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.   


Jan 2, 2013 5:36PM
The rich get richer and the rest of America pays for their crooked butts. Well at least O-Abomination can pay for his vacations now and put us another 13 trillion in debt before 2016.. Everyone paying for this roller coaster ride and wall-street working the fools again to rip us off again.
Jan 2, 2013 5:31PM

This was all foretold in 'The Protocols of the Elders of Zion'.

Jan 2, 2013 5:31PM
If I ran our household budget like Congress runs the USA budget, my wife would shoot me!   She'd probably get off under a plea of "Justifiable Homicide"
Jan 2, 2013 5:29PM
I've been on MSN MONEY for 1 year now and remember   advising investors to stay out of the market at the beginning of 2012. 
Jan 2, 2013 5:19PM
If the market is going to jump over a screwed up agreement about the fiscal cliff, leave me out!
Jan 2, 2013 5:15PM
This is probably as good as your column will get, Mirhaydari.  The market will exceed your low expectations.  I wish they would have open tryouts for your spot, you're on the bubble.
Jan 2, 2013 5:12PM
Yeah Havasu......I could go along with most of that....And some of your commentors too...
Jan 2, 2013 5:09PM

Well it did hit 300+, so I'm just beaming, but then again we have tomorrow and Friday....

But I will still stick with the projection from last week of 300-500 up for the week...

About 35 points and we are there for the high-end....

Enjoy the ride while it last....


What say you....Next Time Up ??......And Anthony, keep trying, just keep on trying.

Jan 2, 2013 5:06PM
It used to be that the "Stock Market, in general- and "Individual Stocks" specifically were an indicators of the overall health & well-being of the their specific industry or the general out-look and direction of the Country as a whole.  This hasn't been the case for years!!!  The Market is nothing more than "Legalized Gambling" and most of the games are "rigged".  The best investment you can make is to invest in yourself. Get a better Education, start your own Business...OOPS- SORRY...that doesn't even work now that the Government is going to "tax the hell" out of anyone or any business that makes MONEY.  So much for the "Incentive" to "Make it Big in America"... the Government just took that away from as all!!! 
Jan 2, 2013 5:03PM
Anthony makes a lot of good points. I expect this will be a rocky year for the market contrary to the predictions of the market pros. Until and unless, Washington starts acting in the best interests of the American people, business, the economy, and the market will be in a holding pattern.

Don't like my view? Well why did you vote for Obami El Salami fools?
Jan 2, 2013 4:58PM

The Liberals got their tax increase on the wealthy. What? That still leaves us in dire straights? But... Hey... Didn't that... Wasn't that supposed to...


No, It did essentially nothing to better our economy and reduce our deficit. All it did was get Obama re-elected. Like all the conservatives have been blogging about for months, is that it would have little to no impact on the solvency of our wasteful government.


Be careful Democrats, It wont be long until anyone with a job, any job is considered 'Wealthy' and they come after you for your "Fair Share'

Jan 2, 2013 4:53PM
The president has been the single largest contributor to this problem (1/3 of the national debt in his first 4 years) so he needs to solve by admitting that his stimulus spending was a failure and spending cuts are what are needed,  Sure it's bad for the economy in the short term but the last 100 year party brought to you by Progressivism has to stop sometime.  It's time to man up and end it now.
Jan 2, 2013 4:42PM
This guy is worse than Cramer.  He couldn't find his financial **** with both hands.  MSN will hire anyone.
Jan 2, 2013 4:13PM

This definitely wasn't a "win" for Democrats. They'd have been better off to see January 1 arrive without a deal. That would have let all taxes rise to pre-Bush levels and established a foundation upon which the Republicans would have something to "win" by voting for tax cuts for the middle class, up to $250,000 by negotiation, and for spending cuts by trimming defense and other programs.


Instead we get what appear to be permanent tax cuts for those making up to $400,000 a year while the middle class sees their effective take home decline with the reinstitution of with-holding.


Sure, social security with-holding needs to begin again at normal rates, but not necessarily now, and assuredly not without lifting the cap on income so that the receipts collected increase.


And this agreement did nothing about joblessness in the U.S., still the largest obstacle to a full recovery.


We've ended up with two parties in office that are effectively of one mind, if of different names. The wealthy profit from this agreement, but not the middle class.



Jan 2, 2013 4:02PM
Yes the long view is negative but for the rest of the month, lets make money.
Jan 2, 2013 3:31PM

WHAT MARKET? Isn't it about time we recognize financial terrorism and go after it? When the world starves so button pressers and paper pushers can spend all day **** with other people's cash and get rich off fees... there is a problem worth pursuing. Abolish the Gramm Leach Bliley Act. Throw the Party of NO out of Congress. Restore jobs or tax dysfunctional businesses into oblivion.


The holiday season was an illumination.

Jan 2, 2013 2:52PM
It seems that the remaining issues are not important for the market, especially the debt ceiling. If we get a reasonable payroll number this coming Friday, we might see further stock gains as well. 
Jan 2, 2013 2:18PM
US (Congress and President) still has to deal with the debt ceiling and that will require spending cuts across the board with maybe a little more tax increases. You'll see Medicare eligibility age finally tied to Social Security. You'll see SS age raised by 1-2 years at 1 month per year over the next 24 years for those under the age of 50. You'll see defense spending cut another 5-10% as we say goodbye to the Middle East and hello to alternative energy. We also see tax reform by eliminating or limiting deductions for home mortgages and other giveaways. We also need immigration reform really bad.
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