As 2012 draws to a close, the fiscal cliff issue comes down to the wire and new challenges face investors as 2013 approaches.
Regardless of if, when or how the fiscal cliff issue is resolved, the next big hurdle for U.S.stocks and ETFs is the budget ceiling debate set to start in January.
Of course, the last budget ceiling debate stalemate led to the current issue with the fiscal cliff and so rough water could lie just ahead in the new year.
On My ETF Radar
In the chart above of the S&P 500, we can see how the fiscal cliff has impacted this major U.S. ETF index. Momentum and relative strength are in decline, as seen in the upper panels, and the S&P 500 Index) has once again fallen below its 50 day moving average, a short-term sign of weakness.
Major resistance lies at the 1,450 level with major support at the 200-day moving average.
The S&P 500 will need to clear resistance to resume the uptrend, while a drop below the 200-day moving average would be a negative technical signal.
VIX and VIX ETFs had a very bullish week with the index rising 27.3% for the week and 16.7% on Friday. For December through market close Dec. 28, the VIX is up 43% as fear reenters the market and investors seek protection from increasing volatility.
From a fundamental perspective, VIX ETFs will likely continue to rise so long as lawmakers inWashingtoncontinue to grapple unsuccessfully with the fiscal cliff dilemma.
However, beyond the fiscal cliff, the upcoming debt ceiling debate will create another significant hurdle for politicians andU.S.stocks and ETFs to cross.
From a technical standpoint, VIX and related VIX ETNs look bullish, although reaching overbought levels.
VIX ETF Update:
Volatility Index – New Methodology (VIX): Index: 22.72, +16.7%
iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX): +5.1, This ETN is designed to track volatility in the markets as measured by the Chicago Board Options Exchange Market Volatility Index (CBOE Index), a popular measure of the implied volatility of S&P 500 index options
VelocityShares Daily 2X VIX Short-Term ETN (NYSEARCA:TVIX): +8.6%, This ETN is designed to track 2X return on volatility in the markets as measured by the S&P 500 VIX Short-Term Futures Index.
VelocityShares VIX Short-Term ETN (NYSEARCA:XIV): -5.28%, This ETN is designed to inversely track the volatility in the markets as measured by the S&P 500 VIX Short-Term Futures Index.
For the week of Dec.30, 2012, we continue to hold Velocity Shares Short Term VIX ETN (VIIX) in anticipation of lower equity prices and higher volatility.
We also continue to hold iShares 20+ Year Treasury Bond Fund (TLT)
Wall Street Sector Selector remains in “red flag” mode, expecting lower equity prices ahead. Lower equity prices typically translate into higher VIX and higher bond prices as volatility increases and investors participate in the “flight to safety” trade in U.S. Treasury Bonds.