Coming into the New Year, the U.S. just about fell over that fiscal cliff, and technically did, since the US Congress did not pass the deal before the deadline. However, what many didn't realize was the safety harness that the economy was wearing which allowed Congress to easily pull it back up. That is, there was little risk of the economy truly falling to certain disaster over the cliff.
Currently the markets are not operating in a manner that determines how much events will affect the overall economy, but rather in a binary manner. That is, will there be a crash, or will there not be a crash? Thus, the market runs either way, depending on the sentiment at the time, the fundamental impact is little analyzed on the news that comes through. This is why during the lead up to the fiscal cliff we saw markets dropping, and then after the U.S. economy was pulled back up with its safety rope, in turn the market shot back up.
As such, with 2013 now upon us and markets operating as described, we look at events on the horizon that we can see while we are firmly standing back above this cliff. Smart traders will be able to play off these events to make gains when these opportunities arise, if they can read these coming events carefully and ride the short term momentum, up and down. This can be best done through the use of Index Exchange Traded Funds to get market exposure or possibly foreign exchange. An Index ETF is an investment traded on stock exchanges, similar to stocks, which holds assets such as stocks or bonds and trades close to its net asset value, and tries to replicate the performance of the index it tracks, such as the S&P500. So from our perspective, index ETF's will make a good proxy at tracking the market to trade on economic events occurring that will affect the market as a whole.
Below is our analysis of these coming known events in 2013 that we can see while standing high above this cliff with our feet firmly on the ground at present.
The Debt Ceiling
Yes, it's back again, time for the sequel to the U.S. debt ceiling saga. Time runs out at the end of February and it looks like the Democrats and Republicans will be at it again (however, it may be extended until May 18, based on current talks). This is likely an even bigger looming disaster than the fiscal cliff if it were to eventuate. Not being able to raise the ceiling is such a large problem, because this means that the US will default on its current obligations, unable to pay its debts. If the US government cannot fund projects, the economy will not grow, but the opposite, it will spiral downward. In short a catastrophe!
As we saw in the first part of the debt ceiling saga back in July/August of 2011, the market went down in the squabbling week leading up to the deadline and the subsequent downgrading of the US credit rating by Standard & Poor's.
Source; Google Finance
How to play it: Going into the deadlines, traders may see an opportunity to short the market (through possibly the iShares IVV ETF, as well as the US dollar against other safely currencies such as the Swiss Franc), here as other investors will become nervous at the wrangling going on in the House of Representatives. The other possible play is for traders to wait and see if the market does go down, then when it is down enough to go long as the assets as suggested above, as the odds are an agreement will be made, as they have to come to some sort of agreement here. The safety rope, just as with the fiscal cliff, is unlikely to be cut. Of course there is the chance the market does not react this way and the politicians can sort this out with minor fuss, therefore traders should be sure to implement tight stop losses if they enter into such trades.
EU Debt Crisis
This looming disaster has been dragging on for some time now, and as the term has been said many times the "can is being kicked along the road". It feels as we go into 2013 it's been well and truly punted all the way across the Trans-Canada Highway.
Injections of cash by the European Central bank have kept this can moving along the road for now. But what happens when Spain and Italy come along with cap in hand? This could mean the central bank is unable to fund the debts of Spain, Italy and other Eurozone countries in trouble. Therefore, they likely have to default on obligations, and undertake severe austerity measures. Again, as with the US economy this will stunt any growth and send it into a downward spiral as governments are unable to fund large parts of the economy.
How to play it: The fact is, it is again likely disaster has to be avoided. When bad news comes, smart traders should let it roll down and then perhaps take a contrarian long trade. That is by either trading the IEV ETF or the EURO against safe haven currencies. Inevitably, the EU will try everything to avoid disaster and a break up, and this should be kept in mind. Of course there is the risk this does not happen, and traders need to monitor and be ready to close out their positions if they employ this strategy and what is expected does not eventuate.
The above are just possible event trades that need to be analyzed further and timed correctly for traders to try and make some short term gains. There are of course many more of these "cliffs", large and small, on the horizon, which could potentially provide opportunities to event traders. These however, are the two major coming events we can see without using our binoculars to be exploited at this stage.
Furthermore, traders should be aware of the costs of trading ETFs, and for this reason, if moves in the market on news are not large enough, a better strategy can be the suggested currency plays, due to their significantly cheaper trading costs.