Stocks’ rally set to run as fear fades

New York (Reuters): Europe’s sovereign debt crisis will still hang over global markets this week, but on Wall Street, investors will not be afraid to bet on stocks.

Wall Street has shown its ability to hold onto gains, or quickly recover from losses this week despite Europe’s debt woes, suggesting that investors are confident of a sustained rally.

“When things don’t fall apart on bad news, you know that the market is no longer vulnerable. The overall sentiment is pretty solid,” said Randy Frederick, director of trading and derivatives at Schwab Center for Financial Research in Austin, Texas.

The outstanding put-to-call ratio on index options, heavily focused on the S&P 500 benchmark, dropped from 1.32 last week to 1.29, showing bullish signs for next week.

The ratio, which is always greater than 1, is the primary hedging vehicle for institutional investors. The ratio rises with a market rally as the possibility of a pullback also increases.

“The ability (to not fall apart) is helping investors remain upbeat on short-term prospects for stocks. We may not see this continue until the end of January next year, but the month of December certainly looks encouraging.”

The CBOE Volatility Index or VIX .VIX, Wall Street’s so-called fear gauge, fell despite a decline in stocks earlier in the day as traders saw fewer reasons to buy protection.

The index, which usually moves inverse to the S&P 500 benchmark, strayed from the relationship and closed at its lowest since April.

The iPath S&P 500 VIX Short Term Futures exchange-traded note also notched a new year low of $41.51 on Friday. The ETN, which offers directional volatility exposure, is based off of the front two-month futures on the VIX.

“There is definitely a trend in the VXX to try to get short in the ETN,” said Dan Deming, a VIX options trader at Stutland Equities.

Fears that Europe’s debt crisis could spiral out of control have pushed stocks off two-year highs hit earlier this month. Last week, the S&P 500 was down 3 percent from November 5.

But the index recovered to the early November levels this week as fears were countered by a spate of healthy economic data and an upbeat outlook on consumer spending during the holiday shopping season.

“Europe is kind of its own play now,” said Jeff Roach, chief economist at Horizon Investments in Charlotte, North Carolina, adding that investors are starting to brush off the longer-term macro issues.

On Friday, stocks closed out their best week in a month with the Dow Jones industrial average .DJI up 2.6 percent, the Standard & Poor’s 500 .SPX up 3 percent and the Nasdaq Composite Index .IXIC up 2.2 percent, after shrugging off tepid jobs numbers for November.