We surely got the short-term oversold rally Monday, didn't we? While the action did not change any of the overbought intermediate-term indicators that I reviewed in full Sunday, I'll make a few points about the rally.
Despite what seemed like a ball of enthusiasm, many skeptics clearly remained, as the put-call ratio came in above 100%. That tells me market players were hedging their bets just in case the folks in Washington couldn't come up with some Band-Aid solution by the time markets opened in the new year.
The other sentiment aspect is more anecdotal. You may recall that, after the presidential election, I said it wouldn't be long until the "fiscal cliff" rose to the fore -- even though everyone seemed to think the election results would bring us clarity. But even I did not expect this to happen so quickly; it took less than 24 hours for the new worries to begin and for the market to turn down.
On Sunday I noted some of the same thought process: Even if a fiscal-cliff deal was cobbled together, I said, folks would then fret over the debt ceiling. But this time I see many others have jumped into that camp very quickly, telling us that the debt-ceiling worry will now be an issue. It's that old adage: "Fool me once, shame on you. Fool me twice, shame on me." In other words, folks learned their lesson from the post-election euphoria, and they will not be duped again.
With that in mind, let's take a look at some charts that bear watching in the coming days. Financial stocks seem to be universally loved now, so we'll begin with the KBW Bank Index (BKX). The first thing to note is that this index underperformed Monday. So, while the sector held up rather well during the Christmas-week decline, it did not enjoy the same explosive round of short-covering we saw elsewhere Monday.
Take a look at the ratio of the BKX to the S&P 500; for those bulls among you, take care and make sure this underperformance does not turn into a repeat of what occurred in the spring.
What you need to watch on the BKX itself is that area of resistance at 52. Should it fail to get through, the chart will look somewhat similar to the early-October failure. Success at broaching that level will look like the move above 48 in early September.
Then there is the Russell 2000, which has resistance around the 852-to-855 area. At present, the ratio of the S&P to the Russell is around 1.68. Once the ratio goes under 1.65, we're close to a top. We'll watch this for signs of underperformance, as it has maintained its outperformance since the November low thus far.