Believe it or not, there is good that can come of the U.S.
partially going over the fiscal cliff; if you know what to look for
and have the right strategy.
In theory, the U.S. actually went "over" the fiscal cliff, since
the midnight January 1st deadline was not met. Lawmakers did clear
the way for tax hikes on Americans making 400k or higher and raised
the estate tax on large inheritances. But the details on the budget
still have yet to be worked out and lawmakers agreed to extend the
timeline on spending cuts by roughly two months, in which time the
U.S. would face a potential default on their debt.
This semi-solution leaves investors cautious, but still hopeful.
The reality is that aside from rising healthcare costs, most of the
middle class will not see a major tax increase and should able to
manage their expenses and continue to grow the U.S. economy in 2013
... albeit slowly. This is part of the reason the markets are
How Can This Be Good?
There are 14 stages of investor sentiment; these variations can be
fairly easy to spot at times and illusive at others. Stocks often
trend depending upon the psyche of investors, not always on hard
Interestingly enough, there is clarity amidst the chaos. As we
enter into the New Year, there is no doubt that markets are
somewhat cautious, as is the average American.
While I feel we are far from panic, despondency or depression, I
think that there is a sense of "hope" in the marketplace, which
actually puts us fairly close to the point of maximum profitability
in the market's emotional cycle (see the chart below).
Before last earnings season began, I believe that markets were
overly excited and closer to the "thrill" area of the psychological
curve. In fact, if you look at a daily chart of the S&P 500
over the past 3 months, you can see these emotions play out in
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In mid September, markets were completely euphoric running up into
the elections, with the fiscal cliff just a twinkle in the eye of
only the savviest investors. After the election results and woes
about the cliff and future of the economy, the market quickly gave
back 9%, changing the mood from elation to outright depression.
This reality check that was dealt by the cliff unknowns and
cautious tone of analysts set the stage for us to profit as markets
are now in a more realistic mood, expecting mediocrity at best.
My theory is further proven by the extremely positive reaction to a
less than perfect solution; if markets were completely euphoric and
overbought, I don't believe we would have seen such a bullish move.
While emotions can rule the markets much of the time, it is 4 times
a year when stocks report their results (earnings) when
. If the subjective mood is not "overly euphoric" than stable
objective data should cause stocks to rise; this works in the
opposite direction as well of course.
A very smart man once told me that the brightest opportunities
usually lie in the darkest of places. Sometimes when it feels like
the worst time to be investing, that might be the best time to dip
your toe in.
Resiliency in Earnings
I'd be lying to you if I said that corporate revenues are shooting
up and that the average company is making money hand over fist. But
I can say that there are three things that I feel very good about
coming into 2013:
Corporations are lean and mean
- The average American company has cut costs and economized their
businesses to keep margins high and operate in a low growth
Hoards of cash
- We are seeing many companies stockpiling cash and equivalents,
preparing themselves not just for the worst, but for the turn. The
turn being an improvement in the economy and that cash is utilized
for expansion, M&A, share buybacks and dividends.
- As I mentioned last quarter, expectations were relatively low;
but more recently the average share price and growth estimates have
come down even further. This makes the reaction to a positive
surprise that much more significant. Even though Q4 earnings won't
be the strongest we have seen in years, stability and moderate
growth should be enough, in the right stocks, to propel them
higher. Keep in mind that average GDP growth estimates for 2013 are
at 2% or less, which is very realistic.
These factors will help support the markets throughout the year
and, with a little luck and continued stability overseas, the
markets should hold their ground by the end of 2013.
Expectations are low for a reason; I wouldn't expect the overall
market to see as good a return in 2013 as we saw in 2012. I also
believe that the next two months or so, ahead of the spending cut
extension, will hold stock prices down until investors have more
answers. There will be "headline risk" associated with the details
and potential for a downgrade or default, which will also keep
volatility elevated (the S&P 500 had an average daily swing of
1.5% in 2012!).
This means that you have to be laser focused and step outside the
box to find alternative investment methods to get superior returns.
Defensive stocks won't cut it...
The "shotgun investing approach" is not the technique of choice as
I believe the big winners will be few and hard to target with a
still doubtful market. You will need an effective tool to do this;
one that stacks the odds in your favor. Whatever method you choose,
be sure to allocate your assets appropriately, reduce risk where
needed and take or protect profits once you have them.
My approach is to target and study analysts' behaviors and actions
ahead of a report to sniff out those companies most likely to beat
The Most Accurate Earnings Whispers
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susceptible to headlines. I can't share the details of our whisper
formula, but it has achieved greater than 81% accuracy in targeting
companies that beat estimates.
You won't make money 81% of the time, but being tipped off to
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This will not be an easy quarter for the average trader, but many
companies will still see their share prices break away (positively)
from the market, which will most likely be stagnant to negative. So
I strongly encourage you to look into our Whisper service. Please
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Jared Levy is a Zacks Rank Senior Equity Strategist with a
broad international following and special expertise in earnings
surprises. He provides private recommendations and commentary for
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