"In this hour, I do not believe that any darkness will endure." -- J.R.R. Tolkien, The Return of the King
The market has been anticipating a fiscal-cliff deal for weeks now, and it's growing more confident as President Obama and House Speaker Boehner exchange new proposals. The market has been a little hesitant, but it's never had any major doubts that a deal would be made. The only real issue was timing, and it now looks as though a deal could come before the Christmas holiday.
The mood had already been positive, and it's now being helped further as banks and homebuilders gain upside momentum. A couple of key analysts comments bullishly on banks Monday, and we're now seeing clear breakouts in Bank of America (BAC), Citigroup (C) and several others.
Another thing helping the mood is that Apple (AAPL) reversed sharply after bouncing off support at $500. The longer-term chart still looks quite problematic, but the bottom-fishers are jumping in and pushing it up a bit more in the early going Tuesday.
The bulls have a nice confluence of positives kicking in. On a seasonal basis, the market is in the best time of the year. There are plenty of underinvested longs who need relative performance, the uncertainty of the fiscal cliff is being resolved and money seems to be rotating from bonds into equities. Further, the European problems have been put on hold -- and we don't have to think about earnings for a couple more weeks.
The bears are arguing that the market is pricing in all the good news right now, and that this will set up the market for a sell-the-news reaction when the fiscal cliff deal is announced. They're counting on the likelihood that it won't be a clean deal, and that key issues -- such as entitlement reform -- will be kicked down the road.
I believe the bears are underestimating how happy market players will be to have this fiscal-cliff uncertainty resolved to even a partial degree. The market has been handcuffed by this news for weeks, and there will be great relief if it can move on, even if the deal isn't perfect.
The biggest challenge I see right now is finding good long exposure to add. Stocks are a little extended, and the rally from the last few weeks hasn't created many good setups. Money is flowing into banks right now, but there hasn't been any major leadership recently. Typically we see some key big-caps are leading the way, but even some names that have been doing well lately -- such as Google (GOOG) and Amazon (AMZN) -- don't have particularly strong momentum. We only saw about 140 new stocks making highs Monday, which is rather light for a market that has been uptrending for weeks.
All that matters right now is that the bulls are becoming more positive and are gaining momentum. Market players are looking for buys, and positive seasonality is helping as well. As I've been saying for a while now, this is not a market you want to short.
I'll be looking for buys and will try to put more money to work. Once the anticipated fiscal-cliff deal is announced, we'll need to reassess, but at the moment the focus of the market is to be long before the news hits.