I took three days off and the market flat-lined. In fact, about the only thing I can see that has changed is that CNBC is now offering us "fun facts about the fiscal cliff" far too many times throughout the day. Is there really anyone who turns on CNBC who still needs to be informed about this?
After about the 10th time I saw one of these facts highlighted, I noticed that the network has now placed three or four boulders on the screen to mark the countdown: one with the days, the next with the hours and so on. CNBC is clearly obsessed with this next "event" in the market. Heck, the other evening my local television news, which rarely even reports what the markets do day to day, began the nightly broadcast with the looming "fiscal cliff."
In other words, I cannot imagine that many remain who don't know about this impending market snafu. So at what point does it all get priced in? At what point will the indicators I follow get to extreme readings?
Most of the intermediate-term indicators I follow began to show longer-term negative divergences in August, and that carried through to September. In a fast decline, those indicators will often move back to an oversold condition within about six to eight weeks -- but not this time. At present, they are still sitting in the middle of the road.
For example, the Hi-Lo Indicator is currently at 37%. Typically a reading under 20% signals an intermediate-term oversold condition; at the June low, it sank to 17%. We can no longer call this overbought, but it is far from oversold.
Or we can look at the volume indicator. About two weeks ago I noted it was reading as moderately oversold when it dipped to 45%, but that an intermediate-term or extreme oversold reading found this indicator hovering down near 40%. It bounced, and is now retreating. With the reading currently at 47%, it is not oversold enough to launch more than a short-term rally.
The McClellan Summation Index continues to point downward. As longtime readers will know, I often calculate a "what-if" scenario to see what it would take to roll over this indicator -- and, as of Tuesday, an reversal upward would require some +2900 in advancers minus decliners on the NYSE. Typically once this indicator gets to the point where it requires +4000 or more, we consider it oversold enough to bounce. To get to that, we'd need to see at least one or two harsh down days, preferably in a row.
Sure, I would like to see the CBOE Volatility Index (VIX) get jumpy as well. But understand that the VIX is not the only indicator that hasn't quite gotten extreme. As you can see, there are plenty of others. The standard routine is a bounce and then a retest to create a "W" with potential positive divergences. We haven't even seen the bounce yet, even though the market is short-term oversold.
I would have liked to report to you that all sorts of indicators were stretched, or that a slew of positive divergences were present, but that is not the case. We need either capitulation or a W-shaped pattern to end this persistent decline and gloom; thus far, we're not seeing either.