9:00am (EST)

“The slow start by the bulls was to be expected as the zombies wandered their way back from the Thanksgiving holidays but it didn’t take long before the finger-pointed started.  We hate talking politics so let’s keep this short.  The red zombies felt the proposal by the blue zombies and Tim Geithner on Friday was a joke. 

The plan called for $1.6 trillion in new revenue, $400 billion in entitlement cuts, $50 billion in infrastructure spending, and the best one of all…the power for the head zombie to increase the debt ceiling whenever he wants.  Of course, Mr. G was laughed out of the room and shortly after a “stalemate” was declared.  The red zombies are against tax hikes and want more spending cuts but they are expected to agree on higher tax rates on the top 2% of America’s wealthy at some point.

We have said a deal would be announced by December 21st because the zombies will not want to work one minute past a 2-week vacation until after the New Year.  If talks continue to stall, and they likely will, as long as the bottom of the uptrend channels hold the bulls should be good to go.  If there is no deal by yearend, then we could see a 5%-10% pullback.    

Wednesday’s action saw the Dow rise and fall 100 points in the same session for the first time all year but it remains to be seen if it was THE bottom.  We called the pullback perfectly in mid-October and we said a few weeks ago the indexes were ready to bounce off the Fibonacci retracement levels following the test to support.  They have recovered a little more than half and a continued rally could lead to a 100% retracement or a test of the 52-week highs.

December is usually a bullish month for the market so history is on the bulls side.  Although the rhetoric is negative, the price actions in the indexes are pointing to a deal getting done.  Over the past 30 years, December has been the strongest month for the market with average gains of 2%.  We also have the “January Effect” in play that will start in mid-December and is usually a time frame where the small-caps outperform the big-cap stocks through January.

Given the time frames of when we expect a deal and the normal bullish setup for the January Effect to play out, we could have a mini, volatile trading range over the next few weeks.  At least that is how we see it until a nice yearend rally takes shape.  Remember, the “Santa Claus” rally doesn’t start until after Christmas and when the slick-talking pros miss the action because they are on vacation so be patient. (from 12/2/2012  Weekly Wrap)…

The market powered higher for the third straight week, although Tech was weak, as the bulls held support and continued to climb a “cliff of worry”.  It was another wasted week at the White House as the zombies dragged their feet and got absolutely nothing accomplished.  Some of them even headed out early as nearly all of them are only built for 3 and 4-day work weeks.

Despite the negative talk and the uncertainty of a deal NOT getting done by the politicians, the bears had trouble cracking support as economic news helped keep the faith in an economic recovery.  If only the zombies would get out of the way.  

The end result was a trip back to the top of the trading range we said would occur since the November lows and we can expect more of the same this week.

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