The Week Ahead: Opportunities Before Thanksgiving?

We have a very interesting week ahead. Despite the gravity of the issues, not much will be happening. Congress, after convening for a few days, will be back on vacation recess. There is not much news coming on the economic front. Equity markets will be closed on Thursday and open only for the morning on Friday.

In many shops, the "A" team will be off all week, so initiating new positions will be limited.

Alert: The prices and trades still count. If you can find a bargain, you get it.

The non-stop fiscal cliff coverage remains intense. There is a lot of buzz right now about "protecting your portfolio." This is amazing, since the underlying framework of these issues has been known for at least 1 1/2 years, and widely publicized (at this site and elsewhere) for months. By definition, anyone who is only now getting interested does not understand the fundamental issues.

For the average investor there is danger in these messages. Successful traders (like our Felix model) make relatively fast moves, responding to trends and rule-based systems. Unsuccessful traders learn that their system was flawed. None of the systems considers market fundamentals directly, expecting instead that anything relevant is part of the message of the market.

Successful investors do the opposite. They determine the value of a business and then see if they can invest at an attractive price. Think of it this way. Everyone ridicules the "greater fool" theory -- buying an overvalued stock because you hope someone else will soon pay an even higher price for it. Selling an undervalued stock is no different. You are no longer investing, but instead guessing that the market will allow you a better future price.

No one explains this better than new investor resource page -- a starting point for the long-term investor. (Comments and suggestions welcome. I am trying to be helpful and I love feedback. We have a good discussion going on bonds versus funds, and I plan a separate article that will provide a further forum.)

Final Thoughts on Opportunity, Risk and Methods

The best way to protect your portfolio is to create the right asset allocation, understanding that there is always volatility. If you are troubled by corrections in normal ranges -- the sort we have every year -- then you have not "right-sized" your position.

We now have more clarity on the fiscal cliff issues. Here is what I see:

• A resolution to tax issues that will cover at least the entire calendar year of 2013. This will include the Alternative Minimum Tax, the "doc fix" for Medicare adjustments, and the extension of Bush-era tax cuts.
• Despite the more extreme comments, everything is on the table. The revenue package will include more from the very rich, but the dividing lines and rates could be something you have not even heard yet. I expect capital gains and dividend taxes to peak at 20-25%
• Some of the longer-term changes in spending and entitlements may get very hard targets right now, with the opportunity for the new Congress to fill in the details.
• This could all happen very quickly. It is NOT like last year. There are specific consequences for individual taxpayers, not just a general principle like the debt ceiling or a recession. Congress also wants to adjourn before Christmas.

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My conclusions are based on watching and reading dozens of reports. There has been plenty of action behind the scenes. The incentives have changed for all of the participants. Those who do not see the difference just don't know what to watch for.

Written By: Jeff Miller