Stocks Jumping into Final Hour on Plunging Credit Market Angst, Bargain-Hunting, Less Financial Sector Pessimism and Short-Covering

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Medical longs, Defense longs and Biotech longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are gaining and volume is above-average. Investor anxiety is still very elevated. Today’s overall market action is bullish. The VIX is falling 17.46%, but is still very elevated at 58.01. The ISE Sentiment Index is about average at 160.0 and the total put/call is slightly below average at .84. Finally, the NYSE Arms has been running around average most of the day, hitting 1.22 at its intraday peak, and is currently .86. The Euro Financial Sector Credit Default Swap Index is rising 2.91% today to 99.34 basis points. This index is up from a low of 52.66 on May 5^th, but down significantly from 157.81 on Sept. 16^th. The North American Investment Grade Credit Default Swap Index is falling 4.2% to 193.5 basis points. The TED spread is plunging another 18.6% to 295 basis points. The TED spread is now down 169 basis points in less than two weeks. The 2-year swap spread is falling 9.57% to 111.0 basis points. The Libor-OIS spread is dropping 11.59% to 292 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 7 basis points to 1.13%, which is down 150 basis points in under four months and at the lowest level since April 1999. Another meaningful decline in gauges of credit angst is a large positive for the broad market. Uncertainty regarding the settlement of the now-defaulted Lehman credit derivatives may be holding the market back a bit today. I suspect a lifting of this uncertainty tomorrow will lead to further US stock gains. The US dollar continues to trade very well and I still see further upside in the currency over the intermediate-term. The worst-case scenario for the global economy, that had been factored into many stock prices near current levels, diminishes with each day of improvement in the credit markets, in my opinion. Nikkei futures indicate an +250 open in Japan and DAX futures indicate an +100 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, diminishing credit angst, less financial sector pessimism and bargain-hunting.