Stocks Lower into Final Hour on Political Concerns, Financial Sector Worries

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Medical longs, Biotech longs, Internet longs and Computer longs. I added (IWM)/(QQQQ) hedges and added to my (EEM) short this morning, thus leaving the Portfolio 75% net long. The tone of the market is mildly negative as the advance/decline line is slightly lower, most sectors are falling and volume is slightly above average. Investor anxiety is above average. Today’s overall market action is mildly bearish. The VIX is rising 1.88% and is very high at 43.86. The ISE Sentiment Index is low at 93.0 and the total put/call is about average at .88. Finally, the NYSE Arms has been running above average most of the day, hitting 1.18 at its intraday peak, and is currently 1.0. The Euro Financial Sector Credit Default Swap Index is falling 3.10% today to 114.67 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 3.10% to 192.0 basis points. The TED spread is rising 2.07% to 94 basis points. The TED spread is now down 372 basis points in under four months. The 2-year swap spread is rising .73% to 68.75 basis points. The Libor-OIS spread is falling .67% to 97 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 3 basis points to 1.15%, which is down 155 basis points in under seven months. 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 .29%, which is down 3 basis points today. Nikkei futures indicate a +22 open in Japan and DAX futures indicate a -49 open in Germany tomorrow. Considering the ongoing decline in shares of (BAC), the (XLF) is holding up well today. Market leading “growth” stocks are again substantially outperforming “value” shares. Many stocks are rising today, despite losses in the major averages. Large-cap “growth” stocks are just 2.79% lower ytd, while small-cap “value” shares have dropped another 13.72% so far this year. As well, tech stocks continue to substantially outperform with the MS Tech Index up 2.78% ytd. One of my longs, (ILMN), is 21% higher on very heavy volume after another stellar earnings report. I expect the shares to test their record high of $47.87 before year-end. I expect US stocks to trade modestly higher into the close from current levels on short-covering, bargain-hunting, diminishing credit market angst and lower energy prices.