Emanuel said he had expected a rally into year-end but the market's recent behavior is making him more cautious. "I personally have never seen volatility get crunched like this so early before Thanksgiving. It usually happens at the end of December or in August," he said.
Emanuel said he watches the 10-day realized volatility for the S&P 500, a reading of the close to close changes in the S&P over a 10-day period. It was at 3.38 Monday. "It's extraordinary. The 200-day moving average is 10.8," he said. "The range over the last two weeks have been the lowest they've been in aggregate in over five years."
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According to Emanuel, the reading may not be signaling a selloff but rather just limited gains.
"The market to us just feels like upside, rather than a setback. It feels like the upside is capped because you have this combination of low volatility and very complacent sentiment, and Japan tells you the problems are still out there," he said.
Stocks were boosted by big merger deals Monday but also held in check by the surprise news that Japan has fallen into recession, he said. Allergan is being acquired by Actavis for $66 billion, and Baker Hughes reached a $35 billion merger deal with Halliburton.
"If you look at the M&A announcements, it's very healthy. If you look at the activity in the healthcare sector, that sector has the most cash along with technology and they are going to be spending it," he said.
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More energy deals are also expected as oil prices continue to weaken. West Texas Intermediate crude closed at $75.64 per barrel Monday, off 18 cents. Natural gas, meanwhile, jumped 8 percent on cold weather to $4.34 per million BTUs.
What to watch
The producer price index is reported at 8:30 a.m. EST and is expected to show a 0.1 percent decline, but a gain of 0.1 percent when food and energy are excluded. TIC data, or international capital flows, is expected at 9 a.m. and home builder sentiment is at 10 a.m.
Earnings are expected from Home Depot, Dick's Sporting Goods, TJX, Medtronic and JA Solar before the open. PetSmart, Jack in the Box and La-Z-Boy report after the close.