Stocks Rising into Final Hour on Less Financial Sector Pessimism, Short-Covering, Bargain-Hunting

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Technology longs, Financial longs and Medical longs. I covered all my (IWM)/(QQQQ) hedges this morning, thus leaving the Portfolio 100% net long. The tone of the market is very positive as the advance/decline line is substantially higher, almost every sector is rising and volume is below average. Investor anxiety is above average. Today’s overall market action is bullish. The VIX is falling 6.17% and is very high at 42.73. The ISE Sentiment Index is below average at 118.0 and the total put/call is about average at .82. Finally, the NYSE Arms has been running low most of the day, hitting .13 at its intraday trough, and is currently .63. The Euro Financial Sector Credit Default Swap Index is rising 1.72% today to 175.33 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 rising 1.79% to 195.16 basis points. This index is still below its Dec. 5^th record high of 285.99. The TED spread is falling 8.39% to 99 basis points. The TED spread is now down 364 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising 4.04% to 58.0 basis points. The Libor-OIS spread is falling 1.29% to 97 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 6 basis points to 1.31%, which is down 133 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 7 basis points today. Weekly retail sales came in this week at the best level since the first week of January and have continued to improve since bottoming the week of Feb. 3^rd, which is a large positive. As well, the TED spread is rolling over again, which is also a huge positive. While some of today’s sharp gains in the financials are likely a result of short-covering, portfolio managers that didn’t want these stocks on their books at quarter’s end may step in tomorrow on the long side. Nikkei futures indicate an +331 open in Japan and DAX futures indicate an +40 open in Germany tomorrow. I expect US stocks to trade mixed into the close from current levels as short-covering offsets profit-taking.