Will An Imminent Cliff Deal Push Stocks Higher?

By: Chris Ciovacco | Mon, Dec 17, 2012
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Financial markets moved higher on Monday after reports of progress on the fiscal cliff front. The Wall Street Journal reported significant improvement in the previously deadlocked negotiations:

While the White House objected to major parts of the proposal, senior Democrats described it as a tipping point that moves talks away from deadlock. Instead, it cleared the way for both sides to engage in nitty-gritty haggling over exactly where the new income threshold might be set and what should comprise the spending cuts.

The S&P 500 tacked on 16 points and closed near the high for the day. Investors and traders have been waiting for signs the stalemate in Washington was moving toward a framework for compromise. The Wall Street journal hinted at just that:

One Democratic official close to the talks described the offer as a "breakthrough" that allows negotiations to proceed. A GOP official, cautioning that no deal was done, said he believed that any agreement would look something like what Mr. Boehner had offered.


Bullish Credit Spreads

The market's shift back to "risk-on" Monday was supported by bullish moves in credit spreads; long-term Treasury bonds (TLT) closed near session lows, while "junk bonds" (JNK) closed at the high for the day - both support the bullish case. The move away from conservative Treasuries and toward lower-rated bonds signals decreasing fears of a cliff-induced recession.

TLT versus JNK


Small Caps & VIX Align With Risk-On

On Monday, small caps and the VIX showed an increasing appetite for risk assets and a reduction in cliff-related fears. Small caps (IWM) surged into the close. On the other end of the risk spectrum, the VIX dropped like a rock between 2:00 - 4:00 pm ET. We noted last Friday the performance of stocks relative to bonds was hinting at bullish outcomes. Monday's bullish moves in the credit markets, small caps, and VIX provide additional support for further upside in stocks from a probabilistic perspective.

Small Cap and VIX


Big Picture Has Bullish Slant

The video below contains analysis of numerous markets, including the Dow, NASDAQ, S&P 500, and German DAX. The big picture, even prior to Monday's gains, continues to favor the bullish camp.

After you click play, use the button in the lower-right corner of the video
player to view in full-screen mode. Hit Esc to exit full-screen mode.


Table Set For Cliff Negotiations

Monday's market action reaffirmed the market's obsession with the fiscal cliff. Similar to Wall Street Journal reports on Monday, the Washington Post also hinted at positive and bullish progress in the debt talks:

The speaker's preferred plan is to revise downward the annual inflation adjustment for beneficiaries of federal programs, including Social Security. The White House rejected that formulation, but aides in both parties said Sunday that it has set the table for deeper negotiations between the two sides.

Our approach has been and will continue to be to remain on the long side of the markets as long as the fundamentals and technicals allow. With egos and strong political views intertwined in the process to forge a broad framework to tame the federal debt, the odds of something going wrong must be respected. Therefore, flexibility and contingency plans for bullish and bearish outcomes are a must.

 


 

Chris Ciovacco

Author: Chris Ciovacco

Chris Ciovacco
Ciovacco Capital Management

Chris Ciovacco

Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors and tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION CONTAINED IN THIS ARTICLE.

Ciovacco Capital Management, LLC is an independent money management firm based in Atlanta, Georgia. CCM helps individual investors and businesses, large & small; achieve improved investment results via research and globally diversified investment portfolios. Since we are a fee-based firm, our only objective is to help you protect and grow your assets. Our long-term, theme-oriented, buy-and-hold approach allows for portfolio rebalancing from time to time to adjust to new opportunities or changing market conditions.

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Source: The Contrarian Take http://blogs.forbes.com/michaelpollaro/
austrian-money-supply/