Stocks Reversing Higher into Final Hour on Short-Covering, Bargain-Hunting and Less Financial Sector Pessimism

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Retail longs, Biotech longs, Internet longs and Computer longs. I covered all my (IWM)/(QQQQ) hedges this morning, 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 about average. Investor anxiety is high. Today’s overall market action is very bullish. The VIX is falling .32% and is very elevated at 55.61. The ISE Sentiment Index is below average at 107.0 and the total put/call is above average at 1.03. Finally, the NYSE Arms has been running high most of the day, hitting 4.58 at its intraday peak, and is currently .65. The Euro Financial Sector Credit Default Swap Index is rising 10.2% today to 139.67 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 1.07% to 261.0 basis points. The TED spread is falling 3.78% to 191 basis points. The TED spread is now down 275 basis points in two months. The 2-year swap spread is up 2.95% to 104.75 basis points. The Libor-OIS spread is falling 5.88% to 162 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down 8 basis points to .15%, which is down 247 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 unch. today. Given today’s news, the market is again displaying resilience. Asia and Europe should rise substantially on Monday, as a result. 1-Month USD-based LIBOR has plunged 83 basis points over the last five days to 1.04%, which is a big positive. The tech sector is leading today. The main disappointment today is the volume on today’s reversal higher. I suspect we will see better volume and price action next week given how many market moving events we have. Nikkei futures indicate an +455 open in Japan and DAX futures indicate an +69 open in Germany on Monday. I expect US stocks to trade modestly higher into the close from current levels on short-covering, bargain-hunting, lower energy prices and less financial sector pessimism.