For Stocks, The Fuse Is Lit

Stocks ended the day roughly flat, with the Dow (INDEX: ^DJI  ) and the broader S&P 500 (INDEX: ^GSPC  )  up just 0.03% and 0.17%, respectively. Note that, despite the fact that Mr. Market finally found his footing after a dismal post-election performance, the VIX Index (INDEX: ^VIX  ) did not retreat. It appears that investors are finally beginning to price the ambient uncertainty somewhat reasonably. (The VIX, which is based on S&P 500 option prices, is an indicator of the market's expectations for short-term stock price volatility.)

The macro view: In the wake of this week's election, the White House and Capitol Hill indicated that the 'fiscal cliff' is firmly on the agenda -- and none too soon -- as both House Speaker John Boehner and President Obama spoke publicly on the topic today. There's not even a blueprint for an agreement yet, but the fact that there appears to be political will to sit down and find a compromise is encouraging. Nevertheless, investors need to be aware that, given the constraints of the Congressional calendar as the year winds down, averting the fiscal cliff will require a determined effort from politicians, and will likely to go down to the wire. Expect the fiscal cliff to be one of, if not the dominant factor, driving a schizophrenic 'risk-on/ risk-off' market through the end of the year.

Naturally, some stocks are more exposed to this type of political risk than others. I happen to think the fiscal cliff poses an existential tail risk for mREITs that depend heavily on wholesale financing, including Annaly Capital Management (NYSE: NLY  ) . If you're looking for a comprehensive assessment of Annaly's risks -- and its upside -- click here to receive the Fool's premium report on the shares, which includes 12 months worth of updates.


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  • Report this Comment On November 10, 2012, at 9:09 AM, thogshead wrote:

    About "despite the fact that Mr. Market finally found his footing after a dismal post-election performance, the VIX Index (INDEX: ^VIX) did not retreat." if anyone is interested knowing how and when VIX volatility will change, Volatility Research has come up with a pretty good way to predict VIX “fear guage”

    volatility using NYSE VXX:

    http://www.sites.google.com/site/VolatilityResearch/

    The klinker in this market-woodpile is VIX volatility, and this 11-month rally may have been a house-of-cards.

    We’re in the lull before the Perfect Volatility Storm.

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