Jan. 2, 2013, 10:17 a.m. EST
By Nigam Arora
Our prediction that the fiscal cliff would be resolved has turned out to be partially right.
It is important not to get carried away with optimism because only one part of the three-part puzzle has been addressed. The three parts are: taxes, spending and the debt ceiling.
The fiscal-cliff deal only partially addresses taxes and totally kicks the can down the road on spending and debt ceiling. Republicans are on the record as ready to put up a stiff fight on spending and debt-ceiling issues. Democrats are on the record saying that they are still going to try to further raise taxes by closing loopholes.
All of these issues are supposed to be resolved in the next couple of months. Expect a more divisive debate ahead. As market participants realize the foregoing, the enthusiasm being seen this morning may wane. The fiscal cliff has only been superficially resolved, but the super cliff is still ahead.
Big institutional investors have been putting on risk (taking higher risk) in the wake of the last-minute fiscal-cliff deal. DJIA futures jumped 250 points before backing off. Notable strength has emerged in broad-based ETFs such as the SPDR S&P 500 ETF Trust, PowerShares QQQ Trust Series and SPDR Dow Jones Industrial Average ETF Trust. The largest stock by market cap, Apple has moved up to around $550. Strong rallies are in progress in Asia and Europe. Notable strength is being seen in a variety of emerging-market ETFs, as well as those for Germany, the UK, Italy and Spain.
Treasury bonds are falling. Popular issue iShares Trust Barclays 20+ Year Treasury Bond Fund is falling. Inverse ETFs, such as the ProShares UltraShort Lehman 20+ Year Treasury and ProShares Short 20+ Year Treasury are rising strongly. Apparently investors no longer seek the safety of treasurys.
Junk bonds are rallying. Notable strength is being seen in popular ETFs iShares iBoxx $ High Yield Corporate Bond Fund and Barclays High Yield Bond ETF. High-quality bonds are falling and weakness is being seen in the related ETF iShares iBoxx $ InvesTop Investment Grade Corp. Bond Fund.
Gold and silver are rising, as the momentum crowd continues its aggressive buying. Strength is being seen in popular ETFs, such as the SPDR Gold Trust, iShares Silver Trust, Market Vectors ETF Trust Market Vectors Gold Miners and Market Vectors Junior Gold Miners ETF.
Adding fuel to the fire is the fact that lots of new money flows into the markets during the first three trading days of the year.
It is worth noting that the can has been kicked down the road on two important issues of debt ceiling and sequestration (spending cuts).
The plan according to the ZYX Change Method is to take partial profits on strength, and then use any dip over the next two months to buy again. One of our favorite ways to play the moves in 2013 is the ETF PowerShares S&P 500 High Beta /quotes/zigman/5035455/quotes/nls/sphb SPHB +2.87% . This ETF contains the 100 highest-beta stocks in the S&P 500.