Has the market gone crazy?

A surge of investor inflows despite growing worries has lifted stocks ahead of the debt ceiling fight.

By Anthony Mirhaydari Jan 14, 2013 1:57PM

Stock market copyright Digital Vision, SuperStockThe market schizophrenia has reached a new extreme. Thanks to first-of-the-month retirement deposits, as well as New Year's optimism over the fiscal cliff deal, investors poured more money into stocks in the first week of January than they have in at least a decade, according to Lipper data.

 

But instead of igniting a sustainable new uptrend, the inflow looks eerily similar to the inflows seen in late 2007 and early 2008 -- a head-fake rebound that came on the cusp of a new bear market. Indeed, money has been flowing out of stocks over the past six months on a scale not seen since that period.

 

Plus, despite the inflow, there is mounting evidence that something is deeply wrong with both the markets and the economy.

 

Just look at the market action last Friday, rife with broken correlations and odd behavior. The dollar weakened, which should've been a positive for gold and silver -- but it wasn't. Emerging-market stocks weakened, which should've been a positive for the dollar -- but it wasn't. Treasury bonds strengthened, which should've been a negative for stocks and junk bonds -- but it wasn't. I could name a few more, but you get the idea.

 

 

My interpretation is that the market, like an overworked muscle, is suffering spasms as people react to a very dynamic situation.

 

The business cycle is on the precipice with recessions under way in Europe and Japan. Political risk is extremely high with the Treasury poised to run out of its cash reserves in just over a month, President Barack Obama warning he's unwilling to negotiate over the debt ceiling, and House Republicans threatening to shut down the government. The market is losing faith in the ability of central banks to save us from our overindebtedness and an austerity-driven downturn that looks all but inevitable as hawkish central bank policymakers begin to doubt their own efficacy.

 

Retail investors have no qualms, apparently. Actively managed equity funds recorded their biggest inflow, in dollar terms, since they were first tracked weekly in 1Q00.

 

Incredible.

 

The technical outlook doesn't support this confidence, given that market cycles are shortening, correlations are breaking down, price volatility is increasing (but not the volatility index), and market dislocations are growing more frequent as breadth and volume measures roll over.

 

 

Nor do the fundamentals justify this. The Citigroup Economic Surprise Index is rolling over. State sales tax receipts are falling away. The Eurozone looks vulnerable as its core strength, German manufacturers, weakens. Companies like American Express (AXP) and Disney (DIS) are increasingly turning to headcount reductions in a desperate play to boost earnings growth, late in the expansion, as revenue growth stalls -- resulting in an increase in initial weekly jobless claims as well as mass layoff announcements.

 

 

And the banks, as illustrated by Friday's earnings report from Wells Fargo (WFC), are suffering from a decline in net interest margins (caused by the Fed's ongoing efforts to reduce long-term interest rates) at a time of swelling deposits.

 

The context for all this, of course, is the reaction to the kick-the-can fiscal cliff deal two weeks ago. While that avoided the near-term risk of higher taxes for everyone, it added complexity to the upcoming debt ceiling negotiations while also poisoning the dry well of bipartisanship a little bit more. 

 

Now, in just a few weeks, we face the debt ceiling and a rundown of the Treasury's cash reserves, the end of the ongoing budget resolution (which is funding the government in lieu of a real budget), and the automatic "sequester" spending cuts from the fiscal cliff.

 

Rest assured, the spasms won't last forever. Directionality will return soon. And I think the direction will be down.

 

The fundamental catalyst could come from a variety of sources but will most likely start next week as Q4 earnings season heats up and reveals the struggles faced by the corporate sector. Then, as we move closer to February, attention will turn from gun control back to the debt ceiling fight and the rising specter of a debt default and a credit rating downgrade.

 

The technical catalyst will likely be an extremely overdue pop in the CBOE Volatility Index ($VIX) and the U.S. dollar. The volatility term structure is already beginning to flatten -- an antecedent to an increase in the short-term VIX. So it's already quietly happening.

