Stocks Surging into Final Hour on Less Financial Sector Pessimism, Short-Covering, Lower Commodity Prices

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Biotech longs, Semi longs and Medical longs. I covered all my (IWM)/(QQQQ) hedges and took some profits in my (EEM) short this morning, thus leaving the Portfolio 100% net long. The tone of the market is mildly positive as the advance/decline line is slightly higher, most sectors are rising and volume is heavy. Investor anxiety is very high. Today’s overall market action is very bullish. The VIX is falling 3.9% and is very high at 30.45. The ISE Sentiment Index is very low at 90.0 and the total put/call is very high at 1.32. Finally, the NYSE Arms has been running around average most of the day, after peaking at 1.78 this morning, and is currently .44. The Euro Financial Sector Credit Default Swap Index is +13.44% today to 140.50 basis points. This index is up from a low of 52.66 on May 5^th and at a new high. The North American Investment Grade Credit Default Swap Index is +33.9% at 200.42 basis points. The TED spread is rising 2.97% to 2.07 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is plunging another 14 basis point to 1.63%, which is down 99 basis points in about eight weeks and at the lowest level since January 2003, when deflation was the concern. The Fed’s decision today to leave rates unch. leads me to conclude that at the very least a partial resolution to the AIG situation is imminent. I am somewhat surprised the equity market isn’t up more on the decision. This is also a big positive for the US dollar and should lead to further commodity weakness after a bounce from oversold levels. This should also further boost demand for US assets. The S&P Goldman Ag Spot Index is especially weak today, falling another 4.4%. This index is down 26.6% from its March 12^th high. Future inflation readings should continue to register meaningful deceleration. Russian stocks plunged another 11.5% today and are now down 51% for the year. I continue to believe developed markets will substantially outperform most emerging markets for several years. The (XLF) is still right at the bottom end of the trading range it has been in($19.50-$23.50) since July 17^th , which is a big positive considering recent news. Many market leading growth stocks that aren’t dependent on a vigorous global economy are substantially outperforming again today. Nikkei futures indicate a +100 open in Japan and DAX futures indicate an +33 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, less forced selling, lower commodity prices, diminishing financial sector pessimism and bargain-hunting.