Don't Get Too Happy About the New Year

I guess I'm just an old worrywart. All of this happiness about the new year, the new Obama administration solving all of our problems (don't get me wrong, I am thrilled with everything I have seen and heard so far, but he isn't a magician), the new stimulus program, the new optimism, the calls for a bottom to the housing market, the anticipated breakout ... all that sunshine and happiness worries me.

I would feel much better (about the long side) if everything I heard was about how horrible the next few months was going to be, if the CNBC surveys showed that nobody, rather than everybody, believed the market would be higher in 2009. That's what I need to hear in order for me to get a good night's sleep.

On the technical front, I need to see people buying puts, not dumping them for a fraction of what they paid for them a couple of weeks ago. I certainly don't want to see the VIX at new multimonth lows, where it is today.

CBOE Volatility Index (VIX) New sell signal at multimonth lows OptionsXpress

I need to see the S&P 500 trading near support, not back up to its recent double-top highs, at resistance, now forming a possible triple top. I need the market to be oversold, not back to one of its most overbought levels of the past year. The McClellan Oscillator closed on Wednesday at a very bloated +278.8. That, in fact, was the third most overbought reading of the past year.

You wonder if the other two extreme readings were good times to buy? Those times were Nov. 4, Election Day, just before the Dow dropped over 2,000 points in less than three weeks. And after that, it was Dec. 8, when the oscillator closed at the +280 level. So was that a good time to buy? Don't think so. That was another top prior to a quick 600-point drop.

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At the time of publication, Schiller was long XLF, NDX, SPX, Russell 2000 and Dow mutual funds up to 50% levels. Short U.S. Bond Funds up to 20% levels.

Dr. Harry Schiller is a Registered Investment Advisor with the California Dept. of Corporations. He holds a Series 7 General Securities license as well as a Series 4 Options Principal license. He has been owner and editor of the Short Term Consensus Hotline since 1988. For more information, see www.harryschiller.com. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.