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Rally's Low Volume Prompts Question: Whither Buyers?

November is just half way over and already the markets are worrying about December.

The theory, among stock traders and others, is that some investors have had such a good year that they are ready to shut the books and sit it out until 2010, creating a liquidity vacuum.

"There's somewhat of a debate...There is a concern about liquidity drying up in a meaningful way in December, but that is yet to be seen," said Morgan Stanley chief U.S. credit strategist Greg Peters. "There's a concern from bankers and syndicate folks that if you want to bring a deal you have to bring it soon."

For that reason, there's been a flood of corporate debt issuance this week, totalling $17 billion in investment grade in just two days. More deals are expected through the end of the week. Also on tap for markets Wednesday are the consumer price index, as well as housing starts and building permits, all at 8:30 a.m.

Tuesday's markets were fairly quiet. The so-called "risk trade" was out of whack, as the dollar rose, commodities rose, bonds rose and stocks rose slightly. Typically, the dollar trades countertrend to the risk assets, like stocks and commodities.

Whither Buyers?

The low volume nature of the nearly 8-month old market rally has been an ongoing concern, but now the absence of institutional players could be an issue.

Jack Ablin, CIO of Harris Private Bank, said he watches the action in the last half hour of trading for clues about the market, and he is getting concerned. "It used to be we lose ground in the morning and rally back in the afternoon. Now it seems we're losing steam in the last half hour. That's the time usually reserved for institutions," he said.

"It looks like a lot of the thrust form the biggest players is beginning to wane. The good news is because values are full, we're not stretched, it's not a bubble. I think there's enough support around the edges. That's why if we had anything, it would be a 10 percent correction at most, and an opporutnity for those on the sidelines to get back in," he said.

Morgan Stanley's Peters said there's a feeling that some funds could just sit out for a while. "My sense is liquidity will be choked down, but what I think you'll actually see is an up move. I think it could lend itself to a down trade or an up trade, but I think the tendency this time around will be an up trade, which is why you're seeing on the equities side, people start to traffic in the large caps and also a lot of options trades as well. It tells you liquidity is a concern, and they're also worried about a powerful move to the upside," he said.

Ablin said if there is a correction, it would most likely be early in the year. One of his favorite indicators is flashing a warning -- the Smart Money index, which subtracts the S&P 's move in the first half hour of trading from its movement in the last half hour of trading. The first half hour is mostly influenced by order flow from retail investors, while the last half hour is when institutions are active.

He said the index bottomed in October, 2008, and it is now beginning to weaken.

"I don't think we're in a bubble, but I would start to get a little more squeamish if this market goes up a lot.. We may have to wait until after year end. (for a correction) We actually could sees a little pop of upsurge at year end as some of these mutual fund mangers throw in the towel and square in positions for year end," he said.

"Maybe they do a flurry of buying and window dress the end of the year. That could provide a tail wind..that's my sense. It's sort of the 2010 let down affect," he said.

Credit Uncrunching?

There wasn't a lot of hoopla about it, but there was an ice-breaking deal this week that is in fact very important to credit markets.

Winterizing Your Portfolio - A CNBC Special Report
Winterizing Your Portfolio - A CNBC Special Report

CNBC's Steve Liesman Tuesday reported that the first commercial mortgage-backed securities deal in more than a year was completed, largely with private money. The $400 million Developers Diversified deal was underwritten by Goldman Sachs and Citigroup, and traders say it may help start a revival in CMBS.

The deal was the first of its type under the Fed's TALF program. The Fed-eligible portion of the deal totaled $323 million in triple-A rated 5-year notes. Of that, the Fed reported late Tuesday that it financed only $72 million, or about 25 percent, as private investors stepped up to take down the majority of the deal

"The $400 million dollar deal was the first one in a very long time, and it was dramatically oversubscribed," said Greg Peters, credit strategist at Morgan Stanley. "It looked rich to us relative to some stuff in the secondary market. So we think it will help boost secondaries."

Liesman said Industry sources said private investors, such as insurance companies, were attracted to how carefully the deal was structured for lenders. Liesman later said there's a debate in the market as to the extent to which the deal is an anomaly or whether it in fact creates a benchmark for how these type of deals can get funded.

Earnings to Watch

The stocks of regional banks, which are highly vulnerable to the commercial real estate market, were higher for a second day Tuesday. The KBW regional bank ETF was up 1.8 percent.

In another corner of the credit market, corporate issuers have been finding ready buyers for their debt. Last week, the total investment grade issuance was $23 billion and the total for all of October was $51 billion. The record month this year was May when $90 billion in investment grade debt was issued.

"There's an almost rush for the gates mentality. If you want to get it done this year, and lock it in..now is the time to do it when people have the focus, balance sheet to get it done," said George Goncalves, Treasury strategist at Cantor Fitzgerald.

Goncalves said a real test for markets will come next year when lower quality commercial mortgages and leveraged loans are rolled over. "The good stuff is clearing now. the question is what happens mid next year," he said, adding it could mean higher rates.

What Else to Watch

The earnings of several retailers - Whole Foods , Chico's, and B.J. Wholesale - are expected before the bell. The Limited reports after the close.

President Obama continues his visit to China. Treasury Secretary Tim Geithner and Small Bsuiness Administroat Karen Mills hold a forum on small business financning at 9 a.m.

Sweeter Offer?

The Wall Street Journal reported that Hershey and Italian chocolate maker Ferrer are discussing a possible join bid to rival Kraft's $16.7 billion offer for Cadbury.

— Questions? Comments? marketinsider@cnbc.

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