Stocks Lower into Final Hour on Profit-taking, Rising Financial Sector Pessimism, More Shorting

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Medical longs and Retail longs. I added (IWM)/(QQQQ) hedges today, thus leaving the Portfolio 75% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are declining and volume is above average. Investor anxiety is about average. Today’s overall market action is mildly bearish. The VIX is rising 7.65% and is very high at 47.02. The ISE Sentiment Index is below average at 117.0 and the total put/call is slightly above average at .90. Finally, the NYSE Arms has been running high most of the day, hitting 2.28 at its intraday peak, and is currently 1.43. The Euro Financial Sector Credit Default Swap Index is dropping .24% today to 173.25 basis points. This index is down from its record March 10th high of 208.75. The North American Investment Grade Credit Default Swap Index is plunging 12.31% to 198.50 basis points. This index is still below its Dec. 5^th record high of 285.99. The TED spread is falling 1.56% to 103 basis points. The TED spread is now down 360 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is up 2.82% at 63.75 basis points. The Libor-OIS spread is falling .11% to 100 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 8 basis points to 1.25%, which is down 139 basis points since July 7th. 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 .20%, which is up 1 basis point today. Weakness in Real Estate and Financial stocks has pressured the market again today. I expect these groups to stabilize early next week, which should lead to a stronger performance in equities by week’s end. Nikkei futures indicate a -75 open in Japan and DAX futures indicate a -35 open in Germany on Monday. I expect US stocks to trade mixed-to-lower into the close from current levels on profit-taking, rising financial sector pessimism and more shorting.