Down, down, down goes the Nasdaq

Biotechs and big tech stocks fare the worst in Thursday's thumping. Despite everything, the global economy is slowing.

By InvestorPlace Apr 10, 2014 6:07PM

Caption: Traders work the floor of the New York Stock Exchange on the evening of January 23, 2014
File Name: John Moore/Getty ImagesBy Anthony Mirhaydari


On Thursday, for the second time so far this month, the stock market suffered an epic "outside reversal." This is where initial morning gains, above the previous day's highs, give way to an avalanche of selling that pushes the close below recent lows.


For chart watchers, this is a serious sign of weakness.


And to have a group of these patterns clustered together suggests more trouble lies ahead.


Yet again, the weakness was concentrated in the popular big technology and biotech stocks that were leaders in 2013, but have since succumbed to persistent underperformance.


So what went wrong? Simply put: Despite everything, the global economy is slowing.

The Nasdaq Composite was the hardest-hit of the major indices, dropping 3.1 percent for its worst one-day loss since November 2011. Biotech stocks (IBB) lost 5.6 percent in the largest one-day loss since August 2011. And futures contracts in Japan's Nikkei Average, the epicenter of the recent market pullback, hit the 14,000 level and are now down more than 14 percent from its recent highs to six-month lows.


nasdaq-ibb

Just 24 hours ago, Thursday's results seemed about as likely as aliens landing in Central Park. The market launched higher as the Federal Reserve seemed to be following the script that has served it so well over the last five years: Promise more cheap money, and watch stocks fly.


The release of the Fed's March meeting minutes were interpreted by the market to represent some backpedaling from a harsher-than-expected March policy announcement and post-meeting press conference on March 19. But the good feelings have since faded.


The tech-heavy Nasdaq is now down 7.3 percent from its pre-Fed highs in early March.


The problems started to materialize deep within the bowels of the market yesterday: The yen carry trade, which I've been hammering on about recently, started to melt as the U.S. dollar weakened in response to the Fed news.


The proxy for this trade, the ProShares UltraShort Yen (YCS), threatens to fall out of a four-month long support level -- a development that would cause the stock market's losses to accelerate.


yen-carry-trade-ycs

Japan's stock market peaked in late December, in unison with the yen carry trade, and has been drifting lower ever since as hopes are shattered that a weaker currency would end Japan's multidecade malaise. Hedge fund types have piled into this trade, using a weaker yen to fund speculations in stocks and bonds.


And this gets to the core of why stocks around the world are selling off now: Despite the efforts of the central banks, and the trillions in cheap money that has been pumped into the system, the global economy is hitting a wall and threatening corporate profits.


The reversal of the yen carry trade is acting as an accelerant in this dynamic -- flushing stocks lower with intensity as traders scramble to close their multi-leg positions (buy yen, sell dollars, sell stocks).


merchandise


Here at home, economic data has been warning of trouble for months as the Citigroup Economic Surprise Index has fallen to a level not seen since the middle of 2012. This index drops when the economic data consistently comes in below analyst estimates. This not only measures what's happening in the economy, but it measures where market expectations are.


When expectations are high but the data is weak, which is the situation now, the stock market tends to underperform.


Yet it was weak economic data out of Japan and China overnight that really catalyzed Thursday's losses. Japanese machine orders dropped nearly 9 percent in February over January. And in a possible sign of deepening trouble in China, both import and export volumes tumbled in March.


So there you have it. An overconfident, overleveraged market with too much faith in the power of cheap money is now suffering its worst selloff in years. Significant technical support has already been lost. And with both the economic data and corporate earnings likely to keep disappointing in the near-term, the evidence suggests there is more downside to come.


I continue to recommend investors raise cash and move into defensive assets including Treasury bonds and precious metals. The SPDR Gold Shares (GLD) exchange-traded fund has moved back above its 50-day moving average for the first time since January. I added the leveraged ProShares UltraGold (UGL) to my Edge Letter Sample Portfolio earlier this week.


And to give you an example of how quickly profits can accumulate in an environment like this, my put option recommendations in big tech stocks have been on fire: My April $65 puts against Facebook (FB) are up 215 percent , my April 350 puts against Amazon (AMZN) are up 232 percent , and my April 36 puts against Yahoo (YHOO) are up 114 percent .


More from InvestorPlace

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm. As of this writing, he had recommended the options positions mentioned above to his clients.

112Comments
Apr 10, 2014 7:26PM
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The economy never recovered. It's all lies by the FEDs. And propping it up with a stimulus has only compounded the outcome.
Apr 10, 2014 8:03PM
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I honestly believe nobody knows what they are doing in DC..not one of them.

 It is time to start giving "government" their walking papers. Time to start limiting what they can do with OUR money. 

