Stocks Rising into Final Hour on Lower Long-term Rates, Less Financial Sector Pessimism, Diminshing Economic Fear, Short-Covering

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Technology longs, Medical longs, Retail longs and Biotech longs. I added (MS) long and took profits in another long 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 heavy. Investor anxiety is about average. Today’s overall market action is very bullish. The VIX is falling 1.85% and is very high at 40.09. The ISE Sentiment Index is slightly above average at 164.0 and the total put/call is below average at .66. Finally, the NYSE Arms has been running low most of the day, hitting .21 at its intraday trough, and is currently .35. The Euro Financial Sector Credit Default Swap Index is falling 1.05% today to 183.0 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 falling .56% to 238.15 basis points. This index is still below its Dec. 5^th record high of 285.99. The TED spread is rising .88% to 108 basis points. The TED spread is now down 355 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is down 3.49% at 65.63 basis points. The Libor-OIS spread is rising .2% to 106.0 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 9 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 .21%, which is down 1 basis point today. The Fed’s decision to buy up to $300 billion worth of longer-term US government debt over the next six months and expand purchases of mortgage-related debt is a “game changer,” in my opinion. Another significant drop in mortgage rates should put a floor under home prices in many cities. I am surprised the market isn’t up more on the news, but we are technically extended short-term and some large funds are likely using the recent surge to take profits. I expect any near-term profit-taking to be relatively mild and short-lived. Nikkei futures indicate an +103 open in Japan and DAX futures indicate an +83 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, less economic fear, lower interest rates, less credit market angst and diminishing financial sector pessimism.