Beware of a Drop Ahead

The possibility of a settlement of the fiscal-cliff problem appears to be delivering diminishing returns for the market. Last week, the S&P 500 went to nearly 1440 before backing off, and on Monday the market quit at lower levels, even as more participants were becoming convinced that the problem would be resolved. It looks as though a settlement is now baked into the cake, so any new failure would probably be quite traumatic. 

In the meantime, the overbought condition we have been observing is getting even more extreme, as we see on the 21-day moving average of the Arms Index, below. It is at the most overbought level in two years. It suggests an intermediate term decline -- that is, one lasting weeks but not months. The short-term numbers are also overbought, so the slide could start very soon....223 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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