 

Traders of overbought dollar sensitives like emerging market stocks and copper are already showing signs they're headed for the exits. In response, I'm adding the ProShares UltraShort Emerging Markets (EEV) to my Edge Letter Sample Portfolio.

 

Be sure to check out his new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at anthony@edgeletter.c​om and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.

 

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146Comments
Jan 14, 2013 3:29PM
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Like I was saying over on Cramers blog Anthony.  We are now a one trick pony.  No where to go to make money and nowhere to hide from inflation except of course this market and God Bless those that think this will work out.  I am just waiting for these street guys to capitilize on this "appearance" of the only game in town.  Folks sometimes forget that to make your money theirs is how many on the Street will arrogantly view this onslaught of cash. I just hate to not have a viable aternative. Does anyone really believe the same games and fraud will not reappear?  I just don't like the fact institutions get their money for nearly free and then use that to bully the small investor who has earned his.  A level playing field is a joke.  JMHO 
Jan 14, 2013 2:44PM
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An article a few days ago said a whole bunch of money from other countries was pouring into the U.S. stock market....okay, which is it? 
Jan 14, 2013 3:22PM
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No its not going crazy...Its just being manipulated by Wall Street crooks same as is has been for the last several years..

But they now have more of your 401k savings to play (gamble) with..

Jan 14, 2013 4:34PM
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Oh come on now!  Anthony has been positive just as often as he has been negative.   It's always fascinating to me that supposedly highly educated and experienced analysts can look at the same data and come up with opposite conclusions.  It's like paying two fleas to tell you which way the dog is going to go.  If you are right 51% of the time they call you a genius. 

 

As long as the Fed is printing money and giving it to institutions to put into the market, the market will rise.  The money has to go somewhere and it's not being loaned out.  The day they hint that they are going to start unwinding their balance sheet, it will all crash.  So just like it's been since QE1, we are one Fed speech from a market collapse.  It's quite a tenuous existence.   You got to ask yourself how lucky you feel today.

 

 

Jan 14, 2013 3:49PM
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The market is manipulated.  The world is crazy. 
Jan 14, 2013 3:38PM
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The Market is not a "Muscle" - Quit trying to make it something it's not. It is simply the reaction to peoples fears and enthusiasm ! If you simply buy your on Large Iconic Dividend stocks like those Dividend Aristocrats and hold them for the long term you will be fine. Market goes up and down and your Dividend Reinvestments are like Dollar Cost Averaging ! History shows over 11% returns for the long term. No other method will beat this.
Jan 14, 2013 3:55PM
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People are finally realizing that buying 10 year treasuries at 1.7% interest is crazy, so they are reversing.  Maybe a bit late, but better late than never.
Jan 14, 2013 6:16PM
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hmm interesting, I point out the fact that, that criminal marxist filth pelosi, reid and obama voted against increasing the debt ceiling when the Bush administration was in office and it somehow gets deleted from the thread, not surprising, TRUTH HURTS LIBS!!! skewers their collective azzess, they wanted to defund the Iraq war so they didnt' vote on increasing the debt ceiling, now all off a sudden this bastard pig obama claims that raising the debt ceiling now has nothing to do with spending increases hahahah!!!  'we have to pay our debts' yea the debts that pig muslim incurred during a 4yrs nightmare term!! !hahahahaha!!!  we're headin' for 17trillion in debt now!!!

 

oh man!! are these pig democraps something or what?!! hey scumbag osama voters how're those smaller paychecks makin' you feel?? well ,those of you that work, wait till the taxes go up even more on the mid class, oh the hoops they'll be jumpin' thru to justify that!!

 

let me ask you people something, if you ran your household like these motherfckes are runnin' this nation how soon would you declare bankruptcy? hmm, you sure as hell wouldn't be gettin' "bailed out" by the neighbors that's guaranteed!!

