Kass: Fundamentals Befuddle

This blog post originally appeared on RealMoney Silver on Jan. 10 at 7:24 a.m. EST.

The U.S. equity market is at an important juncture.

Technicals are flashing green, but fundamentals remain solidly in the red.

Technicals

I closed "The Edge," my RealMoney Silver trading diary, yesterday with a post on the S&P 500 10-day put/call ratio, a good indicator of the current high level of fear and negativity.

S&P 500 10-Day Put/Call Ratio

Click here for larger image.

Source: Bloomberg

Other measures, such as many of Helene Meisler's oscillators, are at (or approaching) deeply oversold levels.

Consider that the KBW Bank Index (BKX Quote) is currently 24% below its 200-day moving average.

KBW Bank Index

Click chart for larger image.

Source: Bloomberg

That size discount to its moving average has been apparent only three other times in history (Oct. 7, 1998; July 23, 2002; Oct. 7, 2002). On all three occasions, the BKX was within a day of a major low -- only to rise by 33%, 25% and 28%, respectively, a month later.

Fundamentals

Stated simply, fundamentals stink.

Earnings expectations for most companies -- particularly for the financial sector (far worse than in 1998 and 2002) -- are clearly, in the fullness of time, worsening.

With the current conflict between improving technicals and deteriorating fundamentals, we are at a point in time when investment decisions are quite difficult as investors are impelled to answer the following question:

To what degree has the recent stock price decline discounted a likely recession in 2008-2009 and falling/disappointing corporate profits?

Unfortunately, this question is harder to answer than the riddle of the Sphinx.