As I woke up this morning, living on the east coast, and needing to retire early to make my 4 am wake up call, I find the election results in all the headlines. Is this good news? Is it bad news? As I learned a long time ago it is all dependent on your perspective. Since my goal is to make money by being a disciplined investor, I have to find where the opportunities lie as a result of the election. The most revealing statistic in this election is candidates spent an estimated $6 billion for nothing to change relative to the balance of power in Washington. Republican House, Democrat Senate and White House. The fight over policy will continue.
How does it impact the fiscal cliff issue? Democratic Senate and Republican House equals compromise. The President will have to work with both sides to come up with a plan that works best for the country and not one party. If we fail to avoid this issue we will meet with higher taxes across the board, and mandatory cuts in government spending. Not what many want to see, but could be a reality based on the threats made by both sides. This is the key issue going forward of immediate concerns and implications. This will all be discussed in the media and by everyone in the coming weeks, we need a simple solution to move forward.
Some sectors and indexes worth our attention as we move forward:
S&P 400 Midcap index makes a move back to the top end of the current trading range. Resistance is clearly at the 1005 level on the index. A break to the upside would be positive, but the next resistance would be at the 1030 mark. That doesn’t leave much room for a trade on the break higher. That aside the index could be influential on the balance of the markets as it reflects investors who are willing to take on more risk in their portfolios. This is on my watch list as one of the key components going forward to provide some leadership if the markets make a continued move to the upside. MDY, SPDR S&P 400 Midcap Trust ETF is the simple way to track and invest in the index.
Healthcare stocks have been struggling the last few weeks as investors hedge their positions against a Romney presidency. Now that isn’t the case and the actuality of any major changes in the healthcare bill isn’t like to make it to the light of day. If the Senate remains democratic, currently that looks like the case, the focus will not be on healthcare. Thus, all the concerns about lost revenue to the healthcare providers and pharmaceutical stocks is not very well based. That means we could see more upside from the sector as this all plays out short term. Watch for a relief bounce in the sector as the dust settles and the reality of what is going to take place moving forward.
The Pharma sector (XPH) has sold off more than 8 percent over the last couple of weeks. This has been part of the weakness in the sector we stated above. Expect a bounce back to the upside short term and opportunity on the move. Healthcare Providers (IHF) have held up much better in the face of the recent selling only dropping 3 percent. Biotech stocks (IBB) have retreated more than 8 percent similar to the drug stocks. The medical devices (IHI) bounced off the recent lows and have seen investor interest return. The healthcare sector (XLV) remains one of the stronger leaders currently and it is worth watching as this weakness all unfolds and presents opportunities.
Dividend tax increase… Is this going to be a reality in 2013? Some sectors are trading that way recently. A look at Utilities, REITs, Telecom and other dividend producing assets shows a move to the downside. Is this a reflection of selling on the rumor? Since we don’t have a new bill stating any changes, and only speculation of the changes, yes this is selling on the rumor. This could provide some opportunities as the story unfolds pushing forward. Some key examples of pre-selling are Annaly Capital Managment (NLY) and iShares NAREIT Mortgage REITs ETF (REM). Both pay double digit dividends and both have seen a steady decline relative to the rumor on tax treatment and cut dividends. The proverbial double whammy. AT&T, Verizon, Duke Energy, etc. have seen drops of late as well. This is definitely an issue to watch going forward. We may see that selling on the rumor creates buying on the news opportunity. This is a longer term issue to watch and keep in mind as you build your portfolio.
There are many more issues which space does not permit me to cover or discuss further. The key for now is to take it one day at a time. Gain understanding of what lies ahead in the political arena and how that will impact the investment process. Patience is needed to navigate the mine fields and avoid the speculation. The good news is no more commercials or political calls… peace and quite!