Jan 14, 2013 3:55PM
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We're off to see Ben Bernanke, The Wonderful Wizard of Oz
We hear he is a whiz of a wiz, if ever a wiz there was
 If ever, oh ever a wiz there was,
The Wizard of Oz is one because Because, because, because, because, because Because of the wonderful things he does
 We're off to see the wizard, The Wonderful Wizard of Oz
Jan 14, 2013 8:05PM
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I cannot make heads or tails out of what Anthony is trying to get across here. I do know if you want to protect your investments you need to follow the actions of some major Obama campaign contributors and supporters. These are the same people who openly supported higher taxes on the one percent, like themselves. Here is their prescription for financial security in a fickle economy and more dangerous, uncertain political environment that Obama has created. Google and their head honchos shifting nearly 10 billion in revenues to a Bermuda shell company (Isn't this something Obama chastised Romney for during the campaign?). The Washington Post giving 2013 dividends in 2012 to protect investors from paying higher Obama taxes on dividend income. Costco Co-founder Jim Sinegal and Costco board of directors voted to pay a special 7 dollar per share year-end dividend to avoid higher taxes. Jim Sinegal was the mouthpiece that protected Obama on his campaign faux pa, "you didn't build that" quip to small business owners. Facebook Co-founder Eduardo Saverin renounced his US citizenship in order to evade almost 70 million in taxes. Mark Zuckerberg of Facebook who said it was ok to pay higher taxes but has family skirting Facebook shares, estate and gift taxes by placing shares in annuity trusts. This avoidance adds up to 200 million in lost tax revenue. George Lucas of Star Wars fame sold his film company to Disney for 4 billion in cash and stocks to avoid anticipated capital gains tax increases and Obamacare/Medicare surtaxes on investment income. Lucas was a backer of Obama's capitalism bashing rhetoric during the campaign. Andre Young aka "Dr Dre" who was a vocal supporter of Obama, made approximately 100 million last year is using a County Cork, Ireland tax haven to protect his empire subsidiaries from higher US corporate tax rates. If you listened to Obama's rhetoric during the campaign you'd swear these were Romney supporters. WAKE UP AMERICA THE TRUTH IS COMING!!!  
Jan 14, 2013 9:03PM
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To make the statement somewhere-----anyone who can't do anything but pay the interest on their debt IS a "deadbeat" nation. The best soundbite of the whole interview was when BO stated that they think I'm just a "big spending socialist". I noted that the major press didn't pick up on that anywhere? What's new?  It was stated to me long ago----The Whimpy approach. I will gladly pay you Friday for 2 hamburgers today. Maybe? 
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Quote

Retail investors have no qualms, apparently. Actively managed equity funds recorded their biggest inflow, in dollar terms, since they were first tracked weekly in 1Q00.

End Quote

 

Quess you missed the Fed and Treasury announcment at the end of last year that they were going to pour money into real estate.

 

The only trouble is the money is flowing into the high end of real estate in my town Houston there are over 20 new $10,000,000 plus houses being built in River Oaks where the old money lives and at least five high rise (10 to 20 floors) $1,000,000 plus condos going up when the existing ones built just before the 2008 crash are 1/3 to 1/10 occupied with at one that busted out and not occupied 19 stories high in clear lake.

 

Yep they are building lots of new homes but for the wrong income level. This means the housing bubble inflated last year is going to bust about the end of 2013 as no one is going to be able to afford the new $1,000,000 plus high rise housing except the retired public workers who get their last year pay bumped up to $200,000 a year and as a result get $180,000 a year pension money havng only paid in about $50,000 into the retirement system.

 

Yep this is all going to be a disaster about ready to pop in housing.

 

And they will need a scapegoat for the coming collapse as the Federal Reserve is no longer going to support US debt and that means the fat lady she is going to be singing at the end of the year and the US dollar drops to zero.

