Stocks Slightly Higher into Final Hour on Less Financial Sector Pessimism and Diminishing Economic Fear

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Defense longs, Biotech longs, Medical longs and Financial longs. I have not traded today, thus leaving the Portfolio 75% net long. The tone of the market is mildly positive as the advance/decline line is slightly higher, most sectors are rising and volume is about average. Investor anxiety is high. Today’s overall market action is mildly bullish. The VIX is falling 5.77% and is high at 29.72. The ISE Sentiment Index is low at 109.0 and the total put/call is above average at .95. Finally, the NYSE Arms has been running about average most of the day, hitting 1.15 at its intraday peak, and is currently .92. The Euro Financial Sector Credit Default Swap Index is rising 3.74% today to 117.0 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 .76% to 141.42 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is falling 2.99% to 44 basis points. The TED spread is now down 420 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is soaring 20.58% to 50.25 basis points. The Libor-OIS spread is falling 2.66% to 37 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 14 basis points to 1.91%, which is down 73 basis points since July 7th. The 3-month T-Bill is yielding .17%, which is up 1 basis point today. The most economically sensitive stocks are underperforming again today, despite a much-better-than-expected Philly Fed report. However, the Morgan Stanley Consumer Index is jumping 1.89%. Homebuilders are especially weak, declining 2.1%. Market breadth has been relatively poor again throughout the day. Healthcare-related stocks are substantially outperforming again on the hopes of scaled-back government reform. It is a big positive that the (XLF) can rise meaningfully today despite the 15 basis point jump in the 10-year yield. However, yields need to stabilize soon or they are likely to pressure the broad market again. The AAII & Bulls fell to 33.3% this week, while the % Bears rose to 46.4%, which remains a positive. Nikkei futures indicate a -30 open in Japan and DAX futures indicate an +14 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on more shorting, profit-taking, rising credit market angst and higher long-term rates.