Thanks for reading my Diary today. I hope it was informative and value-added.

Have a great evening!

CNBC's Jeff Cox has a nice piece, "Insiders Sending an Ominous Market Signal," in which my friend Jim Paulsen and I are quoted.

I am seeing some large sellers in the bank stocks today on several institutional desks; the issues include Regions Financial (RF), FirstMerit (FMER), JPMorgan Chase (JPM) and Bank of America (BAC).

I still have a trading long rental in Wal-Mart (WMT). 

The shares are slowly ascending and I am hopeful they reach back to the late September level ($62 to $63) with the retail sector starting to make up some recent lost ground.

My thoughts on the day about an hour from the closing bell:

• An early attempt to rally faltered.
• I remain bearish as described in today's opening missive.
• Overall breadth continued to erode.
• I have taken up my short book throughout last week and again today. It is growing to be substantial.
• I remain of the view that a 2015 top was established in May.
• The U.S. dollar strengthened, hitting a recent high at 1.06.
• Crude had more moves that a shortstop batting .110. Down big, up, down and then flat.
• Bonds rallied ... again.
• Municipal bonds were well-bid. I continue to reduce my closed-end municipal bond funds today.
• But high yield remained junky.
• (T)FANG was weak, save Amazon (AMZN).
• NOSH was mixed, with Starbucks (SBUX) and Home Depot (HD) higher but Nike (NKE) and O'Reilly (ORLY) lower.
• Consumer staples were higher on the day, despite the strength of our currency. 
• Consumer discretionary businesses, particularly retailers, were the "world's fair." The advance in retailers was broad-based.
• Money center banks sold off, though regionals advanced, and they should have dipped in light of the continued yield flattening discussed in my opener.
• Life insurance stocks also dropped -- not surprising in the two-day drop in the yield on the 10-year U.S. note.
• Old tech was hit with profit-taking despite a brokerage raise on Microsoft (MSFT).
• iShares Nasdaq Biotechnology (IBB) was flat, but there was divergent performance within pharma/biotech. Allergan (AGN) spit the bit, but Mallinckrodt (MNK) ramped on a beat and looks like a "Saturday Night" horse. Valeant Pharmaceuticals (VRX) continued to look like a "Tuesday Night" horse.  
• Comcast (CMCSA) and Disney (DIS) lagged; they are two of my favorite shorts.

I initiated European shorts today and added to some of my favorite shorts.

I established a small long in Best Buy (BBY) this afternoon.

I added to Macy's (M).

This afternoon I pressed my shorts in European ETFs, Disney (DIS), Berkshire Hathaway (BRK.B) and iShares China Large Cap (FXI).

I've added to my contrarian long of Macy's (M) today.

The shares have gotten a boost from an improving retail sector and a positive mention over the weekend from Barron's (log-in required). (Click here to read the case I made earlier this month for buying the stock.)

I'm convinced that private-equity firms could be circling Macy's after the retailer's sharp share-price decline.

That doesn't mean a deal will definitely occur, but the company's intact franchise and real estate values should provide some security and limit the downside as management begins to execute a recovery strategy.

Add "Peak Speculation" to the long list of market "peaks" that I see.

Shares of KaloBios Pharmaceuticals (KBIO) rose more than $26 earlier this morning to hit nearly $46 a share before dropping back somewhat. (Click here to see the intraday chart.)

Talk about "Peak Speculation"! Or better yet, maybe "Peak Crazy"!!

I'm taking a long in Best Buy (BBY) at $30.71 this morning.

As discussed last week, I think the shares represent good intermediate term value. I'm starting small, though.

I wrote last week that it might be a good time to sell European equities. 

Well, I'm taking my own advice this morning and shorting European markets via ETFs.

I shorted the iShares MSCI Germany ETF (EWG) at $26.78, the iShares MSCI United Kingdom ETF (EWU) at $17.14 and the iShares MSCI France ETF (EWQ) at $25.09.

But at least initially, I'm only shorting them all in a small way.

Morning musings from Sir Arthur Cashin:

"Stocks back to reacting to the moves in crude. Fed discount-rate meeting is at 11:30 p.m. ET. No one expects anything to really happen, but it's been hyped enough that if it adjourns with no action, it could spark a mild relief rally."

"Someone told me long ago

There's a calm before the storm,

I know; it's been comin' for some time.

When it's over, so they say, it'll rain a sunny day,

I know; shinin' down like water."

-- Creedence Clearwater Revival, Have You Ever Seen the Rain?

If you think that this rally is picture perfect, I have a bridge to sell you in Brooklyn.

