A Quick Bounce Could Be at Hand

 | Nov 21, 2011 | 6:00 AM EST
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This week, the markets will see a three-way tug of war.

First there'll be the ever-present Europeans. The constant rumors will continue regarding the European Central Bank's readiness to do something big, and we'll also likely see more "austerity yes, austerity no" commentary from the Greeks and the Italians -- and perhaps the Spaniards soon, as well.

Then there is the Congress Joint Select Committee on Deficit Reduction, or the Super Committee. Have you ever sat on a committee? Does anything ever get accomplished in this way? Now consider it's a committee made up of politicians! The only good news is that expectations here are very low.

The third leg of the tug of war is the seasonality of the Thanksgiving week, when markets typically enjoy an upside bias.

While I give the seasonality the least weighting, I can make the case that the market really should bounce in the middle of the week. Please notice I have not said stocks will become oversold. At this point it is still difficult to see when the market might be set up for a short-term oversold bounce, but it appears the setup could arrive next week -- just in time for the beginning of December. Much of that depends on what the market does early this week.

Overbought/Oversold Oscillator -- NYSE

If you are looking for some other shorter-term positives, I would note that there were fewer stocks at new lows on the Nasdaq Friday than there were Thursday. That's also despite a lower low on the Nasdaq. It was the first time all week we saw this reading contract.

Number of Stocks Making New Lows -- Nasdaq

Then there were the banks, which outperformed the broader market Friday. I hate to make a big deal over this, since the rallies in this sector tend to be short-lived -- but, at least for Friday, the selling here dried up. Maybe it was related to U.S. Treasury bonds? Last week I noted the 1.95% area on the 10-year note midweek as support, and thus far it has held above that level, even in the face of a declining stock market. This is a minor change, since almost every other time stocks have come down, bond yields have declined as well.

Yield on 10-Year U.S. Treasury Bond

I would add that sentiment has gotten rather gloomy, but that would be mostly on an anecdotal basis. The options ratios are all over the map. The index put-call ratio sank to a reading under 100%. Since 2010 it has only done this seven other times. In five of those instanes, the market sold off in the proceeding days.

But, just to counter that, the equity put-call ratio surged above 90%, which has been very rare for days when the market hasn't tanked. Typically a reading above 90% is considered bullish.

Most everyone seems to be focused on the 1200-to-1210 support area on the S&P 500. If it breaks early in the week, and we see some panic -- and if there are fewer stocks making new lows -- then I can foresee a Thanksgiving rally. But, with the intermediate-term indicators rolling over, we'd have to consider it just an oversold rally.


Overbought/Oversold Oscillator -- Nasdaq

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