Is this as good as the market will get?

A surge of short covering and excitement marks the start of 2013. It could also be the year's high, as the months ahead look difficult.

By Anthony Mirhaydari Jan 2, 2013 1:00PM

Close-up of a burning sparkler copyright IMAGEMORE Co., Ltd., Imagemore, Getty ImagesThe risk-on complex is moving higher -- save currencies -- after Congress kicked the can on the fiscal cliff at the cost of the House Republican leadership. 


The deal, which maintains the Bush tax cuts for incomes under $400,000 to 450,000 (but ends payroll tax cuts) and delays the sequester spending cuts by two months, will add $4 trillion to the deficit over 10 years, according to the Congressional Budget Office and will subtract 1% from GDP growth this year.

 

This is exactly the kind of punt on the deficit that the credit agencies have been warning about, and it sets the stage for an even uglier fight over the Treasury's borrowing limit in the weeks to come.

 

The unresolved nature of the debate, along with a looming Q4 earnings season likely to be disappointing, new recessions in Europe and Japan, and shaky consumer and business confidence, and by all indications, the two-day market blast may very well be as good as it gets for the bulls this year.


For one, as the charts below show, the market is tracing out a pattern very similar to the lead up to the August 2011 market meltdown. Lots of stop running volatility, ups and downs before the crash started. This is the nature of the computer-driven trading reality as real, human participation continues to diminish.

 

 

There are other reasons for skepticism.

 

Breadth suggests the recent surge is being driven by a narrow subset of the market. That's a sign of weakness, like a house built on a shaky foundation. While the NYSE Composite has pushed above its September highs, on Friday the percentage of NYSE stocks above their 50-day moving average was just 69% vs. 85% back in September.

 

 

And since the fiscal cliff deal was passed with more Democratic votes than Republican ones in the House, it will likely mark the end of House Speaker Boehner's run as President Obama's legislative opponent. His second in command, House Majority Leader Cantor, voted no on the deal and is expected to challenge Boehner on Thursday when the House selects its new leadership.

 

Cantor is one of the self-identified "Young Guns" in the Republican House and will be a more aggressive challenger on issues of spending and taxes. Obama has already expressed his desire to see the sequester spending cuts offset with a combination of tax hikes (via deduction limits) and spending cuts.

 

It's hard to see Republicans giving any more on taxes now without deep spending cuts and entitlement reforms. That will be the point of contention that makes the debt ceiling fight so much rougher than the fiscal cliff. 

 

Plus, the optics of the debate have shifted in favor of Republicans. It's not longer middle class vs. the rich. They've already raised taxes on the wealthy. Now, it becomes about spending vs. debt -- a firmer ground for fiscal conservatives to make a stand on.

 

So, if you thought the fiscal cliff debate was harrowing, just wait. Instead of the cost of failure being tax increases for everyone, the cost of failure now is a default by the U.S. Treasury. And if Congress kicks the can again and doesn't stop the medium-term rise in the debt-to-GDP ratio, the rating agencies, by their own commitments, will start issuing downgrades. 

 

By adding the sequester to the to-do list, the task has been made even more difficult.
Gap stock market surges like the one we're seeing today often market topping events. With volatility, market, and political risk so high, for most conservative investors, I continue to recommend moving to cash. A little upside could be had by adding exposure to the PowerShares DB US Dollar Bullish Fund (UUP), with the greenback poised to move higher once today's ebullience fades.

 

A more leveraged play on the same idea would be the ProShares UltraShort Euro (EUO).

 
Disclosure: Anthony has recommended EUO to his clients.

 

Be sure to check out his new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at anthony@edgeletter.c​om and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.   

 

59Comments
Jan 3, 2013 10:19AM
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Relief Rally or this is as Good as it Gets....?

Our Projections were 300-500 upside DOW for the week; Mon. +166, Weds. +308 = +474 so far...

The NASD and S&P have hit their highest highs since about the 1st. week of October...

We had lived in a world of stagnation of ups and downs (mostly downs) for a Full Quarter...

 

Maybe we are due for something decent and our Santa Rally, is around the corner posing as the New Years Baby..??...And maybe our Congress and Administration are going to do the right thing ??

Maybe,maybe,maybe; We are living on maybes..

Will we have a pull back today or Friday?....Probably, because it just makes sense, but my gut tells me that with some deals in place, we are in for a bullish run during the month ahead.

