Washington's Impact May Be Poised to Wane

 | Jan 06, 2013 | 7:00 PM EST  | Comments
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EFA

A few months ago I believed that, unless Congress were backed against the wall, it would not act on the "fiscal cliff." Well, on Meet the Press Sunday morning, Sen. Angus King (I-Maine) said something quite interesting. He remarked that, if Senate Minority Leader Mitch McConnell (R-Ky.) (who had been on the show earlier) had ruled out a government shutdown over the debt ceiling, he'd bet the market would rise "200 points" Monday. I will assume he meant the Dow and not the S&P 500!

As I watched this, I thought it confirmed my views: Congress is motivated by a gun against the head, and not by doing the "right thing." In this case the gun to the head was the stock market, which sank as we headed into the last day of 2012 -- so they figured out a way to get a deal done. Now, if we can extrapolate from this senator's views, maybe we can confidently say there is no way they will do anything "difficult," since the markets might not like it. They are reacting to the markets, as we all assumed they would in era following the Troubled Asset Relief Program's passage.

Of course, now that Congress believes only it can move the markets, it will likely be something else that will actually influence stocks.

I thought of that this weekend because, in the past several days, I have seen countless folks -- including in Barron's -- note to us that Europe has been outperforming. As I updated my chart of iShares MSCI EAFE Index Fund (EFA), it occurred to me that these markets didn't have the same fabulous week the S&P did. So I looked at the ratio of the EFA to the S&P, and wouldn't you know it? Europe has underperformed pretty much since Christmas.

EFA vs. S&P 500

Not only that, but the ratio broke that uptrend line that has been in place the entire fourth quarter. Does this now mean that Washington believes we only care about what they do? Given that everyone has finally noticed Europe's ostensibly winning ways, might it now be time for that continent's woes to show their head again?

I note this because, here in the U.S., markets are still overbought on an intermediate-term basis: The 30-day moving average of the advance-decline line peaked last week. At the same time, the number of stocks making new highs is at a little more than half of what this statistic had been in September, even though the S&P made a higher closing high Friday.

Number of Stocks at New Highs -- NYSE

Meanwhile, the index put-call ratio slipped to 77%. The last time it came in at this level was Dec. 17. That was followed by a market rally in the next session -- and then, over the next week, all of those gains were given back, and then some. So, this time around, perhaps the prevailing issue won't be the debt ceiling. Maybe the issue won't even have anything to do with the U.S. Maybe it is time for Washington to become irrelevant and Europe to take front stage, now that it's disappeared from everyone's minds.

But, then, European Central Bank President Mario Draghi did tell us he would do "whatever it takes" to save the euro.


 

Overbought/Oversold Oscillator -- NYSE

Overbought/Oversold Oscillator -- Nasdaq

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