Stocks Reversing Sharply Higher on Heavy Volume into Final Hour on Short-Covering, Bargain Hunting, Less Forced Selling

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Biotech longs, Computer longs and Internet longs. I covered all of my (IWM)/(QQQQ) hedges and some of my (EEM) short today, thus leaving the Portfolio 100% net long. The tone of the market is bullish as the advance/decline line is higher, almost every sector is gaining and volume is heavy. Investor anxiety is elevated. Today’s overall market action is bullish. The VIX is falling 4.95% and is very elevated at 63.17. The ISE Sentiment Index is low at 105.0 and the total put/call is high at 1.13. Finally, the NYSE Arms has been running around average most of the day, hitting 1.43 at its intraday peak, and is currently .52. The Euro Financial Sector Credit Default Swap Index is falling 2.31% 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 down 1.2% to 199.87 basis points. The TED spread is falling 1.73% to 196 basis points. The TED spread is now down 268 basis points in just over four weeks. The 2-year swap spread is rising 1.7% to 112.25 basis points. The Libor-OIS spread is falling 1.5% to 162 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down 5 basis points to .84%, which is down 178 basis points in just over four months and at the lowest level since January 1999. It appears as though we had a successful retest of the lows, with volume surging on the sharp reversal higher. The (XLF) is 4.5% higher on heavy volume, as well. I expect this market rally to have meaningful legs. With all the bad news today, market gains are even more significant. As well, the US dollar also looks poised for some profit-taking over the coming weeks which could help many stocks that are negatively impacted by its recent sharp rise. Nikkei futures indicate an +340 open in Japan and DAX futures indicate an +73 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, bargain-hunting, less financial sector pessimism, less forced selling and seasonal strength.