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

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Medical longs, Internet longs, Retail longs, Biotech longs and Computer longs. I covered all of my (IWM)/(QQQQ) hedges, was stopped out of my (TBT) long and added (XLF) long today, thus leaving the Portfolio 100% net long. The tone of the market is very bullish as the advance/decline line is substantially higher, every sector is rising and volume is about average. Investor anxiety is above average. Today’s overall market action is bullish. The VIX is falling 7.54% and is very elevated at 52.55. The ISE Sentiment Index is about average at 142.0 and the total put/call is slightly above average at .94. Finally, the NYSE Arms has been running below average most of the day, hitting .36 at its intraday trough, and is currently .39. The Euro Financial Sector Credit Default Swap Index is falling 2.19% 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 falling 5.2% to 253.0 basis points. The TED spread is falling 2.37% to 181 basis points. The TED spread is now down 285 basis points in just over two months. The 2-year swap spread is plunging 16.6% to 89.9 basis points. The Libor-OIS spread is rising 8.7% to 167 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 4 basis points to .15%, which is down 246 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 .03%, which is up 2 basis points today. The S&P 500 is breaking slightly above its 50-day moving average for the first time since August. I suspect today’s rally is the beginning of another meaningful move higher in US stocks into year-end. Nikkei futures indicate an +447 open in Japan and DAX futures indicate an +110 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, bargain-hunting, lower energy prices, less financial sector pessimism and diminishing credit market angst.