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Volatility on Wall Street this Week

The S&P 500 moved above 1,400 on 5 days of gains last week, this week traders are taking some of those profits off of the table and will take more off if they sense trouble during negotiations in Washington DC over tax hikes and spending cuts that are the Key focus, we saw a good example of that Tuesday after US Senator Harry Reid, remarked about his disappointment so far, and they are just jousting now.

US President Obamaand US congressional leaders are expected to discuss the manner to reduce the budget deficit and avoid the “F-Cliff” of automatic tax increases and spending cuts in Y 2013 that will likely drive the economy into recession, we all know that the markets can react on politicians comments with wild swings.

One problem that I see is that the CBOE Volatility Index .VIX, known as the VIX, a 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 MA at its lowest in 5 yrs and looking like no one is really worried, but the VIX could spike if dealings in Washington begin to get edgy. And now the Republicans have stated they have the leverage over the White House, ie. the Debt limit.

Short-term we have the fear factor and the chaos factor, and that means volatility for the stock market

Insurance is cheap, Long the VIX and Short the market the way I see things now, The upside risk is an across the aisle hand shake, the market goes crazy, and we could see a 5% run in the S&P 500 exaggerated by the short covering.

The odds that the economy going over the Cliff are being touted at 5%. Savvy observers agree that a deal will be stuck, and that will refuel this rally we have been in since June.

It will be interesting to watch as the Democrats and Republicans vigorously defend their campaign promises made during the recent election.

Washington Liberals want tax increases on the wealthiest Americans and to protect the progressive advances in healthcare.

Conservatives want deep cuts in entitlement programs for the welfare state, and a widening of the tax base to raise revenues without raising tax rates.

The turmoil in the Middle East and unresolved issues in EU over just how to rescue Greece add to the uncertainty and then more volatility comes into the scene.

New home sales for October, due Wednesday, and October pending home sales data, due Thursday, are expected to show a stronger housing market.

Other data this week include the Chicago Purchasing Managers Index Friday.

At last Friday’s close, the S&P 500 wrapped up its 2nd-best wk of the year with a 3.6% gainer.

Encouraging economic data this week is confirms that regardless of all of the Fiscal Cliff talk and what it could bring, some analysts are firm in their belief that the market’s fundamentals are solid in here.

On the year, the Standard & Poor’s 500 Index is + about 12%.