Economic news and corporate profits matter, and so does market breadth. Healthy bull markets have broad participation, but unhealthy ones have narrowing participation.

Here's a look at both the technical and fundamental issues that I see facing the market:

The Technicals: The Rally Has Bad Breadth

The best gauges of market breadth are the advance/decline line and the number of stocks hitting new 52-week highs.

Strong bull markets exhibit bold cumulative advance/decline lines and expanding 52-week highs, which confirm the highs reached in the broad indices (where large-capitalization stocks dominate). But weak bull markets show breadth that diverges from the big indices on these two measures, failing to confirm the new highs.

To measure this accurately, analysts often look at the relationship between an index's equal-weighted and capitalization-weighted versions. A rising relative line between the two denotes a healthy market, while a declining line means a few large-cap stocks are driving the advance.

This year, the New York Stock Exchange's common-stock-only advance/decline line peaked in May and lagged during the market's recovery from late-September lows.

Moreover, new NYSE 52-week lows have eclipsed new 52-week new highs for some time, as you can in the chart below (which is a bit small, but shows new lows in purple and low highs in black). This is a signpost of underlying weakness:

NYSE-52-Week-Lows-vs-Highs-Chart

Source: StockCharts.com

View Chart »View in New Window »

We can also clearly see a declining trend if we compare the S&P 500's equal-weighted and cap-weighted versions. This shows that the index's large-cap components have outperforming their smaller brethren since mid-April -- and remarkably, still made new lows in the face of a 12% recovery in the overall S&P 500:

This raises the question of whether investors should chase the TFANGs or the NOSH -- Nike, (NKE), O'Reilly Automotive (ORLY), Starbucks (SBUX) and Home Depot (HD). These stocks could eventually get defanged because the rest of the market might be unusually vulnerable to a correction.

Large-cap quality holdings might work for a longer time. But without support from the majority of lesser stocks, attrition seems likely to eventually take a toll on the market's current leaders. As the old saying about Wall Street's traditional "Santa Claus Rally" goes: "If Santa Claus should fail to call, bears may come to Broad & Wall."

The Fundamentals:  Good News is Great, Bad News Is Even Better?

The fundamental front shows concerns about punk domestic economic data, as seen in weak retail sales, a manufacturing contraction and a possible peak in housing and autos. We also see the prospects for moderating operating profits, slowing Chinese and Eurozone growth rates and a new multiyear low in high-yield bond prices.

On that last point, high-yield bonds are definitely acting "junky." This chart amplifies just how significantly weak the sector has been this year:

CCC-rated bonds have underperformed BBs over the last 12 months by 700 basis points (and by over 450 basis points ex-energy). There are only three previous instances of such deep underperformance. Two coincide with the mature credit cycles of early 2000 and early 2008 and one was a "false positive" in late 2011.

On the point of slowing global economic growth, Goldman Sachs recently opined that the U.S. economy's natural state has deteriorated from the past and "will remain lower for longer." Indeed, some seven years of monetary easing have served to weaken the economy to the point where secular-growth prospects might be nearly half of what we experienced over the last three to five decades.

Deutsche Bank goes one step further, arguing that after decades of bubbles, reducing the equilibrium real rate of federal funds serves as a negative to growth:

"The real case for policy error -- equilibrium short real rates may be below zero. There are two interpretations of the macroeconomic data that have vastly different implications for the effect of imminent rate hikes. The first is the 'conventional' view, which the Fed subscribes to. This view posits that the short-term real equilibrium rate is around zero. Since the nominal funds rate is at the zero lower bound, policy is accommodative, and this is why the labor market has improved rapidly. Inflation has not picked up because it as a lagging indicator. ...

The alternative view is more worrying. In this view, the equilibrium nominal rate is at present much lower than the Fed thinks, and the equilibrium real rate is meaningfully negative. Policy at present is not very accommodative, and to the extent that it is, inflation is actually running above its equilibrium level, which is close to 1%. ...

This is the important policy-error scenario, because even a very shallow path of rate hikes might drive the real fed funds rate well above the short-term equilibrium real rate, further depressing demand. It is then plausible that the economy would be driven into recession, and the Fed would quickly be forced to abort the hiking cycle."

-- Dominic Konstam, Deutsche Bank

Moreover, there is simply too much debt. Unconventional monetary policy simply expands the debt load and  makes the U.S. economy extremely vulnerable to an interest-rate hike. So, the Fed is trapped.

