Stocks Sharply Lower into Final Hour on Sovereign Debt Fears, China Bubble/Trade Wars Worries, Rising Financial Sector Pessimism, More Shorting

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Technology longs, Financial longs and Biotech longs. I added to my (IWM)/(QQQQ) hedges, added to some commodity shorts and added to my (EEM) short 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 heavy. Investor anxiety is very high. Today’s overall market action is very bearish. The VIX is rising +17.04% and is high at 25.27. The ISE Sentiment Index is low at 85.0 and the total put/call is high at 1.11. Finally, the NYSE Arms has been running very high most of the day, hitting 2.70 at its intraday peak, and is currently 2.47. The Euro Financial Sector Credit Default Swap Index is rising +9.64% to 89.25 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 +4.74% to 96.18 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 rising +4.41% to 29.76 basis points. The Libor-OIS spread is unch. at 10 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down -7 basis points to 2.33%, which is down -32 basis points since July 7^th, 2008. The 3-month T-Bill is yielding .08%, which down -1 basis point today. Cyclical and Emerging market shares are underperforming today. Brazil’s Bovespa is falling almost -5.0%. (XLF) has been heavy throughout the day and is close to breaking down from a 6-month trading range on heavy volume. Airline, Construction, Disk Drive, Steel, Gold, Oil Tanker, Alt Energy, Coal, Oil Service, Semi, Bank, I-Bank and Homebuilding shares are especially weak, falling 3.75%+. The fact that the tech sector is sustaining such damage on the very positive (CSCO) report is a large negative. Moreover, the US sovereign debt cds is soaring +35.0% to 58.0 bps, which is a major negative. As well, the Western Europe sovereign debt cds index is surging +14.0% to a new record high at 105.6 bps. The Portugal sovereign debt cds is spiking another 17.9% to 226.0 basis points. The euro has traded heavy throughout the day. Commodities remain under significant pressure and are sustaining significant technical damage. Oil tanker rates are falling -7.41%. On the positive side, Education, Internet, Drug, Telecom and Internet shares are holding up relatively well. The AAII % Bulls fell to 29.23 this week, while the % Bears rose to 43.08, which is a positive. Unit labor costs, which comprise 2/3 of inflation, fell -4.4% last quarter. We still have massive global overcapacity, especially in Asia. As well, I suspect the euro will remain under pressure for quite some time, as a result of the turmoil with their sovereign debt. This will likely lead to a sustained period of underperformance for commodity/industrial/emerging market shares. I expect Asian stocks to come under significant pressure tonight. Any better-than-expected jobs number tomorrow will likely be trumped by action in emerging market debt. It appears to me that hedge funds/i-banks are piling into the sovereign debt cds instruments in much the same fashion as they did subprime, which created a self-fulfilling prophecy to an extent. Nikkei futures indicate a -320 open in Japan and DAX futures indicate a -7 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, rising economic worries, China bubble/trade war fears and rising financial sector pessimism.