Fiscal Cliff Deal Fails To Address Spending Addiction

January 19, 2013

Well, the folks in Washington D.C. certainly did another number on investment markets with a slightly- later-than-eleventh-hour “fiscal cliff fluff deal” that does nothing to address a life-threatening spending addiction by the US federal government. And now we get to listen to endless yammering about raising the debt ceiling.

Over the next six weeks this debate will escalate, with the predictable grandstanding, digging in of heels, standing on principle, then caving in at the last minute to prevent both a shutdown of the US Federal Government and any kind of default on outstanding US debt obligations. It will likely become the primary hot button topic for everyone, cause a significant rise in market anxiety and serve as a wonderful distraction from everything else that is happening. In a democracy, a nation gets the government it deserves.

John Boehner was humiliated in the fiscal cliff fiasco and the NRA-funded Republicans are looking increasingly dogmatic in reference to gun violence issues. Obama is riding yet another wave of popular support, enhanced by the mainstream media’s intellect-numbing love affair with him. From my seat in the Crows Nest, the Republicans simply don’t have the political might to force permanent and necessary spending cuts in exchange for raising their “line of credit” so their debt/death spiral will continue to accelerate.

In our current environment we appear to have a struggle between some slightly-improving macro-economic metrics and somewhat negative corporate earnings news. To be brutally frank, the data are not clear. When in doubt I always recommend simply looking at price patterns for clues. Ultimately, price action is what determines portfolio returns, so why not make price Rule #1?

In the past 6 or 7 trading days we appear to have shifted from a healthy consolidation phase (following the upward spike in the first few trading days of 2013) to an anaemic upside breakthrough of resistance on the S&P 500 and the Russell 2000. The Dow and NASDAQ have not yet broken to the upside. The TSX may have just broken through resistance on Friday January 18th.

Next week should be very interesting. If we can manage to hold the gains of late this week, there is scope for the S&P 500 to rally into the 1510-1515 range, possibly higher. While we’ve had a nice rally recently, equity indices are not yet really overbought, and valuation levels are still reasonable. Long US Treasuries have been creeping up gradually, indicating that not everyone is convinced that equities are the safer bet right now. Ultimately, it is wisest to ride the tide while it rises, but remain vigilant for early signs of major pullbacks.

Regardless of how much one may have currently allocated in non-cash positions, my personal opinion is that one should always have a “trailing stop” in place to protect from massive downside risk. Markets don’t make public announcements warning of pending downturns, so one must take personal responsibility for managing risk. Trailing stops are not a perfect solution but they are very helpful in allowing even nervous investors to hold upward trending positions, especially in an “irrational rally.”

Gold and silver are extremely interesting here. Over the last week we’ve seen a grind higher in gold while silver went up over 4%. The charts for both include rising bottoms and declining tops resistance, so price patterns will have an increasingly difficult time staying within these formations. While I remain long term bullish on Precious Metals, I’m getting increasingly concerned that we might have a downside scare before getting back to the secular trend. If gold manages to break through resistance at $1693 then there is scope for another rally toward strong resistance at $1800 again. Just remember that regardless of how logical or inevitable a long term outcome may seem, there is no guarantee it will unfold as we picture it. See Rule #1.

I’m looking forward to speaking at the World Outlook Financial Conference in Vancouver on February 1st and 2nd. Michael Campbell’s annual conference is always chock-full of excellent big picture thinking and specific investment ideas, all of which I incorporate into our wealth management and portfolio management processes for clients. After that, Larry Berman of ETF Capital Management and I will be speaking here in Calgary on Wednesday February 20th.

Patience and Discipline are accretive to your wealth, health and happiness; Fear and Greed are destructive.

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