Behind the Money

Why Many Investors Are Selling Today's Big Rally

Many investors were selling into the monster stock rally Wednesday on the notion that the "fiscal cliff" deal hastily hatched New Year's Day did not solve any long-term issues and set the country on the path of several more brinkmanship moments in Congress.

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"I'm going to sell this rally with two hands, two feet and all 10 toes," said Lawrence McDonald, a trader and political risk consultant, in a tweet to his followers Tuesday night after the successful House vote.

Several Wall Street policy analysts, economists and advisors sent notes to clients warning them about the coming battles in Washington on the debt ceiling, spending cuts and tax reform. Topics that this deal did not address, but which are likely to be market volatility-inducing events, they said.

(Read More: Despite 'Cliff' Deal, 'Nothing's Really Been Fixed')

Strategists sent these warnings despite a 2 percent-plus jump in the S&P 500 to start 2013. Take into account its 1.7 percent gain on Monday in anticipation of a deal, and this will be the best two-day rise for the U.S. benchmark since December 2011.

Another 'Brutal Fight' Coming in Congress: Pro
Another 'Brutal Fight' Coming in Congress: Pro

"Conservative opposition could reemerge from House conservatives, including Majority Leader Eric Cantor, over increases in the high-income tax rates and the lack of spending cuts/deficit reduction," wrote FBR's Ed Mills in a note entitled, "Successful Bungee Jump Creates New Challenges."

"We expect renewed brinksmanship when the new House of Representatives returns to address these issues and increase the debt ceiling in the first two months of 2013," added Mills.

The U.S. hit its so-called debt ceiling this week and will use special tactics to keep the government funded for the next two months. Congress, namely the Republicans that hold the majority in the House, need to approve an increase in this borrowing limit and are likely to demand spending cuts neglected in this deal come along with it.

This deal "likely establishes the end of February as the next in a series of high-risk brinksmanship moments," according to a note from ACG Analytics, a Washington research firm. "It failed to address the debt ceiling, across-the-board spending cuts beyond a two-month delay of the sequester, or a long-term plan for deficit reduction."

(Read More: 'Fiscal Cliff' Deal Favors Housing Recovery)

To be sure, the deal had many stock-market friendly elements to it. These include keeping the rate for dividends and capital gains at 15 percent for families with incomes below $450,000. It also extends the Mortgage Debt Forgiveness Act for a year.

"We believe last night's near-term resolution will be positive for domestic markets," said John Stoltzfus, chief market strategist at Oppenheimer, in a note. Buy the "sectors that are cyclical in nature and provide global (U.S. and international) exposure, as well as pay a dividend."

(Watch: What Are the Positives of 'Fiscal Cliff' Deal?)

Yet many investors are still stinging from this latest grudge match in Congress, which comes after the first debt ceiling fight a year and a half ago that got particularly vicious and ended in a downgrade of the country's credit rating.

"The omission of a debt limit increase was expected, but means another disruptive policy debate two months from now," wrote Goldman Sachs economist Jan Hatzius. "These issues will clearly be difficult to resolve and imply that raising the debt limit by early March is likely to be at least as politically difficult as the last increase was in the summer of 2011."

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