Summary: Markets needs to hold current levels, especially in the two leading indexes (SPY & QQQ), and hopefully drag the lagging market internals back into positive mode, though the debt-ceiling issue may provide continued volatility and downward pressure until resolved.

Risk On

• Very mixed picture in the indexes after the Fed induced sell-off mid-week. The Nasdaq held its 50-Day Moving Average and remains in a strong positive bull phase. S&P closed right on its 50-Day Moving Average. S&P got oversold on price and real motion. (+)
• With three out of the four indexes down for December, seasonally the markets tend to be positive towards the end of December and we could see a year-end rally. (+)
• Market internals as measured by the McClellan Oscillator for both the S&P 500 and Nasdaq Composite hit extreme oversold levels and started to bounce Friday, which supports some further mean reversion into year's end. (+)
• Huge volatility spike corresponding with the sell off Wednesday and Thursday. Historically these types of spikes suggest strength in the market going forward when they occur in bullish uptrends. (+)
• Growth continues to lead value by a wide-margin. (+)

Neutral

• Risk gauges are a strong neutral, despite the sell off. (=)
• The number of stocks above key moving averages deteriorated across the board, but on a short-term basis, it suggests some mean reversion. (=)
• Two critical members of the modern family, semiconductors and grandma retail, held up well. However, biotech, transports, and regional banks all closed either under their 50 Day Moving Average or below the 200 Day Moving Average for IBB. (=)
• Copper is holding onto critical lows set in July and October. Needs to hold onto these levels. (=)
• Gold got hit pretty hard on the sell off with momentum breaking down and Real Motion going into a bear phase (warning phase on price). (=)
• The dollar hit new recent highs, not surprising with the Fed indicating it is likely to reduce the number of rate cuts next year, which may put more pressure on equity markets. (=)
• In a strong market year, we are seeing some weakness in the final month relative to traditional seasonal patterns. (=)
• The dollar (UUP) is counter-trending to its seasonal pattern, most likely due to economic and geopolitical stress in the European Union and could be a headwind for U.S. equities. (=)

Risk-Off

• Despite the rally on Friday and even a bullish engulfing pattern in the DOW at very oversold levels, both the DIA and IWM closed in distribution phases and under post-election lows from early November, which could be viewed as a critical swing point. (-)
• Volume patterns were extremely negative in three out of the four indexes with only three accumulations days across the DIA, SPY and IWM in the last two weeks and confirming the negative price action. (-)
• The cumulative advance decline line has deteriorated below key levels from October. (-)
• The new high new low ratio for both the Nasdaq Composite and the S&P, as we pointed out last week, looks and remains negative. (-)
• Foreign equities continue to underperform the U.S. and broke down hard on Friday, further diverging from U.S. equities, which is bearish for both foreign equities and equity markets in general. (-)
• Aggs continue to outperform the S&P on both a short and long-term basis. Inflation persists and is affecting the Fed’s forecast for rate cuts. (-)
• The color charts, which is the moving average of the stocks above key moving averages, have been negative and further deteriorating, with the exception of IWM. (-)
• Rates, across the board, look under pressure, breaking below key support levels established through the summer and fall. Short-term, they may be subject to some mean reversion. (-)
• All the sectors were negative on the week, though technology ( a risk-on sector) was down the least along with Utilities (a typical risk-off sector). Real estate led the decline. (-)