Few people have the imagination for reality. -- Johann Wolfgang von Goethe
After a very pleasant holiday week we return to reality this morning.
Thanksgiving occurred at the perfect time for the market and helped to propel a well-anticipated oversold bounce. We had a particularly upbeat half day of trading on Friday, but there is a little hangover this morning as market players once again contemplate a large number of macroeconomic issues.
After the bounce last week it is almost too perfect of a set-up for a pullback. We went up each day and volume declined each day, which doesn't make for sustained momentum. We aren't yet at obvious overhead resistance levels, but it is hard not to anticipate some sort of consolidation or backing and filling.
In addition to the extended technical conditions, the politicians return to work and you know we will hear endless talk about the fiscal cliff once again. There has been much optimistic talk about a potential deal, but we've been through these negotiations too many times to believe that they will be quick or easy. We are very likely to go to the deadline before a deal is finally made and expect the market to suffer some jitters while we are waiting.
Europe continues to have the same old issues with an election in Spain causing some worries this morning and talk about a further Greek debt haircut causing intense debate. We are likely to have another rally on some sort of deal eventually, but the market seems to be less and less enthused with the neverending search for solutions.
The bulls are shaking their heads and thinking that the bears will never learn. The pattern of this market for a few years now is that once we start to bounce we just keep on going. If you bet against a V-shaped bounce after a breakdown you have been on the wrong side of this market. Time and again we start to run and then the bears are squeezed and the underinvested bulls have to chase and we just keep running right back up to highs. The bulls even have seasonality to assist them this time.
The V-shaped bounce can certainly happen again and I wouldn't be too pessimistic until there is some price action to support it, but two things are different this time. First and foremost we don't have the Fed flooding us with liquidity again. All of our prior V-shaped bounces were powered to some degree by a quantitative easing program. That money had no place to go but into the market and that is exactly where it went.
The central bankers drove the past V-shaped moves and they are not showing the same inclination to provide the conditions to do it again. They are running out of ammunition and it is pretty clear that what they have done in the past hasn't been too effective in actually ending economic ills. They did a nice job of driving equities, but a lousy job at creating jobs and promoting growth.
The other problem we have is the economy is still slow and it is being reflected in corporate earnings. We just had a very poor third quarter and there are few reasons to expect the fourth quarter will be better. We have all the usual chatter right now about the great retail sales, but that will come to an end quickly and we will start hearing about how the economy is actually functioning.
A fiscal cliff deal with be a major market positive, but I'd be very surprised if it comes this week. The bears better not become too comfortable because of that news potential, but in the short term the fiscal cliff debate most likely will cause some nervousness.
We have some early pressure, but there are positive analyst comments about Facebook (FB), Research in Motion (RIMM), Apple (AAPL) and Yahoo! (YHOO) this morning. They may be a little late, but they are helping to keep the selling from accelerating.