 

Jan 3, 2013 1:42AM
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Technical analysis is fine, but often wrong.  The economy has been slowly, ever so slowly, improving fundamentlally while Mirhaydari has been usually pessimistic.  Companies have lots of money in the bank/s if they could only figure out how to spend it.  We need real innovation--look at what the Chinese are doing with High Speed Rail.  The Conservatives here have blocked most advances we might have made.  Vote the ultra-conservatives out whenever and wherever you can.  This coming year may be better than you think.  I'm 72, and have been following The Market for 50 years and I'd rather listen to Buffett's commentary.
Jan 2, 2013 9:12PM
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Hi, there is nothing that out performs the stock market, over a 20 year peroid, not housing , gold or land, a wise man puts his money in good Blue Chip, American stocks !
Jan 2, 2013 7:47PM
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Tea Baggers and other "conservatives" yap like the situation we are in is somehow the result of liberal policies.  Perhaps all these people suffer some sort of brain damage?  What was the state of the economy before the Bush administration?  Answer:  Quite good.  A diminishing debt, budget surpluses and gasp....all the "liberal policies" currently in effect except for Obamacare which has not yet even been implemented!  NO ONE was claiming they had no opportunity to get rich, or that the country was going to hell or anything other than randy Bill Clinton should be impeached for his....what exactly was it all about at first....White Water...which morphed into an adultery inquisition.  Basically just dirty politics for no other reason than to get a Republican dominated administration. 

So, that pre-Bush, pre-tea bag, pre-Nordquist economic situation was OK, right?  What happened?  Answer:  Conservatives got control of the entire administration.  They killed all those "burdensome regulations" they claim was holding down the economy though there was no indication that they were doing so.  They spent money on stupid activities like the Iraq war making all the saber rattling morons happy but screwed alot of good people through extended deployments so that they lost their regular jobs, income and sometimes their family.   Then there is the unacceptable number of people who were otherwise affected by a  loss to their family so Bush could prance around in a flight suit while Cheney quietly satisfied himself with shooting hunting partners.

As the "new, free economy" was legislated by the conservatives, a select bunch of their "friends"...those that contributed mightily to their reelection coffers....utilized the "relief" from burdensome regulations to line their pockets outrageously and set the stage for the near collapse of the monetary system.  Do you "conservatives" even know what Glass Steagle was?  Debt????  We were all assured by these crooks in office that it was not important.  The debt doubled.  Not the first time that happened when across the board tax cuts were instituted....the Great Communicator and now understood to be mentally incompetent, Ronald Reagen presided over a near tripling of the national debt.  But you yapping conservative jackasses don't bother to acknowledge that....maybe Rush Limbaugh told you Reagenomics was a big success.  Did you people know that the unemployment rate EXPLODED under Reagan??? NO???  Look it up you ignorant, lazy yappers....LOOK UP THE FIGURES..

One moron here posted that Obama is responsible for much of the increased debt.  If I could suddenly put you in a car going 100MPH and straigh at a tree, what would be your options?  Crash into the tree or swerve, likely rolling the car.  That was the choices Obama faced.  The inertia of the debt AND the economic panic made a less than good outcome inevitable.  Had McCain and his idiot running mate won, the situation would be NO DIFFERENT and possibly worse because more opportunities for the high rollers to suck money out of the economy would have been created while legislation to strip the average person of his benefits and protections as a US citizen would have been passed to make up for the revenue deficits from the tax cuts.

Grover Nordquist is a wannabe power broker.  He has made money on his "position".  Anyone that has half a brain and is willing to look at the actual results of policies like the ones Nordquist, Cantor, Ryan et al have put into action, would conclude they are conduction a national scam....and they are.

With out hope of changing your feeble minds, all I can say is you better hope you don't get the policies that you ask for.  The result on the economy will be so severe that conservatives will no longer be able to "defend" what they have done and the backlaI will have consevatives hiding from lynch mobs. 

    

Jan 2, 2013 7:36PM
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Kicking the can down the road.  We no longer have any politicians who give a rat's **** about the future of this country.  They only want to increase their own power by spending money other people have worked to earn. The USA is the walking dead because it is just a matter of time before we collapse
Jan 2, 2013 7:04PM
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Not disagreeing with the points made in this article, but I think the timing is wrong.  We won't see the issues associated with mismanaged gov'mnt spending until the bond markets revolt, but theres still plenty of rope left for us to hang ourselves before that happens.  The debt ceiling debate is an artificial construct (very short term problem), as opposed to the underlying cause of it all, which is long term.

I'm actually turning my colors back to bullish to kick off 2013.
Jan 2, 2013 6:59PM
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I concur 100%.  All that was done was kick this bag of s--- down the road.  I am ashamed to be an American after 2012 continuous display of irresponsible performance and behaviour by those we placed in office to serve and protect us.  I hope today's market performance reflected business sentiment going forward and not the reaction of a  mob that is easily appeased by throwing them a few loaves and fishes (i.e., the deal).  Now let's see if business can take control and move this market in the direction it should have been moving over a year ago regardless of what our elective officials do in the month's ahead.  I think it is time for American Business to show our Socialist Government that we don't care what they do (or don't) and what they do doesn't matter - American Business must move the country forward - capitalism is what this Country was built on and Business needs to take control.  
Jan 2, 2013 6:51PM
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OBAMA IS THE one I blame for most if not all of this.  HE IS suppose to be the leader and he is a CATEGORICAL FAILURE at leading.
Jan 2, 2013 6:41PM
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As much as we want these markets to go up, what we had today was a relief rally, an emotional reaction and plenty of short coverings....Don't misunderstand, its great to soar but, whenever people stop and think and evaluate what happened with this so called "fiscal cliff", that's when reality will set in...It was a bad bad deal, almost no spending cuts and taxes going up on everyone, that is correct, everyone that pays taxes, that is...And the party is just starting, debt ceiling arguments coming up...Celebrate tonight and be ready for reality to set in tomorrow or the next day...Hey, this is what happens when you have a marxist, incompetent community organizer as president...Sad.
Jan 2, 2013 6:28PM
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So without further ado, here are eight corporate subsidies in the fiscal cliff bill that you haven’t heard of and I am sure...they all benefit the average American citizien.  This whole fiscal cliff deal is nothing more than a joke, an embarassment and once again proves how corrupt our system is and of course Wall St. "soars" on the great news.  All I can say...is bullsh*t!!!

