There is little difference in people, but that little difference makes a big difference. The little difference is attitude. The big difference is whether it is positive or negative." -- W. Clement Stone
It took longer than many market players had hoped, but the market finally managed a small bounce on Friday. The primary driving force was some optimistic comments from members of Congress that a solution to the fiscal cliff issue would be forthcoming. Nothing specific was offered but the market was so oversold to start with, it didn't take much to bring in some buyers.
The big question now is whether we can build on this bounce. The bulls are hopeful that the market can pull off another of these V-shaped recoveries that we have seen so often in the last few years, but the dynamics are a bit different now. One of the main driving forces behind that sort of action was the flood of liquidity created by quantitative easing programs. The QE programs are no longer having the impact they once did and the constant celebrations that the European sovereign debt issues are suddenly over are also becoming less prevalent.
While there is increased optimism that the fiscal cliff issue will be resolved, it is still going to be a while before we are even close to an actual deal. The politicians are going to play their games. While they may say they are close to a solution, the devil is in working out the details and that is not going to occur until the very last minute. The point is that we better not be too sanguine that the fiscal cliff issue will no longer be a market negative. It is going to continue to push us around for a while.
While the news flow may be a bit more positive, we still have to deal with a very poor technical situation. The market has broken down badly over the last couple weeks and taken out quite a few key technical levels. We actually fell far lower than many had anticipated and it was only a matter of time before we had a little oversold bounce.
The problem now is that we have to deal with technical overhead, which is primarily a function of trapped longs looking for escape. As stocks move back toward their entry points and = have the opportunity to escape a painful investment with smaller losses, there is an inclination to sell. It is a great relief to sell a stock that has kept you awake at nights for just a minor loss.
In addition, overhead resistance is reinforced by the bears who have had success lately and are now looking for more. They will be looking to load up the shorts again as key technical levels are approached. The may give the bulls some room initially but you can bet the dark side players are not done.
Typically, oversold bounces in a downtrending market can be fairly positive so I'll be giving this market a little room to the upside at this point but it is premature to proclaim that the bottom is in. This bounce can very easily fail and it won't take much for us to retest the recent lows. We need to be very watchful for a rollover to occur.
One of the positives for the bulls at this juncture is that it is Thanksgiving week. Trading during the holiday often has a positive bias and traders are often inclined to chase thin small-caps as trading volume slows down. It can be a good time to play some momentum. However, positive trading during Thanksgiving is a general inclination and not a certainty. Don't be too complacent as the market can easily turn on us -- especially if the news flow becomes negative again.
So overall, we have a bit of an oversold bounce trying to gain some traction. We should play it while we can but we can't be over confident. The technical picture suggests a very bumpy ride and anyone looking for a quick and easy, straight-up, rally is likely to be disappointed.