Fiscal-cliff rumors were flying all over the place this morning, as S&P 500 Futures traded in a 10 point range prior to the cash market open. At 9:00, Speaker Boehner took the podium and stated that it was time to consider “Plan B,” a proposal to keep taxes at current levels for those making under $1 million per year. What looked like a stalemate situation between parties has actually led to a big rally in financial markets. In days past, such events would typically lead to a market selloff. However, it appears that this environment has subsided for the time being. At present levels, the Nasdaq is leading the charge, up 1.4%, with the Russell 2000 up 1.2% and the S&P 500 up 1% on the day. Bonds are selling off sharply, currently down over 1% on the day.
What’s particularly interesting about today’s market is the sharp selloff in gold. Currently, gold futures are trading near 1670, down about 30 points on the day. While the gold selloff is noteworthy, it’s especially interesting given the weakness seen in the U.S. Dollar. Commodities typically trade in an inverse relationship to the Dollar, so on a day like today — where the dollar index is down about 0.4% — you would expect strength in the commodities space. Despite dollar weakness, the only real strength in commodities markets is in crude oil and lumber futures. This relationship should be monitored closely going forward, as it has major macroeconomic implications.
CHART OF THE DAY
Instead of an individual stock chart today, I thought I’d pass along this chart of short interest vs. price action over the past two years. Rocky White from our QA department put this together, and it’s a good illustration of overall market sentiment. The red line is total short interest, in billions, of all stocks in the S&P 500. As you can see, it has been rising with the market. This means that even as more and more people are betting against stocks, they continue to move higher. Notice how the last two times short interest peaked near current levels, that led to big rallies in stocks. Don’t get me wrong, we’re a bit overextended in the short term, but until this level of short interest can come down it is going to be difficult for markets to sell off significantly.
WHAT I’M EXPECTING
We broke through the 1440 level on the S&P 500 today, and markets are digesting those gains as I write this. I would look for a move toward 1460 now, with the potential to break above the highs made in September. Yes, markets are overbought, but as you’ve likely heard before “Overbought can become more overbought.” I’ve noticed a great deal of disbelief toward today’s rally among active market participants, and these new potential shorts can add more fuel to the fire. I’d be careful initiating new long positions here and now, but dips should be bought until further notice.