Any 'Sell-the-News' Would Be Short-Lived

A debate seems to be emerging over whether the market will sell the news on a deal out of Washington. Shouldn't the answer be, "Where will the market be trading when the deal is inked?" If it's trading right around the current levels, then my guess is whatever decline we get -- if we get one -- will be short-lived. The reason? The complacency is gone from the market, and "sell the news" works best when there's complacency -- when everyone is loaded up on long positions.

The only sign I can point to that indicates complacency is that the Bloggers sentiment survey now shows a mere 22% ratio of bears. You might recall that this proportion was 19% at the July highs and nearly 55% at the August lows. So this metric has been a great contrarian tell.

However, we do not see complacency in the put-call ratio. After reaching 130% last Wednesday, the readings have remained in the 90s. That fails to show a total acceptance of the rally at this juncture, even though the talking heads on television all say it's clear sailing now.

In early August we saw the equity put-call ratio dip to 49% just before that late-August swoon. In mid-September we saw back-to-back readings in the 40s on this indicator just prior to the high resulting from the Federal Reserve's decision not to taper stimulus. We even saw it get down into the 40s on Sept. 26, just before the fear-of-shutdown-triggered decline arrived.

This indicator is not the sole arbiter of complacency, but it has been a good tell thus far. It dipped to 59% Monday -- its first trip under 60% since the rally began -- so the fear is surely dissipating. But it has not yet shifted to complacency among the options players.

As I write this Monday evening, various news outlets are reporting that Washington is on the verge of a deal to end the shutdown. So we'll have to see what sort of giddiness that news -- if true - brings to the market Tuesday.

In the meantime, the indicators didn't change much after the market opened Monday down and clawed back upward. Breadth was good, but nothing to write home about. The Nasdaq is now 4 points away from making a higher high, and cumulative volume is still far below the peak reading.

The number of stocks making new highs moved up -- but, again, the number was still far lower than the last time the market was trading at current levels. Here, again, the true test would be if we see a deal-inspired rally and if fewer than 240 Nasdaq stocks reach new highs to accompany that move, even with a higher high in the index. If that happens, it would constitute a failure. So would a reading of fewer than 400 new highs -- what we saw in July. But let's deal with the first hurdle of the September peak reading.

The market has worked off much of the short-term oversold condition, but the Oscillator is not showing an overbought condition quite yet. The 30-day moving average of the advance-decline line, though, is reading as overbought. So let's see how giddy folks will get at the sign of a deal.

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