NEW YORK, Nov 23 (Reuters) - Volatility is the name of this
game.
With the S&P 500 above 1,400 following five days of gains,
traders will be hard pressed not to cash in on the advance at
the first sign of trouble during negotiations over tax hikes and
spending cuts that resume next week in Washington.
President Barack Obama and U.S. congressional leaders are
expected to discuss ways to reduce the budget deficit and avoid
the "fiscal cliff" of automatic tax increases and spending cuts
in 2013 that could tip the economy into recession.
As politicians make their case, markets could react with
wild swings.
The CBOE Volatility Index, known as the VIX, Wall
Street's favorite barometer of market anxiety that usually moves
in an inverse relationship with the S&P 500, is in a long-term
decline with its 200-day moving average at its lowest in five
years. The VIX could spike if dealings in Washington begin to
stall.
"If the fiscal cliff happens, a lot of major assets will be
down on a short-term basis because of the fear factor and the
chaos factor," said Yu-Dee Chang, chief trader and sole
principal of ACE Investments in Virginia.
"So whatever you are in, you're going to lose some money
unless you go long the VIX and short the market. The 'upside
risk' there is some kind of grand bargain, and then the market
goes crazy."
He set the chances of the economy going over the cliff at
only about 5 percent.
Many in the market agree there will be some sort of
agreement that will fuel a rally, but the road there will be
full of political landmines as Democrats and Republicans dig in
on positions defended during the recent election.
Liberals want tax increases on the wealthiest Americans
while protecting progressive advances in healthcare, while
conservatives make a case for deep cuts in programs for the poor
and a widening of the tax base to raise revenues without lifting
tax rates.
"Both parties will raise the stakes and the pressure on the
opposing side, so the market is going to feel much more
concerned," said Tim Leach, chief investment officer of U.S.
Bank Wealth Management in San Francisco.
"The administration feels really confident at this point, or
a little more than the Republican side of Congress may feel,"
he said. "But it's still a balanced-power Congress so neither
side can feel that they can act with impunity."
THE MIDDLE EAST AND EUROPE
Tension in the Middle East and unresolved talks in Europe
over aid for Greece could add to the uncertainty and volatility
on Wall Street could surge, analysts say.
An Egypt-brokered ceasefire between Israel and Hamas came
into force late on Wednesday after a week of conflict, but it
was broken with the shooting of a Palestinian man by Israeli
soldiers, according to Palestine's foreign minister.
Buoyed by accolades from around the world for mediating the
truce, Egyptian President Mohamed Mursi assumed sweeping powers,
angering his opponents and prompting violent clashes in central
Cairo and other cities on Friday.
"Those kinds of potential large-scale conflicts can
certainly overwhelm some of the fundamental data here at home,"
said U.S. Bank's Leach.
"We are trying to keep in mind the idea that there are a lot
of factors that are probably going to contribute to higher
volatility."
On a brighter note for markets, Greece's finance minister
said the International Monetary Fund has relaxed its
debt-cutting target for Greece and a gap of only $13 billion
remains to be filled for a vital aid installment to be paid.
Still, a deal has not been struck, and Greece is
increasingly frustrated at its lenders, still squabbling over a
deal to unlock fresh aid even though Athens has pushed through
unpopular austerity cuts.
HOUSING DATA COULD CONFIRM RECOVERY
Next week is heavy on economic data, especially on the
housing front. Some of the numbers have been affected by
Superstorm Sandy, which hit the U.S. East Coast more than three
weeks ago, killing more than 100 people in the United States
alone and leaving billions of dollars in damages.
The housing data, though, could continue to confirm a
rebound in the sector that is seen as a necessary step to unlock
spending and lower the stubbornly high unemployment rate.
Tuesday's S&P/Case-Shiller home price index for September is
expected to show the eighth straight month of increases,
extending the longest continuous string of gains since prices
were boosted by a homebuyer tax credit in 2009 and 2010.
New home sales for October, due on Wednesday, and October
pending home sales data, due on Thursday, are also expected to
show a stronger housing market.
Other data highlights next week include durable goods orders
for October and consumer confidence for November on Tuesday and
the Chicago Purchasing Managers Index on Friday.
At Friday's close, the S&P 500 wrapped up its second-best
week of the year with a 3.6 percent gain. Encouraging economic
data next week could confirm that regardless of the ups and
downs that the fiscal cliff could bring, the market's
fundamentals are solid.
Jeff Morris, head of U.S. equities at Standard Life
Investments in Boston, said that "it's kind of noise here" in
terms of whether the market has spent "a few days up or down. It
has made some solid gains over the course of the year as the
housing recovery has come into view, and that's what's
underpinning the market at these levels.
"I would caution against reading too much into the next few
days."
(Wall St Week Ahead runs every Friday. Questions or comments
on this column can be emailed to:
rodrigo.campos(at)thomsonreuters.com)