For the last week, market participants have been adding to their stock risk. The activity seems to fly in the face of how markets tend to react to significant uncertainties like the fiscal cliff.
While many expect a financial deal to get done, the market’s collective calm is reminiscent of the debt ceiling stalemate of 2011. Stocks pulled back in May and June of last year, then rallied back in July. Investors expected that cooler heads in the U.S. Congress would prevail. When they didn’t, stocks collapsed in late July-early August.
Nearing the end of 2012, the S&P 500 is currently presenting a very similar pattern to the one that we witnessed in 2011. In fact, the only thing missing is the monstrous finale where negotiations fall apart completely.
Could the present equanimity turn ugly on yet another botched political impasse?Â The prevailing wisdom today is that U.S. leaders learned their lesson from the previous go-around. And to be frank, it is difficult to imagine any other scenario than one where Republicans acquiesce on taxes and Democrats allow for a small amount of spending cuts.
However, the wisdom of commentators as well as the markets themselves may be tested in the days ahead. For one thing, Boehner and Reid are publicly stating that an agreement is unlikely to come by Christmas. This means that investors will need to rely on the proverbial 11th-hour arrangement. Expect some itchy trigger fingers to pursue additional tax-related trading.
What’s more, these are the same leaders that faltered in the 2011 negotiations. As days continue to pass without tangible progress, will the “risk-on” crowd find itself changing its collective heart? Once bitten (2011), twice shy (2012)?
My guidance is to remain relatively defensive. This doesn’t mean abandoning the markets when key indices are above 50-day and 200-day moving averages. What it means is… profit from sectors that hold individual companies with competitive leverage.
For instance, consumer staple stalwarts — Procter & Gamble, Heinz, Hershey, General Mills — are individually thriving. Consider a non-cyclical sector ETF like PowerShares Dynamic Consumer Staples (PSL) or iShares S&P Global Consumer Staples (KXI). Both exhibit strong technical uptrends and both are less sensitive to recessionary pressure in the global economy.
If you’re willing to take on a bit more beta risk, biotechnology stocks continue to show enormous staying power. Amgen, Celgene and Gilead individually hit new 52-week highs on Tuesday, 12/11. Meanwhile, the exchange-traded funds that hold these brand-name biggies — Market Vectors Biotech (BBH) and iShares NASDAQ Biotech (IBB) — are benefiting from the biotech share price surge.
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