The low volume of stock market trading exacerbates the impact of news on the market due to all the traders away from their desks taking Christmas holidays. The daily doses of bad news may lead to more down days than up days for the balance of the year, but the up days may be explosive enough to produce a Santa Claus rally. However, once 2012 arrives and optimism about a Santa Claus rally is no longer in place to prop up the market, look out below. The deterioration of European economies due to the debt crisis will be daily news, and the contagion will eventually spread to the U.S. The bi-polar volatility based on the day's new is likely to continue, only with more of a downside bias.
It is only a matter of time until a real bombshell hits. It may be from a run on a bank, a failed sovereign debt auction, or from a threat to oil supplies coming from the Mideast. However, a 500 point down day on the DJIA will likely occur sometime during the next 10 weeks. While I am not so rash as to short the stock market during the remainder of 2011 in the face of a potential Santa Claus rally, I am fearful enough that I am lightening up on my holdings. Today's rally has served as a good exit point. I will not start selling stocks short until the first week of 2012.