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3 things to watch before the end of 2014

OK, sports fans — Let's not over react. The last couple of weeks have been a bit interesting to say the least but it is not the end of civilization; the broader market is only off by 3.2 percent.

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Yes, we have seen oil collapsing — now down 47 percent off the summer highs — and energy names getting dragged out and beaten up as investors re-price current and future reality. Some energy-sector stocks are down as much as 50 percent, while the big names are off a more reasonable 15 to 25 percent. (Presenting one heck of an opportunity for the long-term investor and the short term trader).

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Add in the anxiety over what this week's Federal Reserve policy meeting will reveal, more worrisome macro data out of Asia and next month's European Central Bank policy statement and you have almost a perfect storm. So, what will the final two weeks of the year bring?

I think there are three broad themes that will dominate the news wires: oil, the Federal Reserve and the ECB. For the most part, Asia has already signaled the next move – both Japan and China prepared to ease further and, in fact, have already begun that process. So, since there isn't much in the way of U.S. macro data that is going to make or break anyone's planning, the focus turns to the much broader global macro data points that have the ability to create just a little bit of havoc.

The dominating story will continue to be oil and what the ripple effects may be. I mean look: The market had a swift mini correction in mid-October (not specifically tied to oil), wiping out just 10 percent of the index values across the board — enough to classify it as a correction but not enough to create a panic. Investors saw this as an early Christmas present and swooped in to scoop up all of the bargains created by this swift move lower, taking the markets back to an overbought condition.

This overbought condition suggested that everything was good in the world – as they say, "Nothing to worry about… move on… nothing to see here" — except, this was not the case. Oil would have nothing of it — nor would OPEC. So, in late November, the Saudis decided to turn up the heat — frustrated about the newfound competition in the marketplace that was now threatening their "bottom line." They made it clear that they were not happy. Oil traded lower — first to $60 a barrel, then piercing that level, moving still lower.

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Analysts are now coming out of the woodwork, creating a bit more anxiety with calls for $40 oil before the bleeding stops. Algorithms (not humans) reading the headlines have kicked into overdrive, causing the perception to, quite possibly, become reality.

Theme one: Keep your eyes focused on the oil chatter. It has the possibility to turn higher just as quickly as it shot lower. The high-yield (junk bond) market is already feeling the pressure as the speculation builds over the perceived coming defaults. That was made very clear by Stephen Schwarzman, CEO of BlackRock, last week at the Dealbook Investor Conference in NYC.

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Theme two: The Federal Reserve. The big question is: What will Janet do? (Expect a new Twitter trending acronym #WWJD). Cleary, the markets are worried about future policy initiatives, in light of the recent weaker European/Asian macro data along with global market instability created by weakening oil. So, will we see the language change? If so, does that mean that the Federal Reserve is not concerned about the meltdown in the oil patch along with difficulties abroad? Is the U.S. truly an island unto itself? I don't think so … so, I expect to hear the Federal Reserve change the language a little but continue to send the message that current policy will remain in place until such time that it doesn't. See how this is played? She has to get herself out of the corner without creating full-blown panic and I think she will do that.

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Theme three: The ECB. It is time for Mario Draghi and the ECB to set the record straight. Investors have given him and the European Union the final "hall pass." In January, investors will now demand real action — not just talk any longer. Any sense that the ECB is unable to pull the trigger will cause global investors to do it for him — taking the markets lower as they re-price the new "reality." This is something that none of the central bankers want to see, because a meltdown in Europe will metastasize across all market centers around the world creating that new "perfect storm."

Now, while I believe that the ECB will not falter, it is a clear wild card — one that may not come to fruition until the sun rises over the New Year but it will have investors on edge as we close out 2014.

Commentary by Kenny Polcari, director of NYSE floor operations at O'Neil Securities. He is also a CNBC contributor, often appearing on "Power Lunch." Follow Kenny on Twitter @kennypolcari and visit him at kennypolcari.com.

Disclosure: The market commentary is the opinion of the author and is based on decades of industry and market experience; however no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of O'Neil Securities or its affiliates.

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