Volatility On The Horizon? Take Advantage Of The Fear

Lately stocks have had strong gains for two months straight after dipping in November. The Dow is now about 50 points from 14,000, which is a major psychological barrier. The Dow Jones ETF (DIA) is at 5 year highs at $139.23. But how did we get here? The economy has not really rebounded strongly. The market seemingly has been propped up by the actions of central banks. First, in late summer of 2012, the European Central Bank announced an unlimited short-term bond-buying program with some conditions, reinforcing its position to do all it can to save the euro. Following this, Ben Bernanke and the U.S. Federal Reserve announced a massive third round of quantitative easing, aka QE3, consisting of buying $40 billion in mortgage assets monthly until unemployment improves. Even the Bank of Japan recently hopped on board the central bank stimulus train and announced its own round of easing. Then the Fed recently made a new announcement to accelerate its debt-buying program, to spend another $40 billion to $45 billion a month in balance sheet expansion to replace Operation Twist. This action has been excellent for stocks. Now that the allure of central bank action is beginning to pass and there is talk of the Fed reducing its overly accommodating stance, earnings and economics reports are returning to the focus of investors. Many professionals believe earnings estimates are too high and will not be beat frequently this quarter and in future quarters. In addition there is the looming debt ceiling debate to contend with in a few weeks, which could cause volatility in the market to spike. Coupled with the fact that the United States is addicted to debt, there is a lot of opportunity for the market to sell-off. After all the action that.......READ MORE