Stocks Surging into Final Hour on Short-Covering, Bargain-Hunting, Less Severe Economic Pessimism, Diminishing Credit Angst

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Biotech longs, Healthcare longs, Retail longs, Education longs and Computer longs. I covered all of my (IWM)/(QQQQ) hedges and some of my (EEM) short this morning, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are rising and volume is about average. Investor anxiety is above average. Today’s overall market action is very bullish. The VIX is falling 6.22% and is very high at 42.69. The ISE Sentiment Index is below average at 118.0 and the total put/call is below average at .82. Finally, the NYSE Arms has been running around average most of the day, hitting 1.06 at its intraday peak, and is currently .95. The Euro Financial Sector Credit Default Swap Index is falling .70% today to 118.33 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 3.08% to 199.0 basis points. The TED spread is dropping 7.39% to 91 basis points. The TED spread is now down 375 basis points in under four months. The 2-year swap spread is falling 2.20% to 69.75 basis points. The Libor-OIS spread is rising 2.63% to 98 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 5 basis points to 1.12%, which is down 158 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 .32%, which is up 8 basis points today. Given the large declines in the (RKH) and (XLF) earlier in the day, today’s broad market strength is quite impressive. Market-leading stocks are outperforming again. Healthcare-related stocks, my favorite group, remain very strong and are responding positively to news that Tom Daschle is withdrawing his name for consideration for the post of Secretary of Health and Human Services. As well, Education, Road & Rail, Retail, Homebuilding, Steel and Coal stocks are posting 3%+ gains. Unlike last year where most stocks declined significantly, select stocks are massively outperforming and posting strong gains this year. Nikkei futures indicate a +220 open in Japan and DAX futures indicate an +50 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, bargain-hunting, diminishing credit market angst and less severe economic pessimism.