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I know you probably are tired of hearing about how the fiscal cliff issue is dominating the equity markets right now, but the fact is that this issue is the proverbial 800-pound gorilla in the room. Until we see a resolution to this issue, traders are going to continue to be very nervous.

 

In last week's trading, we saw slight gains in the major averages due to optimism that there will be a resolution to the fiscal cliff in time to avoid the automatic federal spending cuts and the termination of the Bush tax cuts.

 

That optimism still is present, and I think it is one reason for the gains we saw in today's trading. However, in terms of a political resolution to this issue, it appears that the two sides have reached a stalemate of sorts. The president continues to insist on an increase in the tax rates paid by the wealthiest Americans, while Republicans in the House want to see at least some movement to curb federal spending.

 

Whichever side you are on in this issue, I think it is safe to say that neither the president nor House Republicans are really tackling the deficit issues head on, as there hasn't been much mention at all of entitlement reform. This area of spending is where the real cuts and/or reform need to be made. Until the parties address it, we are going to continue having debates about deficits and taxes -- and unfortunately, there is likely to be more class warfare, too.

 

In the meantime, stocks in the S&P 500 continue to trade above the long-term, 200-day moving average, but below the short-term, 50-day average.

 

 

 

We are close to breaking above short-term technical resistance. But until we do, I am keeping any bullish tendencies in check. One reason for my hesitation about being too bullish here, and that's even if we get a quick resolution to the fiscal cliff situation, is due to the sell-off in market leaders such as Apple.

 

The chart below shows the decline in the personal technology giant's shares since the all-time high hit in September. And despite a recent attempt to fight its way back to the 200-day average, Apple has failed to do so yet again.

 

 

Shares are down nearly 5% in today's trading, and that's not a good sign for the stock, for the technology sector, for the NASDAQ and for so many investors who own this widely held stock.

 

I recommend keeping a very close watch on this bellwether, as it will give us a good sense of how the sector is likely to trade going forward. If we see more browning in this Apple, it could bring the bears back to Wall Street.

The mortgage market and homebuilding industries have been two of the top-performing sectors in 2012 and their recovery from the bottom of the '08 real estate crisis appears to be gaining momentum. An exchange-traded fund (ETF) that lets you invest in both of these sectors is the SPDR S&P Mortgage Finance ETF (KME).

 

The fund seeks investment results that closely correspond to the price and yield performance, before fees and expenses, of the S&P Mortgage Finance Select Industry Index. That index features the mortgage banking, processing and marketing segments of the U.S. financial services industry. To understand the components of the fund, it is useful to know what the index is designed to track.

 

To that end, the performance of the index is reflecting a strong recovery in the sector. While mortgage rates are at record lows, lending has tightened due to uncertainty about the economy. Despite this heightened aversion to risk among mortgage lenders, KME is up 32.43% year-to-date. 

 

One reason for this surge is the inclusion of homebuilders in the ETF. Homebuilding has improved this year, with existing-home sales, new residential construction and building permit authorizations beating market expectations. These positive signs point to growth and new business for mortgage finance companies. 

 

 

 

The sector allocation is worth noting. The index's name gives the impression that the primary businesses it tracks consist of mortgage industry-related companies. But a closer look at the composition of the holdings reveals that 58.77% of the ETF includes property and casualty insurance companies. Other major holdings of the fund are homebuilders, 22.52%, and thrifts and mortgage finance companies, consisting of 18.71%.

 

KME is a well-diversified fund that consists of 45 holdings, each consisting of less than 4% of the portfolio. The five biggest holdings are: Ocwen Financial Corp, 3.73%; Fidelity National Financial, 3.48%; Old Republic Intl. Corp, 3.16%; Arch Capital Group Ltd, 3.12%; and Ryland Group Inc., 3.11%. 

 

Recent indications are that the mortgage and homebuilding markets will keep moving toward full recovery in the next five years. While policy implications in Washington have tightened lending standards, a resolution in the near future should clear up some uncertainty and give another boost to KME.

 

If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my Successful Investing newsletter. As always, I am happy to answer your questions about ETFs, so do not hesitate to email me by clicking here. You may see your question answered in a future ETF Talk.

From time to time, I like to make sure I am doing what my readers and listeners want. This is true of the content of my newsletters, the content here in the Alert, and it's especially true of my Monday Morning Market Outlook podcast.

As a new year approaches, now is a great time for me to ask you, the listeners, what you want to hear when I do my podcast each Monday. Would you like more macro-economic news, or would you prefer I get a bit more political? Or, would you like me to concentrate on specific stocks and ETFs? Or, maybe you want me to do more personal finance segments?

Whatever suggestions you have, I would love to hear them. Just drop me a note here and let me know what's on your mind. And if you aren't already a listener, then please check out my Monday Morning Market Outlook podcast today!

NOTE: Fabian Wealth Strategies is a SEC registered investment adviser, and is not affiliated with Eagle Publishing.

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To the best within us,

Doug Fabian