Market's tumble is far from over

Tuesday's sell-off, driven by political turmoil in Europe and weak economic data, knocks out major technical support levels.

By Anthony Mirhaydari May 8, 2012 2:01PM

Stocks dropped Tuesday as investors belatedly reacted to weekend electoral victories by anti-bailout, left-leaning politicians in Greece and France -- wins that threaten the German-led austerity-focused status quo in the eurozone. The losses would have happened on Monday, but chatter of a potential bailout of the Spanish banking system tempered the selling pressure.

 

No matter. They happened Tuesday as the leader of a potential far-left Greek coalition government chafed against the German-led austerity-for-bailouts status quo that has plunged Greece into its fifth year of recession and pushed the unemployment rate to a record 22%. Markets are not happy and have taken out critical support levels in the process. As a result, stocks are threatening to return to levels not seen since December.

 

All this is being driven by some disturbing headlines of out Greece. The pro-bailout New Democracy party, part of the current coalition government, has failed to secure enough support to govern. That gives the second-place far-left, anti-bailout Syriza party a chance. 


Now the leader of the party has claimed the election nullifies Athens' bailout pledges, has threatened to halt new budget austerity measures and debt payments, and is exploring nationalization of the banking system.

 

After years of European leaders doing and saying things to placate the markets, this was rather shocking for people. The euro plunged against the dollar in response as traders headed for the exits. That was enough to push the exchange rate down through the critical 1.30 dollars per euro handle at one point, a level that's been an important line in the sand since 2006 -- with excursions, such as the initial 2010 panic over the first Greek bailout, quickly reversed. 

 

There was weakness everywhere as the euro-dollar exchange rate acts as an important source of capital for hedge fund carry trades, on which people sell dollars to buy risk-on assets like copper and crude oil. As the euro weakens and the dollar strengthens, these traders must be reversed frantically.

 

Thus commodities, which are particularly sensitive to the undulations of the dollar, are being smashed. The U.S. Oil Fund (USO) fell 1.3% toward mid-December lows.

 

 

But the real dramatics happened in the stock market as the NYSE Composite ($NYA) broke neckline support of a big multimonth head-and-shoulders reversal pattern. The pattern traces down to mid-December levels and suggests the sell-off is far from over.

 

 

You can see this in the way cyclical, economically sensitive sectors and small-cap stocks are leading the decline. That's a sign investors are in risk-off mode. And it provides short side opportunities for nimble traders.

 

For conservative investors, I recommend moving to cash. 

 

***
Trading update

I expanded my Edge Letter Sample Portfolio's short positioning Tuesday morning with the addition of three new short ideas: Nabors Industries (NBR), Freeport (FCX), and HollyFrontier (HFC). Both NBR and HFC are in energy. FCX is in materials and is being pulled down by the drop in copper and gold.

 

My existing materials shorts are doing very well as steel stocks are pummeled. Highlights include a 10% gain in Gerdau USA (GGB) short and a 8% gain in AKSteel (AKS) short.

 

Disclosure: Anthony has recommended NBR short and GBG short to his newsletter subscribers.

 


Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up. Contact Anthony at anthony@edgeletter.c​om and follow him on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.


 

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43Comments
May 8, 2012 2:37PM
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This is just a continuaton of what we saw happen tin 2008. Nothing has changed. The reason no one went to jail or took blame for the financial collapse, is that everyone from the wall street guru's the sec, the fed, rating companies, and politicians were all in on it. And you may as well count all those counterparts of theirs in Europe and Asia as well. This was a global scam, and the little guy, as usual, takes the fall. This was an insidious, criminal act, from which we will continue to feel the repricussions from for years to come. Obama and his socialist, bailout policies don't help, but it's not all his fault. I fear the worse is yet to come. We maybe seeing the end of the global economy as we know it. For nations well positioned to handle this, and there are only a handful, this maybe the opportunity of a lifetime. But for the rest of the world, it maybe the start of armegeddon.
May 8, 2012 2:29PM
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Like a drug abuser, market needs to crash and bottom out for once.  Time to let the market truly represent the shape the economy is in.  Let the democrats prop it up as much as they want.  When regular investors do not follow, those liberals will lose and lose hard. 
May 8, 2012 3:22PM
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All veryinteresting, however; I would ask , Where do we put our savings?? I have suffered steep losses in the market in the last 10 years, and I see my bank savings earning much less than inflation. What's the answer?? Do we REALLY have 8 or 9% unemployment, or is it much higher? The very wealthy can ride this out, but what about the seniors that depend on interest to supplement their SS? Buy land?? Buy Gold??? I remember the great depression, and I don't want to go through that again with the few remaining years i have on this earth.
May 8, 2012 3:30PM
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DJIA in review:

1-day chart: ahhh the sky is falling!!!

