Stocks Higher into Final Hour on Less Economic Pessimism, Short-Covering and Declining Credit Market Angst

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Retail longs, Biotech longs, Internet longs and Medical longs. I covered all my (IWM)/(QQQQ) hedges today, thus leaving the Portfolio 100% net long. The tone of the market is bullish as the advance/decline line is higher, most sectors are gaining and volume is about average. Investor anxiety is above average. Today’s overall market action is mildly bullish. The VIX is falling 3.94% and is very elevated at 56.58. The ISE Sentiment Index is around average at 145.0 and the total put/call is slightly above average at .93. Finally, the NYSE Arms has been running around average most of the day, hitting 1.2 at its intraday peak, and is currently .93. The Euro Financial Sector Credit Default Swap Index is falling .78% today to 128.67 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 rising 4.99% to 270.17 basis points. The TED spread is falling 3.92% to 209 basis points. The TED spread is now down 257 basis points in two months. The 2-year swap spread is down 6.77% to 108.50 basis points. The Libor-OIS spread is falling 3.68% to 184 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 1 basis point to .23%, which is down 239 basis points in about five months and at the lowest level since Bloomberg record-keeping began in August 1998. The 10-year TIPS spread bottomed at .65% in October 1998 during the Asian financial crisis and at 1.24% in October 2001 during the technology bubble-bursting meltdown. The 3-month T-Bill is yielding .01%, which is up 2 basis points today. Small-caps and cyclicals have outperformed throughout the day on diminishing economic pessimism. If it were not for the mild weakness in the (XLF) I suspect the major averages would be up much more today. It is noteworthy that the recent uptick in commodities has barely budged inflation expectations. I still think the sectors with the worst declines this year will outperform through year-end on short-covering and bargain-hunting. The TED spread is starting to roll over again, which is a large positive. Nikkei futures indicate a -15 open in Japan and DAX futures indicate an +16 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, falling credit market angst and less economic pessimism.