Nobody Should Be Comfortable

 | Nov 28, 2012 | 8:05 AM EST  | Comments
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Since I took a poll during Tuesday's trading to see how folks lined up on whether we would see a cliff save or a cliff dive by year end, several have asked if I think we get saved or go off the cliff. I would not call myself one who pays close attention to the political machinations, but from what I have seen I believe our Congress is more likely to get something done when there is a gun to their heads than when there is no gun.

So, my guess is that they still feel as though there is time left before any deal must be done. But more than that, the market is not down and it is not tanking on a daily basis. You might recall they approved TARP, but not until the market tanked when they did not do so the first time. They act best when under pressure.

Perhaps that is why gun sales are up so much this year? Perhaps too many folks realize Congress needs a gun to their head to actually get anything done. In case you think I am joking about gun sales, I saw that background checks, a good indicator of actual gun sales, was up 20% year over year on Black Friday.

If we look at the way the indicators shape up for the month of December we might also see another point of view on the resolution of the fiscal cliff. As I indicated yesterday, we have some of the indicators attempting to turn upwards. Their attempts are rather tepid. For example, the McClellan Summation Index has turned up for the first time since September, but notice the difference in the move this time vs. the low in June.

The red line on the chart represents where the indicator had moved to after a 4% move, similar to the move we had last week. You can actually see the move in June, whereas this time you must squint and get a magnifying glass to see it now.

We cannot even compare the Oscillator since at the June low it was so far off its lows. I have noted the June low with a red arrow. My point is there was no positive divergence on the Oscillator at the recent lows, there was just an oversold reading.

Even if we forget about the one day reading of the put/call ratio that I reviewed in depth yesterday, if we look at the moving average of this indicator we discover two points. First, it is heading down (that's bullish). Secondly, it did not get to the panic level we had at the June lows when the moving average went over 115%. If we had gotten to a reading over 115% I'd be thinking we're due for an extended rally, but having not gotten there I think it looks more like an oversold one.

If the indicators were lined up the way they were in early June, I'd say the fiscal cliff will be resolved. But I look at these indicators and I can sense there will be more volatility in the coming weeks. For example, I think we have another rally attempt later this week, but it wouldn't surprise me if we then pulled right back again next week when we are maximum overbought. 

I suppose that means no one should be comfortable in this environment. Not the bulls or the bears and not the Democrats or the Republicans.

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