There are three issues that are front and center: the fiscal cliff, Greece, and the Middle East.

Bulls are reading too much into the political “happy talk” from Friday. Republican and democratic leaders’ positions are deeply dug in. Listening to House member talking points away from the Rose Garden and you’ll note that there will be no compromise without tax increases on the wealthy (Pelosi et al) or spending cuts (Boehner). So despite Friday’s gathering reflecting goodwill and the best of intentions, nothing has changed. Indeed there is still a wide divide as noted via the AP here.

A Greece debt negotiation after many months and moving deadlines still has no resolution. Like the fiscal cliff in the U.S. they all would like things moved further into the future. As some point the music must stop. The troika hasn’t found any solution to grant the country funds to meet its obligations this week. The latest news from Greece included a Greek official stating the government won’t accept an IMF request of a 20,000 reduction in state workers.

In the Middle East the fighting continues and each side is looking for anhonorable cease fire.

There was some optimistic economic data in the U.S. as Existing Home Sales increased (4.79M vs 4.70M expected & prior 4.75M) and the Housing Market Index rose (46 vs 42 expected and prior 41). This is impressive but a glance at the chart below reveals the Home Market Index is only back to levels seen in 2001.

In other news the WSJ reported in a headline story Investment Falls Off a Cliff it was noted how much U.S. companies are cutting spending at the fastest pace since the recession. Of course this is an extremely negative story that bulls have shrugged-off believing instead the rosy Rose Garden scenario.

Stocks reacted positively to the overall tone from Friday’s Rose Garden “happy talk” rallying sharply on light volume. Those sectors up most (technology) were those that were weakest previously as a significant short-squeeze was put in play. Bulls must believe it’s better to pay more taxes than fret about spending cuts.

The dollar (UUP) was sharply lower while gold (GLD) rallied as Bucky dropped. Commodity (DBC) prices rallied across the board as the dollar fell. Oil (USO) was sharply higher also on the weaker dollar not to mention Middle East tension. Bonds (TLT) fell as it was “risk on” once again for markets.

As indicated volume was unimpressive given the scope of the rally but this is in keeping with many previous market melt-ups. Breadth per the WSJ was quite positive and may have approached a 90/10 in some sectors. One thing you can take to the bank is markets are no longer oversold.

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