Two Themes to Watch in 2013

This article original appeared on Options Profits. Sign up for a free trial here.

WEBINAR: Stocks to Watch and Trade Ideas 12/18 at 6pm ET CLICK HERE FOR INVITE AND TO REGISTER.

It has been a nerve-wracking several years for investors, but economic data and market indicators are pointing to a real and hopefully permanent change in the tone of the market. As I explain in the attached video, two things investors can watch for confirmation of the end of the "risk-on / risk-off" environment are:



1. Declining correlations among stocks and major asset classes. The realized correlation within equities has dropped significantly, back to pre-crisis levels, and that's a very good thing. But the correlations among oil, the euro and other assets to equities is still quite high, and that net absolute correlation should keep dropping as investors focus more on the fundamentals.

2. The return to form of the carry trade. ETFs like iPath Optimized Currency Carry ETN (ICI) and Powershares DB G10 Currency Harvest Fund (DBV) track strategies that profit from the carry trade in G10 currencies. In recent years, those strategies haven't worked nearly as well as their historical records would suggest, partly because investors have been prone to rush back and forth between perceived safety and risk, paying less attention to the fundamentals of particular currency pairs. As world economies start distinguishing themselves again and investors think less about tail risk and more about return potential, carry relationships should normalize.

It almost goes without saying, but the prospects for normalizing markets and declining tail risk all still depend on the how much austerity the U.S. inflicts upon itself in the coming weeks. Unfortunately, both the President and Congress apparently believe that pro-cyclical, anti-growth policies are called for at this moment despite all of the evidence in economic history indicating that the time to raise taxes and/or cut spending is during an economic boom, not during a tenuous recovery. Still, assuming that the self-harm is not too serious, the prospects for healthier markets next year are looking up.

OptionsProfits can be followed on Twitter at twitter.com/OptionsProfits.

Jared can be followed on Twitter at twitter.com/CondorOptions.

Read the full story and get access to the Real Money Pro trading floor.

There’s no substitute for a trading floor to get great ideas, so Jim Cramer created a better one at Real Money and blogs there exclusively. We then added legendary hedge fund manager, Doug Kass, with his exclusive Daily Diary and best investing ideas. Staffed with more than 4 dozen investing pros, money managers, journalists and analysts, Real Money Pro gives you a flood of opinions, analysis and actionable trading advice found nowhere else, and allows you to interact directly with each expert.

Already a Subscriber? Please login.

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.