Stocks Lower into Final Hour on Profit-taking, More Shorting

BOTTOM LINE: The Portfolio is mixed into the final hour as gains in my Medical longs and Financial longs offset losses in my Biotech longs and Semi longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are declining and volume is about average. Investor anxiety is about average. Today’s overall market action is neutral. The VIX is falling 1.78% and is very high at 42.46. The ISE Sentiment Index is below average at 128.0 and the total put/call is slightly below average at .73. Finally, the NYSE Arms has been running high most of the day, hitting 9.79 at its intraday peak, and is currently 1.40. The Euro Financial Sector Credit Default Swap Index is down 1.28% today to 159.33 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 dropping 2.32% to 187.35 basis points. This index is still below its Dec. 5^th record high of 285.99. The TED spread is falling 1.37% to 102 basis points. The TED spread is now down 361 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is falling .82% to 60.75 basis points. The Libor-OIS spread is falling .30% to 99 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 6 basis points to 1.36%, which is down 128 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 .21%, which is up 1 basis point today. Today’s action appears to be another healthy consolidation of recent gains rather than the start of another decline. Market leading stocks are firm. As well, Education, Road & Rail, Medical, Disk Drive, Computer, Paper, Steel and Defense stocks are all higher on the day. Breadth isn’t too bad today considering the losses in the major averages. REITs and Banks are today’s biggest losers, but they are maintaining most of yesterday’s huge gains. The US sovereign debt credit default swap is falling another 13.2% today to 72.0, which is a big positive again. One of my longs, (QSII) is hitting a new record high today on above-average volume. While it is extended near-term, I still think this stock has significant upside from current levels longer-term. Nikkei futures indicate a -38 open in Japan and DAX futures indicate an +11 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, diminishing credit market angst, bargain-hunting and declining economic fear.