Traders Still See Volatility Ahead

Volume has been light and stocks have traded in a narrow range since last Tuesday. Despite the low volatility, the Volatility Index has been little changed in the past two weeks, indicating that traders still anticipate elevated levels of volatility in the coming months.

Given the renewed geopolitical issues, oil was surprisingly flat for a good part of the day, though it did rally late in the day. Energy stocks were the market leaders.

Real estate investment trusts (REITs), which have rallied since the November lows, were down 5 to 10 percent today on concerns about debt refinancing. Office REIT SL Green down 4 percent as they cut their dividend almost in half to preserve capital they will need to pay down debt. Mall owner Macerich was also weak on a WSJ article that was cautious on the recent rally in mall REITs.

Retail-oriented stocks like Gamestop , Liz Claiborne , JC Penney , and Jones Apparel were weak as there was little sign of a last-minute holiday rush.

Traders have been mentally out of 2008 for the past couple weeks, trying to figure out January. There have been several arguments made for a January rally:

1) cash accumulating on sidelines (but this is disputed by many, who note that all we have seen is institutional money market funds with higher cash levels)

2) low valuations for stocks

3) stimulative fiscal and monetary policy

The stimulus package that is coming is the real X-factor for stocks. The question is what kind of stimulus is coming. In order of their biggest influence on stocks, traders say the stimulus package should:

1) cut income taxes (far and away the number one choice--traders note that's what helped the economy in 2002)

2) Fed buying more mortgage backed securities

3) lower mortgage rates/downpayment assistance

The two biggest concerns:

1) additional fund redemptions on Madoff aftermath

2) consumer won't spend, despite stimulus packages; simply pockets gas and/or mortgage savings

Questions? Comments?