 

Obama is getting rid of all our nuclear weapons ahead of this collapse so the rest of the world is not going to have to fear us like we did when Russia collapsed with over 5,000 nuclear weapons.

 

Get ready to live below the standards of Mexico folks it's about ready to happen.

Jan 14, 2013 3:18PM
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You really need to get rid of this idiot, He's always wrong about everything. What a pessimistic jerk !!

Jan 14, 2013 3:43PM
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pouring in? going sideways maybe but pouring in.....NO
Jan 14, 2013 5:12PM
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Get ready for the shut down      the new GOP is the old GOP       there going to do what they were voted to do        there just doing their job        the approval rating will go up after the job is done.
Jan 15, 2013 5:52PM
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I'm scared and concerned for our country and our personal safety...I hope they figure it out soon on how to fix this fiasco that can and will lead to country system crash. Aristocracy and nepotism to fill executive leadership positions and creating the wealthy through inheritance just doesn't work to maintain financial and political stability so we need to fire a bunch of people and put into offices, the ones who are qualified and have discipline to do the extremely important leadership management jobs. We do in fact have the home grown talent with potential to shine brilliantly all over our great country with service to protecting our (majority) interests as primary focus of management rather than only serving the top 1% upper crust's interests, but it's being underutilized and underemployed due to corruption, nepotism, and aristocracy ruling the world. 

There is still time for them to set things right as to prevent failure, but it's going to take a totally different peaceful, but effective approach than just having, "Laissez-faire." They must fix it for their money too won't be worth anything more than the cheap paper and computers it's written on. 
Jan 14, 2013 8:55PM
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We ended the day basically flat, a bit down, we'd take it any day, especially after the village idiot opened his trap once again and lied to the American people saying the economy is roaring...Oh well, we are used to this arrogant ignorant buffoon talking garbage...The biggest debt creator in American history as usual blaming the Republicans...Like we always tell you, he may fool the people, he doesn't fool Wall Street....We will see what happens tomorrow...Hopefully a bit better than today.
Jan 14, 2013 10:53PM
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You forgot the disclosure that Anthony Mirhaydari is in triple short etfs and is wrong every time the market goes up as he only knows how to find indicators to the downside.
Jan 15, 2013 11:40AM
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Jimmy Cliff, "sitting here in limbo, waiting for the tides to change".  And after reading such nonsense as pawning a national monument and Cramer's disingenious confession of not being who he wants folks to think he is what could be next?  The dog  days of January.  Oh then lets talk superbowl.  But we already know New England will win, next idea please.  We have the POTUS in an unbelievable stomping on the 2nd ammendment and nobody seems to care.  Perhaps we need another Jolt of coffee laced with sugar, or Armstrong on his Oprah confessional or even Gore making himself into the Worlds second biggest fraud and hypocrite and  nobody seems to care.  Okay then lets talk gun control because that makes more liberal folk feel good about protecting the innocent children and the whales.  Yes lets save the whales. What we all need most is soft music to keep us occupied while we fritter and waste our hours in an off hand way.  Yawn.  I need to do something constructive.
Jan 15, 2013 10:11AM
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Even if the market showed to be over the top, doing well, there are 20% less jobs available in the U.S. today than ever before.  To include that many who used to hold positions where they could pay there bills, are no longer able to do so.

And it is only going to get worse from here.  Even if the economy were not such a disasterous mess, more and more jobs will be taken over by technology.  This is already been happening on  large scale.  The three largest corporations in America only have 150000 employees combined, when an older company alone, (without the newest technology) has more employees than those three combined.

If you conduct your research, you will see that things may very likely continue to go in downward spiral for an insurmountable amount of people here in the U.S. 

Again, even if the economy and stock market are off the wall spectacular, the people will be suffering with no jobs and no means of paying bills or buying food.  The stock market is no longer a representative of things possibly getting better for the people of the United States. 

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