Headline Risk to Stocks is Heightened With Russia Probe

 | May 19, 2017 | 4:31 PM EDT
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The indices were rolling along without a worry in the world until a headline hit at 3 pm ET indicating that a high level White House official was a potential target of the Russian probe. The market reacted quickly and gave back a big chunk of its gains.

Until this week, the market has had not reacted much to the political battles in Washington. Investors have stayed generally positive about the potential for some new fiscal policy and tax reform in particular. The other stuff like the Comey firing has been a sideshow that hasn't had any lasting impact.

What changed this week was that there is now some concern that this Russian matter will be enough of a distraction to slow down progress on tax policy. Treasure Secretary Mnuchin tried to reassure the market that was not the case and the helped the indices bounce back from the hard hit that it suffered on Wednesday.

The market was doing a pretty good job of moving on but the headlines form the Washington Post this afternoon make it clear that we are going to continue to hear comparisons to Watergate. It may be an exaggeration, but this is a market that has been ripe for a correction for a while and this news is a convenient excuse.

The market suffered some technical damage this week but the bulls were working hard on repairing it. The weak close undermines their efforts but there clearly are some folks who are anxious to buy dips.

The big question for next week will be whether the market is going to react more to these stories out of Washington. There is no doubt that there will be more stories like the one from the Washington Post this afternoon but will the market continue to care? It is going to take many months for the special prosecutor who was appointed this week to do his job, but there is going to be endless speculation about what he might find.

The market's problem is that it is already vulnerable to a correction and the political news will make it easier for it occur. The bulls aren't going to give up without a fight, but the bears have gained ground and are exerting some pressure. Be prepared for more volatility.

Have a great weekend. I'll see you on Monday.

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