Forget the Fed, here comes the Santa rally: Pro
Investors are gearing up to hear what the Federal Reserve has to say and though the Christmas rally has proven illusive so far, I think the rally back to the year's highs is coming.
Speculation is mounting that the Fed will announce a pullback but I remain firmly on the side that says any action by the Fed is unlikely in the final two weeks of 2013 notwithstanding the transition of leadership that will take place next month.
The Fed has gotten off of a "schedule" and they have worked hard at stressing that any reduction in stimulus depends on the economic outlook. Even Janet Yellen at her confirmation hearing said, "It is a work in progress."
You will hear the pundits tell you that this week defense is the name of the game. If the Fed announces a taper, then they expect bonds yields to surge and stocks to plummet.
I'm not so sure that stocks will plummet at all. A test lower to the S&P 500's 50-day moving average of 1753? Sure. And I have said that numerous times in the past three weeks. But even that only represents a 3-percent pullback off the highs — hardly a "correction." (And by the way..... we did test that level overnight last night.)
After Wednesday, expect investors to begin to wind down the rhetoric and turn their sights to next year. The large asset manager does not expect any huge move in the next two weeks, so unless we get a big surprise from the Fed, expect the market to churn and move toward the yearly highs before the final bell rings.
Are the markets pricing in a Fed announcement? The S&P did fall some 1.6 percent last week, while the CBOE volatility index (VIX) shot up 14 percent. The VIX is now up 29 percent from the November low.
Is it the strong economic data causing all of the nervousness? Strong economic data is a good thing — that signals that the turnaround is here. So why the tantrum? Well, it is the uncertainly. The lack of clarity or the perceived lack of clarity. In fact, I would say that the Fed has been quite clear so far. In fact, I think it is all of the noise that is created by the differing opinions within the Fed, along with Twitter, Facebook, and other social media that makes the market a bit skittish.
I believe longer term asset managers are alive and well — and will take advantage of any nervousness if trader types start to pressure the market. In fact, they are hoping that is what happens. Thus the bounce off the 50-day moving average this morning. Expect a bit more volatility this week as the market waits.
Friday also brings "quadruple witching," the quarterly expiration of four classes of options. Expect volatility as traders positions themselves for this event.
(Read more: Will the Grim Taper be a body blow to the wealthy?)
—By Kenny Polcari, director of NYSE floor operations, O'Neil Securities and CNBC contributor, often appearing on "Power Lunch." The author is not compensated by CNBC for this or any other written materials found on CNBC.com. 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.