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So now what?

We've had a December sell-down on fears that the United States would go off the fiscal cliff -- the Dow Jones Industrial Average ($INDU) was off 2.48% in the fourth quarter.

We've had a huge pre-New Year's move. The Standard & Poor's 500 Index ($INX) climbed 1.7% on Dec. 31 on hopes that the crisis would get resolved, and made an even bigger move on Jan. 2 on an actual "solution." The total gain comes to 4.3% for the two sessions.

But where does the market go from here?

I think you can guess, right? After all, we did go through this pattern of sharp rallies and deep retreats in 2012.

So, with the benefit of that experience, let me give you my seven steps for success in the first half of 2013.

Last year, markets went down when high levels of worry about big macro-events such as a hard landing for China's economy or a Greek exit from the eurozone led money around the world to slosh toward safety. When that happened, U.S. Treasurys and German Bunds became the assets of choice, and stock markets with any hint of risk -- such as China's or Brazil's -- sold off.

Last year, markets went up when worries receded and investors breathed a collective sigh of relief. When European Central Bank President Mario Draghi said he would do whatever it took to defend the euro, and investors decided they didn't need to fear a meltdown in Spain, markets rallied in relief. When China's economy showed evidence that it had bottomed in September without breaking below 7% growth, markets rallied in relief.

Jim Jubak

Jim Jubak

When it looked as if the U.S. Congress and president would force the country off the fiscal cliff, markets went into a funk. And when the House of Representatives actually voted to approve a deal on New Year's Day, the sigh of relief swept financial markets around the world.

But we know from 2012 that relief can easily turn back to worry.

That seems all too likely in coming weeks.

It's not as if the fiscal cliff "solution" actually solved anything: The mandatory budget cuts -- the sequester -- that were supposed to force lawmakers to behave like adults (or get spanked like children) have been put off for two months. At the end of that time, Congress will face exactly the same budget cuts. (And the suspension of these budget cuts in the current deal will be paid for -- according to the fiscal cliff compromise -- by some amazing gimmicks such as encouraging people to convert their traditional individual retirement accounts to Roth IRAs so they'll pay taxes sooner.)

And it left the whole tax/spending-cut battle to be replayed when the federal government hits its ceiling for borrowing. Depending on what magic Treasury Secretary Timothy Geithner pulls out of his hat, the U.S. will run out of room to pay its debts in late January or early February. Republicans in Congress say they intend to use the leverage from the debt ceiling to force big spending cuts. President Barack Obama says he has no intention of negotiating anything in exchange for an increase in the debt ceiling. It should be interesting. I think we can be sure that the markets, as in the 2011 battle over the debt ceiling, won't be amused at the idea that the United States might default on its obligations.

The 7 steps

Using the lessons of 2012, here are my seven suggestions for the early stages of 2013:

  • First, because relief rallies can be incredibly explosive and remarkably short-lived, don't dither. If you're going to try to increase the upside potential of your portfolio by adding stocks that seem likely to do well, do it within the next week -- or play the hand you've got. The worst move is to wait and wait, hoping for evidence that will convince you that this move up is for real. That practically guarantees that you'll be jumping in just as sentiment starts to turn. You'll be buying high and will probably wind up selling low.
  • Second, this isn't a time for regrets and for moves designed to get even or make up for mistakes. I thought raising some cash at the end of 2012 gave me a reasonable shot at buying low if the fiscal cliff deal didn't happen. Didn't work out. I sold Costco Wholesale (COST) and Dollar General (DG) out of my Jubak's Picks portfolio (find it at Jubak Picks) to raise cash that I didn't get a chance to put to use. But this isn't the time to try to fix that sell by rebuying those shares. That decision is history; it's time to move on.
  • Third, if you're going to buy something in an attempt to profit from this sigh of relief, buy the stuff that's going up most strongly now. The deal has created its own buying logic -- go with it.  As I explained in my Jan. 2 post ("Global markets breathe sigh of relief as US dodges fiscal cliff"), the reduction in fear that came with the fiscal cliff deal has enabled traders and investors to focus on the ongoing positive story of accelerating growth out of China and on the increased odds for massive stimulus in Japan. The stocks best positioned to take advantage of those stories are China commodity or financial plays. Since getting in and out of these could be important if sentiment moves quickly in the other direction, I'd use New York-traded American depositary receipts here such as Aluminum Corp. of China (ACH) or China Life Insurance (LFC). Please note that I don't especially like Aluminum Corp. of China on its fundamentals and prefer Ping An Insurance (PNGAY) to China Life, but, in the context of a short-term trade, liquidity gives the first two stocks a decided edge. For commodity plays, I'd suggest Thompson Creek Metals (TC) and Vale (VALE). 

