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Market Outlook: Why Investors May Not Feel Very Thankful

Markets could see another volatile week as investors remain anxious about the "fiscal cliff" and watch escalating tensions in the Middle East.

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U.S. Federal Reserve Chairman Ben Bernanke speaks Tuesday. There is housing data Monday and Tuesday, and jobless claims and consumer sentiment Wednesday, ahead of the Thanksgiving holiday Thursday.

The week ends with a shortened trading day on Black Friday, the traditional start to the holiday shopping season.

Stocks mostly sold off in the past week, but closed higher Friday after congressional leaders made encouraging comments about negotiations on the "fiscal cliff." (Read More: Stocks End Higher)

The cliff is the expiration of taxes and other programs, and the start of automatic spending cuts that could deal a $500 billion blow to the economy, if Congress does not act. (Read More: Congressional Leaders Optimistic on Avoiding Fiscal Cliff)

The Dow was off 1.8 percent at 12,588 for the week, and the S&P 500 was down 1.5 percent to 1359.

"I think we waffle now until there's some generalized agreement," said James Paulsen, chief investment strategist at Wells Capital Management. "The problem we're going to have here is the Sandy data is going to be so bad, how do you interpret it … I think the combo is going to keep it hard to sustain much of a rally (in stocks). But I don't know how much we go down. Right now we've got almost an equal trade. It's almost as much a risk being in as being out."

Oil gained nearly one percent Friday, as Israel began mobilizing tens of thousands of soldiers and increased its air campaign on the Gaza.

Meanwhile, militants there sent rockets deeper into Israel, while Egypt's new government voiced its support for Hamas, raising concerns of a broader conflict. Brent crude, the international benchmark, rose to $108.95 a barrel.

Treasury yields fell as investors sought safety in bonds. The 10-year yield was 1.57 percent Friday, its lowest closing yield since Aug. 31.

Whither Stocks

Stocks are down about five percent since election day, on concerns President Barack Obama and the divided Congress will not be able to reach an agreement on spending cuts or on tax hikes. Republican leaders Friday again said that revenues could be part of the deal, and leaders from both sides made it clear they were willing to compromise.

Thomas Lee, JP Morgan chief equity strategist, said he thinks investors are taking capital gains, before an anticipated hike in capital gains tax rates next year. But the question is when do they reinvest.

"I think capitulation is taking place because people really had a Romney bet on. We've had 10 days to examine market reaction. I think we're probably two weeks away from the low," he said.

Bearish sentiment spiked to 48.8 percent in the past week to its highest level since August, 2011, according to the latest AAII Sentiment survey.

According to AAII, bullish sentiment, expectations the stock market will rise over the next six months, fell to 28.8 percent. Lee said when sentiment turns so negative, it often signals the approach of a bottom.

Econorama

Economic data, including a very negative Philadelphia Fed survey, weekly jobless claims and industrial production, all took a hit in the past week from super storm Sandy's impact on the East Coast.

RBS economist Michelle Girard said she does not expect this week's housing data to show that much impact from the storm, but data will continue to be murky because of it.

"The turnaround in housing had people feeling better about things, and now I think there's a worry back," she said.

The Northeast has accounted for less than 12 percent of total housing starts in each of the last six months, she said. Starts are reported on Tuesday.

"We're still thinking it's going to be an okay holiday season," she said. "We will see softer holiday sales because of a shift in wallet share, where people have to pay for repairs. Home Depot is a big gainer, but all the apparel guys are going lower. At the low end, in particular, you had all these hourly workers that lost work for a week and they're never going to get it back."

Holiday sales are expected to increase 4.1 percent, compared to a 5.6 percent increase last year, according to the National Retail Federation. More retailers plan to open Thanksgiving night to get a jump on Black Friday sales.

Girard said she will be watching Fed Chairman Bernanke's comments for any discussion Tuesday of what the Fed might do when its Operation Twist ends in December.

"Our view and the consensus view is they continue," she said.

In the minutes of its last meeting, released this past week, the Fed noted that some members favored continuing asset purchases.

Operation Twist involves the purchase of longer-dated Treasurys and the sale of the same amount of shorter-dated securities. Economists expect the Fed to continue the purchases but not sales. The Fed also is conducting a mortgage purchase program, in a third round of quantitative easing.

Bernanke, who speaks Tuesday at the Economics Club of New York, could also elaborate more on the Fed's effort to change its communications policy. The Fed has been discussing more definitively connecting its interest rate policy to specific levels for unemployment and inflation.

"We're not expecting much out of the Fed in December. The Fed, like the markets, like us, they're waiting to see what happens with the fiscal cliff. The data with Sandy and the fiscal cliff are almost meaningless … the data are going to be distorted," she said.

What to Watch

Monday

Earnings: Lowe's , Tyson Foods, Agilent, Brocade, Urban Outfitters .

1000 am Existing home sales

1000 am NAHB survey

Tuesday

Earnings: Hewlett-Packard, Best Buy, Campbell Soup, Chico's FAS, Hormel, Medtronic, DSW, Salesforce.com .

0830 am Housing starts

0900 am Richmond Fed President Jeffrey Lacker speaks

1215 pm Fed Chairman Ben Bernanke speaks at Economic Club of New York

Wednesday

Earnings: Deere, Donaldson

0700 am Mortgage applications

0830 am Initial claims

0850 am PMI manufacturing index flash

0955 am Consumer sentiment

1000 am Leading indicators

1030 am Oil inventories

1100 am Natural gas inventories

0100 pm $13 billion 10-year TIPS auction

Thursday

Thanksgiving Day

U.S. markets closed

Friday

0100 pm closing for stock market

Follow Patti Domm on Twitter: @pattidomm

Questions? Comments? Email us at marketinsider@cnbc.com

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC's Senior Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.