Many experienced market technicians will tell you "the name of the game is maximum pain." When it comes to investment vehicles, momentum lasts longer than expected, retracements go past predicted, cheap gets cheaper and overpriced gets overpriced---er.
Trends change before they're reported on balance sheets. Unfortunately many investors fail to actually observe the economy in which they invest.
While fundamentals matter in the long run, markets are prone to panic on occasion and traditional metrics such as trailing P/E ratios, historical sales growth and even dividend rates can become entirely irrelevant. Markets look forward, not backward. The sustainability of corporate earnings accrued in recent years is in dire jeopardy without monetary stimulus in excess of that implemented globally in 2008 and 2009. Economies have become entirely dependent on support from politicians and central banks. Currencies, meanwhile, have inflated due to market expectations and enacted policies, making the continuation of inflationary action a delicate process for policy makers.
Whether by agreed cuts in indulgence or harsher ones imposed by a Washington DC failure to collaborate on a fiscal solution, the iconic United States consumer is about to take an ugly haircut.
Retail (XRT), technology (QQQ) and homebuilders (XHB) stand to lose most certainly and significantly in the upcoming environment characterized by austerity and negative real growth. Homebuilders will find financing unattainable and see significantly reduced demand for new mass-produced luxury homes. Subsidies and demand for innovation will dwindle. High end retailers performed well from 2010 through the first half of 2012, yet recently issued widespread cautionary guidances and have not benefited from bargain seeking mall traffic this holiday season. Existing rentable housing (URE) along with banks (XLF), given supportive Fed policy, are the most promising domestic investments.
Market participants have been trained since 2008 to buy QE announcements, a behavior that no longer appears to be profitable. The S&P 500 (SPY) is trying to scratch back to even and leading consumer tech stock Apple (AAPL) is down 25% since QE3 was announced. Both have sold off on consecutive days following recently announced additional easing with no end in sight. Gold (GLD) is also down slightly since the QE3 announcement, gold mining stocks (GDX) more so.
As many argue investors are complacent in the face of upcoming uncertainty, as they have been historically leading up to moments of "maximum pain." Recent market behavior, along with reduced consumer purchasing power contingent with any deal that may come out of DC, suggests the news will be sold whenever a deal is made.
The sidelines are looking very comfortable at the moment, with lower prices apparently approaching. Puts on consumer sensitive indexes, particularly XRT and QQQ, are highly liquid and offer diversified leverage for investors looking for downside protection or to make bearish bets. Apple is widely considered the sector leader for retail and technology, indicating both are ripe for significant damage.