Disconcerting Giddiness

 | Sep 20, 2012 | 7:00 AM EDT
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Sometimes it's just helpful to make a list when it comes to the markets. So I've done just that.

Oil plunged. A biotech stock blew up. Apple (AAPL) was flat on the day. The banks tried to rally and stalled. The semiconductors cannot get out of their own way. The Russell 2000 was red for the third day in a row. Then, after the market closed, we saw earnings disappointments. So would someone kindly tell me why the put-call ratio was 68% Wednesday? What was so very bullish in Wednesday's action as to get folks loaded up on calls?

The only justification I can come up with is that most everyone believes you cannot fight the Fed, as we've learned in the past four years, during which we have not seen a natural ebb and flow in the economy nor in the markets. It used to be you that could look around you and see businesses doing well and think, "OK, the market has priced in all the bad news, so an upturn would be bullish." If the indicators lined up, we'd often see a market rally.

The inverse was true, as well. You might have noticed your local coffee shop had more empty seats or that the UPS (UPS) truck didn't deliver as often as it used to, and as a result you would think the market had too much good news priced in. If the indicators lined up, meanwhile, we would see a selloff. This is no longer true, because there doesn't seem to be a soul who believes the market can go down anymore, regardless of earnings.

If you look back at the last few years, you'll see that only times the market actually declined in earnest was when quantitative easing was ending or during the Japanese tsunami and subsequent nuclear meltdown. That's it. So it takes either a lack of QE or a nuclear meltdown in order to allow the market to flow naturally.

Still, I would remind you that, after last Thursday's Fed announcement, there weren't many who thought oil could go down -- yet, here it is, having plunged 10% in a matter of days. I have been bearish on oil since mid-August (which hasn't helped me much), but this week's plunge took even me by surprise. I even thought oil would have a short rally after Monday's plunge before it took its next leg lower. I was clearly wrong.


Oil now finds itself at a decent trendline, so it should attempt to bounce. But when you consider that the $95-per-barrel support barely held, you have to at least sit up and take notice. In my view, if oil manages to get back to that red line (currently at $95, but rising) it will be a sell.

Since it seems many of the old rules don't apply anymore, you can scoff at the following chart if you want. But please note that, while United States Gasoline Fund (UGA) managed to hold firm during Wednesday's trading, it led the market in the spring, and ultimately stocks fell anyway. Of course, at that point we were at the end of some Fed easing program with a fancy name or acronym, then so it's not an exact comparison.

UGA vs. S&P 500

Otherwise, I maintain the market is overbought and that the air of giddiness Wednesday was disconcerting to me. Some more pulling back from the overbought condition would be healthy. I don't know if it's allowed anymore, but it sure would be healthy.


Overbought/Oversold Oscillator -- NYSE

Overbought/Oversold Oscillator -- Nasdaq

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