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Fed hangover: Is the taper-triggered rally over?

Stocks rallied after the Federal Reserve finally pulled the trigger and announced plans to start tapering. But a day later, the bloom is off the rose and the major indexes have been down most of the day — and, I think, rightly so.

Why? Because the market isn't convinced that the economy is ready to go it alone.

As the news unfolded, the Fed made it very clear that the taper was a "mini amount" and that interest rates would remain low for longer than expected. Essentially, they said: "We are not going away just yet."

They outlined it methodically so that traders/speculators wouldn't overreact negatively. And, they got what they wanted: The Dow and S&P 500 ended at record highs. (Click here for the latest market action.)

Was the move a bit exaggerated? Yes.


(Read more: El-Erian: Fed begins taper—What happens next?)

Behind the rally were short-covering trader types who trade the "momentum" and algorithms that need to play catch up with swift changes in prices. The longer-term asset manager doesn't react to every headline just to react. And since we have been consumed with Fed policy for the last six months, the longer-term fund manager has made himself /herself comfortable with the range of outcomes. Listen, they get paid to manage the risk, right? They get paid to be proactive not reactive. So, the action yesterday was the noise created by the trader/speculator/high-frequency algorithms.

That being said, I think this was the big move for the year. I think from here, the market levels off so investors/traders can dissect and digest the news and then re-assess. Technical levels that define support and resistance remain intact and the market continues to adjust to the new reality. I don't expect the market to make a major move either way for the rest of the year. I do think that traders will struggle to help the market close at 1800 or above to set the tone going into the new year. 1800 is nothing more than psychological but, like food, it's all in the presentation!


(Read more: Will taper set the stage for a Santa rally? Traders hope so)

Expect the new year to be a return to "normalcy," where we see the market return some 8 to 12 percent — I would expect the first half of the year to be volatile as investors deal with continued Fed tapering, political morass and earnings reports that continue to miss on the top line, yet grow earnings through cost cutting, plant closures and fancy accounting. Jobs,health-care costs, and housing will remain key issues on the minds of all Americans as we enter the midterm elections, while we watch to see who throws their hat in the ring for the 2016 presidential election. The second half of the year will be marked with an improving European economy that will signal a return to "global normalcy" as investors make investing decisions more on fundamentals versus artificial stimulus.

Happy New Year!

(Read more: Ding ding: Taper tantrum, round two?)

—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.

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