 Is anybody really paying attention or care...? We must stop feeding the monster! 
Apr 10, 2014 7:30PM
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Its all been rigged the last 5 years anyway. It'll shoot up tomorrow and more millionaires will be made. All the while the 75% of the public will struggle on week to week and paycheck to paycheck.
Apr 10, 2014 7:23PM
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It is all smoke and mirrors......the feds propping us up with fake money being printed to keep our economy afloat.......the Obama administration LYING about anything and everything that has to do with Obama care......which will be, and is even now,  a JOB killer.  The list goes on and on........it is all smoke and mirrors.
Apr 10, 2014 7:52PM
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The government is in denial (they all need major Dr Phil type therapy and probably straight-jackets) that their policies have caused the greatest economic power in history to go into a rapid spiraling decline. They just will not admit it. Has anyone heard them say anything but "America's best days are ahead." Sure if we can get rid of them, maybe. But otherwise, that's like saying a worn out, sick 15 year old dog's best years are ahead. America is in record debt, stagnant wages, reduced standard of living, business is totally propped up by the government, our biggest enterprises seem to be coffee stores, indian casinos, and worthless websites.  Anybody with any money in those stock markets that they actually worked for, better get it outa there.

Apr 10, 2014 8:19PM
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"Despite everything, the global economy is slowing."


NOooooooo! Really?? You mean, it's all been propped up by the Fed?! Say it ain't so!! << sarcasm >>

Apr 10, 2014 7:24PM
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Not to worry, the Fed can make all right in the world again by just announcing a return to the purchasing of $85 billion per month in Treasuries and Government MBS.
Apr 10, 2014 7:58PM
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 The important thing is how can democrats profit off poverty and enslave more morons on the plantation of big Daddy.
Apr 10, 2014 10:03PM
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The whole market run-up was nothing but a suckers rally. I played along, but started selling some positions about a month ago. From what I've seen so far, the economy is no better off than it was in 2008. In fact, the economic policies of the Obama administration are going to make things even worse. Electing a president who understands nothing about business or economics was a big mistake. At least I can proudly say I didn't vote for this clown.

Apr 10, 2014 7:31PM
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When I first clicked on this article I thought "oh good, a lowdown on what happened." Then a couple seconds later I saw the author's name and realized this wasn't going to be a unbiased, objective article.
Apr 10, 2014 7:55PM
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Trying to prop up an economy with borrowed money causing huge deficits is a path to disaster. Just like a mortgage or credit card, if you don't figure out how to pay it back, you end up in financial ruin. Our politicians have never been forced to live within their means for generations, and now Ryan and other conservatives are being shellacked by those who promise a free ride for votes. Of course many will carry on the lie about a Clinton surplus when the national debt continued to rise before during and after his presidency. I guess we'll just have to see how this one plays out in the long run.
Apr 10, 2014 8:46PM
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Just the bankers cashing in their .5% interest free Fed Funny Money. When the well runs dry soon enough, you'll start too hear more about how we need austerity measures like Italy. Starving and homelessness soon too follow, maybe even some rioting.
Apr 10, 2014 8:26PM
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This is exactly why I truly believe every broker in the world should be in prison. This market is rigged and all the broker's are laughing their way to the bank. There is no broker alive who cares about any client. They only care about their profits and they are killing it. Put the broker's in jail for this ponzi scheme called the market and shut the stock market down. 
Apr 10, 2014 8:31PM
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They never mention that values have been driven well above the real time worth of these companies. The free money being pumped in by the Federal Reserve is the primary reason it's risen as high as it has. There is no recovery as much as we've just learned to call poor conditions the new normal, or rather that's what the Administration has pushed. Play money is flowing on Wall Street and everybody is celebrating the good times. LOL
Apr 10, 2014 8:09PM
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The Fed is $4trillion in debt and and going in more each day. When people find this out there may be a market wise up or down!! This is the craziest market ever.
Apr 10, 2014 8:21PM
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Seeing the pics of the reactions of the guys on the floor when the market drops like this..........PRICELESS. Dude looks like he's ready to pull his hair out. LOL.
Apr 10, 2014 9:20PM
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Global economies are not just slowing they're deflating in spite of the central banks zero rates and currency printing. The US Fed can not get inflation going even after printing $12 trillion. Nasdap has so many stocks like Apple, Facebook and Google that are either consumer fads or social networking and have really noting to do with real technology. The internet is not technology, it's just printing content over a glass cable.
Apr 10, 2014 9:54PM
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You would have to be out of your mind to be in the stock market.  No one can compete with insider trading and instant computer trading.  And the Fed can never be in debt since it can print money at will.  The problem is when foreign countries like Russia, China, Brazil, etc. decide not to use the dollar anymore for international trading and the world reserve dollar tanks to nothing....then we are all screwed.
Apr 10, 2014 9:46PM
Apr 10, 2014 10:07PM
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Cover your a$$e's, with dollars, that's all their good for anymore.
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