A month ago, you could cut the optimism in the air with a knife. Any concern -- over slowing manufacturing activity, disappointing Q2 earnings guidance or low-quality job creation -- could be riposted quite simply: The Federal Reserve (and the Bank of Japan) is pumping billions of dollars a month into the bond market. That's forcing cheap cash into every nook and cranny, boosting prices.

How quickly it's all changed over the past week. The Fed, despite deteriorating economic fundamentals, is so confident about the outlook that it's increased its unemployment rate threshold to 7% from 6.5% and looks ready to start pulling back its $85 billion-a-month bond-purchase stimulus. That's roiling the bond market, pushing interest rates back up to mid-2011 levels.

But that's not all.

Millions of people are protesting high inflation in Brazil. India is suffering from a speculative currency attack. China's interbank lending market is seizing as officials belatedly clamp down on a runaway credit bubble. Europe is unfixed again as the International Monetary Fund reportedly threatens to pull the plug on Greece unless it fixes its budget just as the ruling coalition in Athens fractures under the stresses of austerity. Emerging-market countries are suffering from rapid capital outflows as the U.S. dollar strengthens, disrupting their fragile economies.

Stock market crash copyright Kyu Oh, Photodisc, Getty Images
And in Japan, policymakers are struggling to figure out what to do next after their attempt to boost the economy by inflating stock prices (and destroying the yen's value) failed miserably.

All the while, we are marching toward a Q2 earnings season that should remind investors that the corporate profit picture is darkening because of weak global growth, higher labor costs and less ability to use ultra-low corporate bond yields to leverage up balance sheets and boost earnings via share buybacks.

Just look at the catastrophic decline in the iShares Investment Grade Corporate Bond Fund (LQD).

None of these issues are quick, easy fixes. They represent structural problems. The high from the cheap-money morphine was fun while it lasted. Now reality is biting.

After such a long run of complacency, investors have yet to suffer a dose of panic yet. I'm looking for the S&P 500 to test, at the very least, its 200-day moving average down near 1,500 -- which would be a drop of about 6% from current levels. The lower envelope, shown in the chart above, hasn't been tested since 2011. That would be worth a 10% drop from here.

I'm recommending short positions against European financials like ING Group (ING) and homebuilders like DR Horton (DHI) in my Edge Letter Sample Portfolio.

Disclosure: Anthony has recommended ING short to his clients.


Check out Anthony's 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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