Meanwhile, the conspicuous flattening in the yield curve is another possible signpost of slowing domestic economic growth and/or a Fed policy error:

Source: Zero Hedge

The Calm Before the Storm

The bottom line: The "Ah-Ha" Moment, where investors lose faith in central bankers, might be ever closer at hand. Both the technicals and fundamentals are conspiring to form a possible toxic market cocktail.

Be alert to foul weather ahead. As Creedance Clearwater Revival once sang: "Sun is Cold and Rain is Hard."

My view of the mega-merger announced this morning between Pfizer (PFE) and Allergan (AGN) is that at the minimum, there will be some headline risk.

Beyond the good dividend yield, I don't find the new company particularly appealing as measured by pipeline or secular-earnings growth prospects.

Pfizer (PFE) and Allergan (AGN) have agreed to merge in a $155 billion inversion deal.

Here are Sanford Bernstein's comments on the transaction:

"Allergan and Pfizer have officially announced they are merging, and Tim Anderson and Ronny Gal review the details, which are broadly in line with our expectations. We think what the deal yields is a larger PFE, but with a lower tax rate.

In the all-stock deal, AGN shareholders will receive 11.3 PFE shares, implying an AGN price of $364 a share, according to Friday's close. PFE is paying  about 7% less for AGN than what we had been expecting, which is a positive for PFE shareholders and somewhat of a disappointment to AGN shareholders. According to our survey last week, they were expecting  around $390 a share.

Other disclosed terms are very much in line with PFE guiding for earnings-per-share accretion of about 20% in the out years. Although it can be debated whether the deal makes strategic sense, we argue PFE is paying a lot just to lower its tax rate but think fair value of PFE plus AGN (either alone or split up) is more than $40."

Peter Boockvar rounds up oil, copper, bonds and overseas manufacturing this morning:

"Oil has reversed by about $2 from its early morning lows after Bloomberg headlines hit the tape saying 'Saudi Ready to Cooperate with OPEC, Non-OPEC for Stable Prices' and 'Saudi Gov't Ready to Do What It Takes for Stable Oil Market.' I've seen no other details. The news also reversed higher the S&P futures, which on some days are correlated to the price of oil and sometimes not. Over the past year, it certainly has not been, as oil has fallen by 60% and the S&P 500 is just off record highs. Let's be honest, oil prices have basically been only correlated to energy stocks over the past year and a half.

Copper is down another 1.5%, lower for the 12th day in the past 14, and the 7-day Relative Strength Index is down to 3 in a range of zero to 100. Bloomberg has data back to 1988 and there has not been a more oversold condition in this 27-year time frame. I don't think I've ever seen an RSI this low in any asset class. Note that this measure of oversold is only a short-term indicator.

The U.S. 2-yr note yield continues higher as the reality of a very likely rate hike on December 16th keeps sinking in. At 0.935%, it's at a fresh 5-1/2-year high vs. 0.85% just one week ago and vs. 0.62% on October 27th, the day before the last FOMC meeting. As the 10-yr yield is higher as well today, the 2s/10s spread is little changed at the lowest level since April.

The first look at the November Eurozone manufacturing and services composite index saw it rise to 54.4 from 53.9, and that was slightly above the estimate of 54.0. The index is at the best level since May '11 and was driven by Germany and some of the periphery countries, as France saw a decline m/o/m likely due in part to the terrorist attacks. On a component basis, employment, new orders and backlogs led the gains. Bottom line, according to Markit was this, 'The PMI shows a welcome acceleration of eurozone growth, putting the region on course for one of its best quarterly performances over the past 4-1/2 years. The data are signaling GDP growth of 0.4% in the closing quarter of the year.' In light of these data and a core rate of inflation at more than a two-year high, Mario Draghi's strong desire for more QE and a deeper below-zero deposit rate smacks of panic and desperation and certainly not prudence. The euro is lower modestly as helicopter Draghi is trumping the data."

Some important reads to check out this morning:

• Barron's highlighted Macy's (M) over the weekend (log-in required) as an attractive buy.

• Reuters says the Bank of Japan will publish new indicators that show prices rising in the Asian nation.

• The Federal Reserve will today consider hiking the discount rate. Minutes from the Fed's September discount-rate meeting showed that eight governors favored such a move according to Reuters. 

• The New York Fed says subprime auto loans have hit a 10-year high, raising concerns about defaults. Edmunds.com already reported back in August that used-car prices hit an all-time high during the second quarter. Meanwhile ...

• ... UPI quoted the New York Fed as saying student-loan defaults have also risen. 

• San Francisco Fed President John Williams said over the weekend that the central bank, according to Reuters.

• Is the market about to get de-FANG'd? Market watcher (and former Reagan administration bigwig) David Stockman weighs in.