Stocks Slightly Higher into Final Hour on Diminishing Credit Market Angst, Short-Covering, Bargain-Hunting

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Biotech longs and Medical 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 neutral as the advance/decline line is slightly lower, sector performance is mixed and volume is below average. Investor anxiety is above average. Today’s overall market action is mildly bearish. The VIX is falling 1.16% and is elevated at 45.31. The ISE Sentiment Index is low at 105.0 and the total put/call is about average at .91. Finally, the NYSE Arms has been running high most of the day, hitting 1.94 at its intraday peak, and is currently .90. The Euro Financial Sector Credit Default Swap Index is rising 3.4% today to 105.0 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 5.4% to 217.92 basis points. The TED spread is plunging another 10.3% to 99 basis points. The TED spread is now down 367 basis points in just over three months. The 2-year swap spread is falling another 6.11% to 51.88 basis points. The Libor-OIS spread is falling 5.45% to 93 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 5 basis points to .63%, which is down 212 basis points in just over six 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 .11%, which is up 5 basis points today. The US dollar continues to trade very well and is getting extended short-term. I wouldn’t be surprised to see some temporary weakness in the currency, after the ECB rate decision, before another move higher. The major averages are being held back today by a few large-caps. Cyclicals are relatively weak again. The broad market is performing better, with small-caps taking the lead. I expect the Russell 2000 to outperform the S&P 500 for the year. The 2-year swap spread is now near long-term average levels of 43.10, which is a big positive. Nikkei futures indicate an +37 open in Japan and DAX futures indicate an +14 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on diminishing credit market angst, short-covering and bargain-hunting.