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● Fourth, you don't have to scramble to do anything just to catch this relief rally. And you certainly shouldn't buy something at a price that seems uncomfortably high in an effort to catch the rally. Remember 2012: If you miss this rally, another will be along soon. Given the coming debt-ceiling negotiations and the next round in the euro crisis, I don't think we'll lack for volatility in 2013. 

● Fifth, consider the possibility that the U.S. financial markets aren't going to be the greatest place to be in the first half of the year. Wall Street figures that the fiscal cliff uncertainty and then the deal will take economic growth in the first quarter of 2013 down to a 1% rate from 3.1% in the third quarter of 2012. The biggest specific dent to growth comes from the expiration of a 2-percentage-point cut in Social Security payroll taxes. (The rate has returned to 6.2% from 4.2%.) That's certainly better than sending the U.S. economy into recession, and Wall Street economists do expect growth to pick up in the second half of the year, but the political follies of Washington have hurt the economy.

● Sixth, in the weeks before the fiscal cliff deal. Japan (on potential government stimulus) and China (and other emerging markets linked to China's economy) showed signs of being able to move up even when the U.S. market had stalled on fear. In the first half of 2013, I think that's again a good possibility as long as the battle over the U.S. debt ceiling doesn't threaten to cause a global financial meltdown. (A big mess is fine; Armageddon is not.) I think adding to your weighting in China, Brazil, Turkey and Korea makes sense for the first half of 2013. I'd especially look for stocks that will take advantage of domestic growth in those economies.

● Seventh, the challenge, once you start talking about domestic growth in emerging markets, is that most of the big, well-known and highly liquid stocks on those markets are exporters or commodity plays. Everybody knows Brazil's Vale and Petrobras (PBR). But few investors know Kroton Educacional (trading as KROT3.BZ in Brazil) or Natura Cosméticos (trading as NATU3.BZ), even though in the past year you would have much preferred to own Natura (up 68%) over Vale (up 5.9%). And it sure doesn't help that many emerging-market, domestic-oriented companies trade only in national markets rather than as ADRs in New York. (Kroton and Natura trade only in São Paulo.) To get domestic emerging-market exposure, you have to cast a wide net that includes New York-traded ADRs such as China's Home Inns & Hotels Management (HMIN), Argentina and Brazil's Arcos Dorados (ARCO), and Brazil's Itaú Unibanco (ITUB); relatively liquid (72,420 shares daily volume) New York OTC-traded stocks, such as China's Tencent (TCEHY) and Japan's owner of the ubiquitous Asian Seven-Eleven chain Seven & I (SVNDY), or developed economy companies with big emerging-market revenue such as Johnson Controls (JCI) or IMAX (IMAX). Yes, that IMAX. About 40% of the company's order book for new IMAX theaters is in China. (Home Inns and Hotels Management & Johnson Controls are members of my Jubak's Picks portfolio.)

If you've read this and think it sounds like I think 2013 is going to be as volatile as 2012, you're absolutely right -- at least for the first half of the year. After that, I wouldn't mind some good ol'-fashioned boredom. You know, the kind where markets grind upward so steadily that you don't even know you've made good money until the end of the year.

But I'm not holding my breath.

Updates to Jubak's Picks

These recent blog posts contain updates to the stocks in Jubak's market-beating portfolios:

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At the time of publication, Jim Jubak did not own or control shares of any company mentioned in this post in his personal portfolio. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this post. The fund did own shares of Arcos Dorados, Home Inns & Hotels Management, Johnson Controls, Kroton Educacional, Natura Cosméticos, Seven & I, and Tencent Holdings as of the end of September. Find a full list of the stocks in the fund as of the end of September on the Jubak Asset Management website.

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Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.

Click here to find Jubak's most recent articles, blog posts and stock picks.

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