1-month chart: wow this is a lumpy upward trending roller coaster

3-month chart: this roller coaster is still kinda lumpy but not really very exciting

YTD chart: hmmm generalized upward trend with a few dips

1-year chart: bit of a dip in mid-late 2011 but hey, we're actually looking pretty good...

5-year chart: wow we hit a bad point in 2009, but my god look at how far we've come 

 

to all the chicken littles, maybe if you quit running in circles like the proverbial headless chicken, cease with the incessant overreaction to every little market burp, and focus on a longer-term trending, maybe we could ride this out with some sense of decorum and a degree of success...?

just a thought.

or we could go with pointless mass hysteria. rioting is so much more fun when you're with the right people, so let me know before we all start.

May 8, 2012 4:33PM
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I've no idea why they keep calling this game show "The Market". It's quite simply a casino designed to favor the house (bankers) and seperate John Q. Public (the chump) from his money. Wonder how many John Qs ended up owning Apple @ $644 courtesy of "the house".
May 8, 2012 4:32PM
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Sad Just last week this guy had an "article" about time to buy. Now, I guess, it is time to sell??? Please make up your mind so we the clueless and not-as-smart-as-you-are mortals out there know what to do. 

Had I taken your amateur market tales seriously, I would have lost about 10% in the last few months.  
May 8, 2012 3:11PM
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How many bad weeks has the market had this year and how many times has someone claimed "this is it!!"?  The global economy is definitely screwed up and a market crash may be coming, but these experts are like the boy who cried wolf.
May 8, 2012 5:13PM
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Was the 2012 end of the world predicted by the Mayan calendar or the Mirhaydari calendar?
May 8, 2012 5:20PM
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This kid just slays me. A 77-point drop on a 13,000 point market and Mirhaydari cries about how the market is in "free fall." Somebody needs to check baby's diaper, again.
May 8, 2012 5:05PM
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Anthony, as usual, I have no argument with your techs.  Thing is now that 99 % of trading is done on the computer/programs  the markets are pretty much set to trap you or get you to bail your positions when key levels are broke.  Today, as expected, the market had a HUGE rally after ALL key support levels had been broke(except one).  i think at this point in the game people should learn to put their money some place safe and enjoy life not having to worry about the markets at night. 
May 8, 2012 3:07PM
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For the past  few years, the stock market has started to go down in May and usually rebounds in the fall. Not sure this is any different. If stocks go down a good amount, they have these articles waiting it seems...and when stocks go up the next day, there are a bunch of positive articles. Its sickening how its all doom and gloom one day or week, then the complete opposite the next week.


May 8, 2012 6:25PM
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Don't listen to a word this guy says.  Just a week or so ago he was touting that it was time to BUY into a supposed upswing.  And this isn't the first time he's so rappidly reversed his advice either.  In truth, he should be banned from offering ANY advise on ANY site.
May 8, 2012 2:59PM
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What seemed to be an orderly withdraw from the market is turning out to be "everyone for themselves".  The markets and countries are only interested in their own self interest.  But that is what happens when people do not have jobs and no money for food or rent.  Greece has hit the "fiscal cliff" and Spain is close behind.  The US is going down the same road.  So much for "financial repression".  Smile 
May 8, 2012 2:20PM
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The big drop in the stock market is HERE!!!!
May 8, 2012 3:01PM
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For those of you that like to take a beating. Stay in the market.
May 8, 2012 3:59PM
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Obama has been the leader of the economic mess for 3.25 years but he has nothing to do with it prgprops? Thanks for clearing that up.
May 8, 2012 6:01PM
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Hurry, buy, buy, buy, next week it's sell, sell, sell, next week it's move to cash, move to cash, move to cash. Good grief, man, If you publish it all you can say one of them is right. What a joke. Go with your own instincts.
May 8, 2012 5:25PM
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This putz couldn't predict a sunrise.
May 8, 2012 3:13PM
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All the kings horses and all the kings men can't put Humpty Dumpty back together again. Wait until abject fear sets in on Wall Street. Even the mighty Ben Bernanke will be helpless to stop the slaughter.
May 8, 2012 4:11PM
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One would think that with all of Anthony's doom and gloom, one should just kill themselves.

 

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[BRIEFING.COM] The stock market punctuated July with a broad-based retreat that sent the S&P 500 lower by 2.0% with all ten sectors ending in the red. The benchmark index posted a monthly decline of 1.5%, while the Russell 2000 (-2.3%) underperformed to end the month lower by 6.1%.

To get a better feel for what led to today's retreat, we'd like to look back to Wednesday, when the market had ample reason to rally, but did not. Instead, it ended basically flat after a sloppy day of ... More


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