Stocks Lower into Final Hour on Rising Energy Prices, Higher Long-term Rates, More Shorting

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Financial longs, Technology longs and Retail longs. I added (IWM)/(QQQQ) hedges and added (EEM) short 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 high. Today’s overall market action is mildly bearish. The VIX is rising 3.04% and is high at 29.13. The ISE Sentiment Index is below average at 115.0 and the total put/call is about average at .87. Finally, the NYSE Arms has been running about average most of the day, hitting 1.26 at its intraday peak, and is currently 1.19. The Euro Financial Sector Credit Default Swap Index is falling 1.13% today to 102.33 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 .75% to 123.98 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is falling 1.83% to 47 basis points. The TED spread is now down 416 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is declining 5.16% to 47.13 basis points. The Libor-OIS spread is falling 2.43% to 41 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 9 basis points to 2.09%, which is down 55 basis points since July 7th. The 3-month T-Bill is yielding .17%, which is unch. today. The rises in oil and long-term rates are pressuring the broad market. I continue to believe near-term equity gains are capped until we see these stabilize. However, the major averages are holding up well considering the rises in these two. A number of market leading stocks are just slightly lower or even higher on the day. The 10-year yield hit 4% today and has since pulled back 6 basis points. I suspect bonds will find some buyers around current levels. I will be monitoring tomorrow’s Treasury auction closely again. Nikkei futures indicate an -71 open in Japan and DAX futures indicate a -21 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on more shorting, higher energy prices, rising long-term rates, financial sector pessimism and profit-taking.