RPT-Wall St Week Ahead: A lump of coal for 'Fiscal Cliff-mas'

NEW YORK, Dec 23 (Reuters) - Wall Street traders are going

to have to pack their tablets and work computers in their

holiday luggage after all.

A traditionally quiet week could become hellish for traders

as politicians in Washington are likely to fall short of an

agreement to deal with $600 billion in tax increases and

spending cuts due to kick in early next year. Many economists

forecast that this "fiscal cliff" will push the economy into

recession.

Last Thursday's debacle in the U.S. House of

Representatives, where Speaker John Boehner failed to secure

passage of his own bill that was meant to pressure President

Barack Obama and Senate Democrats, only added to worry that the

protracted budget talks will stretch into 2013.

Still, the market remains resilient. Friday's decline on

Wall Street, triggered by Boehner's fiasco, was not enough to

stop the S&P 500 from posting its best week in four.

"The markets have been sort of taking this in stride," said

Sandy Lincoln, chief market strategist at BMO Asset Management

U.S. in Chicago, which has about $38 billion in assets under

management.

"The markets still basically believe that something will be

done," he said.

If something happens this week, it will come in a short time

frame. Markets will be open for a half-day on Christmas Eve,

when Congress will not be in session, and will be closed on

Tuesday for Christmas. Wall Street will resume regular stock

trading on Wednesday, but volume is expected to be light

throughout the rest of the week with scores of market

participants away on a holiday break.

For the week, the three major U.S. stock indexes posted

gains, with the Dow Jones industrial average up 0.4

percent, the S&P 500 up 1.2 percent and the Nasdaq

Composite Index 1.7 percent higher.

This year - with just five trading sessions left in 2012 -

stocks have booked solid gains: The Dow has advanced 8 percent

so far, while the S&P 500 has climbed 13.7 percent, and the

Nasdaq has jumped 16 percent.

IT COULD GET A LITTLE CRAZY

Equity volumes are expected to fall sharply this week. Last

year, daily volume on each of the last five trading days dropped

on average about 49 percent, compared with the rest of 2011 - to

just over 4 billion shares a day changing hands on the New York

Stock Exchange, the Nasdaq and NYSE MKT in the final five

sessions of the year from a 2011 daily average of 7.9 billion.

If the trend repeats, low volumes could generate a spike in

volatility as traders keep track of any advance in the cliff

talks in Washington.

"I'm guessing it's going to be a low-volume week. There's

not a whole lot other than the fiscal cliff that is going to

continue to take the headlines," said Joe Bell, a senior equity

analyst at Schaeffer's Investment Research in Cincinnati.

"A lot of people already have a foot out the door, and with

the possibility of some market-moving news, you get the

possibility of increased volatility."

Economic data would have to be way off the mark to move

markets in the coming week. But if the recent trend of

better-than-expected economic data holds, stocks will have

strong fundamental support that could prevent selling from

getting overextended even as the fiscal cliff negotiations grind

along.

Small and mid-cap stocks have outperformed their larger

peers in the last couple of months, indicating a shift in

investor sentiment toward the U.S. economy. The S&P MidCap 400

Index overcame a technical level by confirming its close

above 1,000 for a second week.

"We view the outperformance of the mid-caps and the break of

that level as a strong sign for the overall market,"

Schaeffer's Bell said.

"Whenever you have flight to risk, it shows investors are

beginning to have more of a risk appetite."

Evidence of that shift could be a spike in shares in the

defense sector, expected to take a hit as defense spending is a

key component of the budget talks.

The PHLX defense sector index hit a historic high on

Thursday, and far outperformed the market on Friday with a dip

of just 0.26 percent, while the three major U.S. stock indexes

finished the day down about 1 percent.

Following a half-day on Wall Street on Monday ahead of the

Christmas holiday, Wednesday will bring the S&P/Case-Shiller

Home Price Index. It is expected to show a ninth-straight month

of gains.

U.S. jobless claims on Thursday are seen roughly in line

with the previous week's level, with the forecast at 360,000 new

filings for unemployment insurance, compared with the previous

week's 361,000.

(Wall St Week Ahead runs every Sunday. Questions or comments

on this column can be emailed to:

rodrigo.campos(at)thomsonreuters.com)

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