Breakout

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Stocks Slide from 5-Year High as Traders Embrace the Fail Mantra

Breakout

As demoralizing as two months of fiscal cliff negotiations were, the stock market had been able to uniquely see through the stand-off and continually move higher. The uptrend, of course, culminated last Wednesday, when markets gapped higher in the first minute of trading of the new year — notching up 90% of a short-term gain in the blink of an eye. If you missed that initial minute of action, you were sunk. And yet, by many accounts, you're about to get another chance to enter an overbought market.

"I think we'll test [1475 on the S&P 500], but I think we're going to hit too much resistance and then back off," says Kenny Polcari, a director at O'Neil Securities, in the attached video. "I'm not not saying we're going to crash," he adds. "We're probably just going to churn here and move lower first."

In a note to clients this morning Jeffrey Saut, chief investment strategist at Raymond James, echoes this pullback prediction saying: "If I could script it, I would look for an attempt to challenge the September 2012 intraday reaction high of 1475 this week. That attempt should fail, just like the multiple attempts we suggested it would take to travel above the 1420 - 1430 resistance zone on the way up. If correct, the failure at 1475 should cause a pullback into early February, which should be bought."

It's not only technicals that are fueling this change of heart and direction, Polcari says the reality that the so-called fiscal cliff deal was really no deal at all has started to sink in and "you get the sense that the market is looking for bad news."

And the first place it may find it is earnings season. Even though low expectations should make for many positive surprises, Polcari says a cloudy climate for forecasting will continue to weigh on stocks — to a point. Probably later this month or in early February is the point at which the push to 1475 could come back into play.

In the meantime, he and many other investors are easing off an overbought market that they say simply got ahead of itself in a moment of glory last week.

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