Stocks Mostly Lower into Final Hour on Euro Sovereign Debt Worries, More Shorting, Rising Financial Sector Pessimism

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Technology longs and Biotech longs. I added (IWM)/(QQQQ) hedges and added to my (EEM) short this afternoon, thus leaving the Portfolio 75% net long. The tone of the market is mildly negative as the advance/decline line is lower, most sectors are declining and volume is slightly above average. Investor anxiety is high. Today’s overall market action is neutral. The VIX is rising 1.3% and is above-average at 21.76. The ISE Sentiment Index is slightly below average at 128.0 and the total put/call is around average at .85. Finally, the NYSE Arms has been running above average most of the day, hitting 1.81 at its intraday peak, and is currently 1.73. The Euro Financial Sector Credit Default Swap Index is rising +.06% to 80.76 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 -1.85% to 91.83 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is unch. at 16 basis points. The TED spread is now down 447 basis points since its all-time high of 463 basis points on October 10^th, 2008. The 2-year swap spread is falling -3.03% to 28.31 basis points. The Libor-OIS spread is unch. at 10 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up +1 basis point to 2.40%, which is down -25 basis points since July 7^th, 2008. The 3-month T-Bill is yielding .09%, which unch. today. Cyclical shares are underperforming today. The Transports are falling -1.45%. (XLF) has been heavy throughout the day. Airline, Gaming, REIT, Bank, Paper and Steel shares are especially weak, falling 2.0%+. Weekly retail sales continue to decelerate, rising 1.0% in the latest report. The Portugal sovereign debt cds is spiking 17.6% to 193.3 basis points and the Western European sovereign debt cds index is jumping 6.3% to a new high of 93.47 bps. The euro has traded heavy throughout the day. Copper remains under significant pressure. The Ag spot index is also falling 2.54%. The Baltic Dry Index is down -16.0% over the last 5 days. On the positive side, Education, Ag, Restaurant, Computer and Internet shares are rising .5%+. Tech sector market leaders are substantially outperforming the broad market ahead of (CSCO), (BRCM) and (AKAM)’s earnings reports tonight. I am surprised that the market isn’t paying more attention to the surge in European sovereign debt credit default swaps and the weakness in the euro. Right now, this is a positive, but could become a big negative if the situation continues to deteriorate. Nikkei futures indicate an +61 open in Japan and DAX futures indicate a +25 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on more shorting, European sovereign debt concerns, higher long-term rates and rising financial sector pessimism.