Stocks Sharply Lower into Final Hour on More Shorting, Profit-Taking, Rising Economic Fear, Increasing Financial Sector Pessimism

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Technology longs and Financial longs. I added to my (IWM/QQQQ) hedges, added to my (EEM) short and took profits in my (MS) long this morning, thus leaving the Portfolio 50% net long. The tone of the market is very negative as the advance/decline line is substantially lower, every sector is declining and volume is below average. Investor anxiety is high. Today’s overall market action is very bearish. The VIX is rising 6.56% and is high at 27.94. The ISE Sentiment Index is high at 162.0 and the total put/call is above average at 1.04. Finally, the NYSE Arms has been running high most of the day, hitting 2.48 at its intraday peak, and is currently 2.40. The Euro Financial Sector Credit Default Swap Index is rising .80% today to 105.60 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 jumping 5.76% to 137.0 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is rising .27% to 43 basis points. The TED spread is now down 421 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is falling 4.20% to 41.38 basis points. The Libor-OIS spread is rising 1.38% to 37 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 8 basis points to 1.66%, which is down 98 basis points since July 7th. The 3-month T-Bill is yielding .15%, which is down 2 basis points today. REIT, Healthcare and Commodity shares have been under significant pressure throughout the day. The (XLF) has weakened slowly throughout the day and is now trading at session lows. The AAII % Bulls rose to 37.84% this week, while the % Bears fell to 44.59%, which is a mild negative. A number of sectors are being turned back right near their 200-day moving averages. It is also a negative that the ISE Sentiment Index has been high throughout the day. On the positive side, a number of tech leaders are relatively firm and the SOX Index is just slightly lower. As well, the NYSE Arms has been running very high on low volume, which is a positive. Nikkei futures indicate a -136 open in Japan and DAX futures indicate an +5 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on more shorting, increasing economic worries and rising financial sector pessimism.