 

 

1) Help out NASCAR - Sec 312 extends the “seven year recovery period for motorsports entertainment complex property”, which is to say it allows anyone who builds a racetrack and associated facilities to get tax breaks on it. This one was projected to cost $43 million over two years.

2) A hundred million or so for Railroads - Sec. 306 provides tax credits to certain railroads for maintaining their tracks. It’s unclear why private businesses should be compensated for their costs of doing business. This is worth roughly $.

 

3) Disney’s Gotta Eat - Sec. 317 is “Extension of special expensing rules for certain film and television productions”. It’s a relatively straightforward subsidy to , and according to the Joint Tax Committee, was projected to cost $150m for 2010 and 2011.

 

4) Help a brother mining company out – Sec. 307 and Sec. 316 offer tax incentives for miners to safety equipment and train their employees on mine safety. Taxpayers shouldn’t have to bribe mining companies to not kill their workers.

 

5) Subsidies for Goldman Sachs Headquarters – Sec. 328 extends “tax exempt financing for York Liberty Zone,” which was a program to provide post-9/11 recovery . Rather than going to small businesses affected, however, this was, , “little more than a subsidy for fancy Manhattan apartments and office towers for Goldman Sachs and Bank of America Corp.” Michael Bloomberg himself actually thought the program was excessive, so that’s saying something. According to David Cay Johnston’s The Fine Print, Goldman got $1.6 billion in tax free financing for its new massive headquarters through Liberty Bonds.

 

6) $9B Off-shore financing loophole for banks – Sec. 322 is an “Extension of the Active Financing Exception to Subpart F.” Very few tax loopholes have a trade association, but this one does. This strangely worded provision basically allows American corporations such as banks and manufactures to engage in certain lending practices and not pay taxes on income earned from it. According to , supporters of the bill include GE, Caterpillar, and JP Morgan. Steve Elmendorf, super-lobbyist, has been paid $80,000 in 2012 alone to lobby on the

 

7) Tax credits for foreign subsidiaries – Sec. 323 is an extension of the “Look-through treatment of payments between related CFCs under foreign personal holding company income rules.” This gibberish sounding provision cost $1.5 billion from 2010 and 2011, and the US Chamber loves it. It’s a provision that allows US multinationals to not pay taxes on income earned by companies they own abroad.

 

8) Bonus Depreciation, R&D Tax Credit – These are well-known corporate boondoggles. The research tax credit was projected to cost $8B for 2010 and 2011, and the depreciation provisions were projected to cost about $110B for those two years, with some of that made up in later years.

Conveniently, the Joint Committee on Taxation in 2010 did an analysis of what many of these extenders cost. You can find that report .


Read more at
Jan 2, 2013 6:17PM
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I guess if someone threatens to kill you and they only take off your leg then you are grateful. So it seems to go with us and Congress.
Jan 2, 2013 6:08PM
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These bears are missing the point.The market hates uncertainty.This rally was

overdue.Now, thursday the market will take back some of it`s gains and then it`s

off to the races.

Jan 2, 2013 5:55PM
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you can always tell if your in a replubican chat room
Jan 2, 2013 5:55PM
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No one got anything they wanted totally - like watching people at war with each other - over what?? Monery!! Aid to New Jersey is held up - greta job GOP!!!
Jan 2, 2013 5:46PM
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Who are the Zion Elders ?........Sweet Geezus..
Jan 2, 2013 5:44PM
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AKI......Agreeing with you may have did....But the Markets are totally predictable ???

 

Tell me so, because I am greedy..

Jan 2, 2013 5:43PM
Jan 2, 2013 5:43PM
Jan 2, 2013 5:42PM
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AJBr......Did MSN pay you for any of that advice...??

It was a pretty good year to expand on new possibilties...

Jan 2, 2013 5:36PM
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The surge in the market was totally predictable, and I took some money off the table today.

 With all the angst  and hand wringing over the fiscal cliff, an agreement was a sigh of relief for the market and an inevitable reason to push stocks higher. Not always but often, the market takes a second look at its hysterical behavior and suddenly becomes more circumspect and rational. While we may have a day or two more of irrationality, I expect the market will quickly cool off. To what extent I don't know. 

It is only a couple of hundred points from its 52-wk high, and I can't see much reason for it to do all that much this year with all the political and economic problems. 

BTW I got a red MB C63 AMG for Xmas. What did you clowns get? A tootsie roll? Har har har!
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