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

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Technology longs and Financial 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, almost every sector is declining and volume is about average. Investor anxiety is above average. Today’s overall market action is bearish. The VIX is rising 1.29% and is very high at 40.88. The ISE Sentiment Index is below average at 125.0 and the total put/call is slightly above average at .88. Finally, the NYSE Arms has been running high most of the day, hitting 7.89 at its intraday peak, and is currently 1.81. The Euro Financial Sector Credit Default Swap Index is rising 1.45% today to 162.67 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 rising 1.41% to 181.48 basis points. This index is still below its Dec. 5^th record high of 285.99. The TED spread is rising .31% to 109 basis points. The TED spread is now down 354 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is falling another 6.96% to 55.13 basis points. The Libor-OIS spread is falling 1.04% to 98 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 7 basis points to 1.43%, which is down 121 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 .12%, which is down 2 basis points today. I think today’s losses are mainly a function of short-term traders taking profits after one of the best months for US stocks in history, as quarter-end approaches. A number of market-leading stocks are maintaining recent gains very well, with some even higher on the day. Telecom, homebuilding, medical, insurance and alternative energy stocks are sources of relative strength. The 2-year swap spread is now down almost 29 basis points in just 2 weeks. As well, the US sovereign debt credit default swap is down another 13.9% today to 68.0 and has dropped about 33 basis points since Fed. 25^th, which is also a huge positive. We could see some more early weakness on Monday, but I suspect another rally will begin to materialize later that day. Nikkei futures indicate a -16 open in Japan and DAX futures indicate an +9 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, bargain-hunting, lower energy prices and declining economic fear.