financial Sector Pessimism, Diminishing Credit Angst and Short-Covering

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Computer longs, Software longs, Medical longs, Biotech longs and Gaming longs. I added (IWM)/(QQQQ) hedges and added to my (EEM) short today, thus leaving the Portfolio 75% net long. The tone of the market is very positive as the advance/decline line is sharply higher, almost every sector is rising and volume is very heavy. Investor anxiety is still very high. Today’s overall market action is very bullish. The VIX is falling -3.32% and is very high at 31.97. The ISE Sentiment Index is very low at 67.0 and the total put/call is around average at .81. Finally, the NYSE Arms has been running high most of the day, peaking at 1.51 this morning, and is currently 1.22. The Euro Financial Sector Credit Default Swap Index is falling -22.69% today to 107.67 basis points. This index is up from a low of 52.66 on May 5^th, but down from 157.81 on Sept. 16^th. The North American Investment Grade Credit Default Swap Index is -4.38% to 179.45 basis points. The TED spread is falling -27.38% to 2.27 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 32 basis point to 1.93%, which is down 69 basis points in about eight weeks and at the lowest level since August 2003, when deflation was the concern. While the major averages are technically extended near-term, I seriously doubt recent lows will be retested anytime soon. It is a large positive that angst remains elevated despite the global rally of the last two days, which was the largest in history. I still expect stocks to be substantially higher than current levels by year-end. I think it is very likely we have seen a secular top in short-selling as the “US negativity bubble” begins losing air and the “mother of all short squeezes” commences over the long-term. Nikkei futures indicate an +485 open in Japan and DAX futures indicate an +64 open in Germany on Monday. I expect US stocks to trade mixed into the close from current levels as less financial sector pessimism, diminishing credit market angst and short-covering offsets profit-taking and higher commodity prices.