Nasdaq crumbles as the sell-off gets serious

Stocks are suffering the largest technical breakdowns we've seen in years. Here's why the market snapped so violently.

By MSN Money Partner Feb 3, 2014 6:22PM
Image: Stock market (© Digital Vision Ltd./SuperStock)By Anthony Mirhaydari, InvestorPlace

The bears aren't messing around anymore. 

After watching stocks melt higher throughout 2013 -- on a narrowing base of support and with increasingly ridiculous justifications (such as the December post-taper spike) -- the sellers are dumping everything not tied down. Even the tech-heavy Nasdaq Composite Index ($COMPX).

The Nasdaq, which could do no wrong and was lifted in recent days by a last-minute spurt in biotech stocks, has collapsed below the 4,000 level -- violating a dot-com bubble style uptrend going back to 2012. It's on like "Donkey Kong," as the kids say.

There are many catalysts in play and sentiment is far from an oversold extreme -- suggesting additional price damage in the days to come.

One by one, the supports for the uptrend have been knocked out.

The global tide of cheap money is waning as the Federal Reserve tapers its ongoing QE3 program and the Japanese, who have been actively and desperately pushing down their yen, realize that competitive currency devaluation is not their path to salvation. That's forcing emerging markets to hike interest rates, quite dramatically, to stabilize their currencies, fight inflation and try to prevent a 1997-style crisis.

That led Turkey to jack interest rates to more than 12 percent last week, which fueled a short-lived rebound on the mistaken belief the emerging-market turmoil was over. Not so fast: Such a dramatic increase in the price of money will hit an already beleaguered economy hard, further weaken stock prices and increase credit defaults. We're likely to see bailouts from the International Monetary Fund before this is all over.

That's forcing many of the assumptions that drove stocks higher in 2013 to reverse, such as the idea that the yen-dollar and yen-euro exchange rates could only go down. 

The reason the market snapped so violently Monday was that the yen jumped higher as Japanese stocks fell during the Asian session -- with "Abenomics" in trouble with food and fuel prices rising faster than inflation, Japan's trade deficit ballooning and a necessary sales tax hike looming.

Corporate earnings have been disappointing as the fourth-quarter reporting season has rolled out. Just look at Amazon (AMZN), which is down more than 14 percent during the past two sessions after reporting for its worst performance since the 2011 debt ceiling/credit downgrade scare.

And for those who made light of currency troubles in Turkey, ignored bubbling credit problems in China, or assumed the epic money printing would reverse a slow-burn debt/demographics nightmare in Japan, global pressures are starting to hit the U.S. economy as well. On Monday, we learned that U.S. factory activity growth is slowing at a scale not seen since 2011.

In just a few weeks, all eyes will turn towards Washington as another round of the recurring debt ceiling/budget battle in Washington gets rolling with the U.S. Treasury set to run out of cash as soon as Feb. 28 -- threatening Social Security benefits, military pay and the country's credit rating.

These are big serious issues with no easy fixes. And that's why stocks are suffering the largest technical breakdowns we've seen in years.

For now, I continue to recommend investors remain cautious with a focus on safe haven assets like U.S. Treasury bonds. The leveraged Direxion 3x Treasury Bond Bull (TMF) is up more than 14 percent since I added it to my Edge Letter Sample Portfolio on Jan. 10.

For more aggressive traders, there are plenty of new short-side opportunities, including solar stocks like Trina Solar (TSL). Or you can play the breakdown in the Nasdaq via the ProShares UltraShort Nasdaq (QID).

In January, thanks to a skeptical outlook, the Edge Portfolio gained nearly 16 percent vs. a 3.5 percent loss for the Standard & Poor's 500 Index ($INX).

Anthony Mirhaydari is founder of the Edge, an investment advisory newsletter, as well as Mirhaydari Capital Management, a registered investment advisory firm. As of this writing, he had recommended TMF, QID and TSL short to his clients. 

More From InvestorPlace

Feb 3, 2014 6:48PM
this is a good lesson for people...The minute that the Fed slows down propping up the market....the market plunges. We have had an artificial stock market propped up by the government and not on any of the real criteria that should rule......Investors beware...
Feb 3, 2014 7:49PM
Maybe you analyzing buffoons will realize that without a middle class with disposable income, the Feds QE's cannot support an ever increasing Corporate Profits. There's only so many people you can fire/ layoff before profits drop. I would think economics majors would know something about that? Instead they blabber on about supply side economics which is being proven wrong on a daily basis.
Feb 3, 2014 6:53PM
Feb 3, 2014 7:56PM

Wait a d**n minute,are the rich slowin their trickle down! I feel so used again.    Just when I had caculated that I could afford to retire at age 223, my 401k gets robbed again!

Feb 3, 2014 7:01PM
I wouldn't actually fear that the sky is falling. Too many people were relying on the Fed to continue to purchase treasuries. However, as that slows down (it won't stop quite yet), the markets have to adjust for the change in monetary policy; and they will. This dip is called a natural correction, and what goes up, must come down. Upon adjustments, the hawks will swoop in to buy on the low and ride out another increase. That is the way of the markets. Get used to it or buy CD's that pay nothing right now.
Feb 3, 2014 7:31PM
As small fish among shark, I have to trust my own instinct. The ones who own most are the ones who manipulate the market, just as they do to the currency exchange.
Feb 3, 2014 7:10PM
and tomorrow, the market will be up, and all this talk will be BS, as it always is.    These pundits don't have a clue what causes the market to go up and down.   Just take a look back at fairly large down days, and the reasons given.   I get a kick out of it.   Last time it took a large dump, it was because of China, and the next day it was up.   You mean that China solved its problems in one day?
Feb 3, 2014 8:27PM
Prepare yourself as the music stops..the people playing the music already have their chairs...and are betting you can't find one! The market is a corrupt cesspool of get rich quick minded people who care not who they step on to get ahead. What a shame..
Feb 3, 2014 7:00PM
Marijuana stocks will get higher returns than many other  stocks on the DOW....
Feb 3, 2014 6:40PM
Anthony Mirhaydari suggesting additional price damage in the days to come... A clear buy signal if there ever was one ;) 

(Don't buy stocks if you can't calculate their intrinsic value.)

Feb 3, 2014 9:04PM
printing money creates a market mirage....
Feb 3, 2014 7:14PM

and a lot of you bozo's kept proclaiming economy was in a turn around....can you now say Taper, Taper, Taper?


you'll learn eventually...NEXT!

Feb 3, 2014 7:59PM
Corporate Welfare, capitalism just works if you have socialism to bail it out. The 800 Billion TARP bailout, the Federal Reserve 2 1/4 trillion .0003% loan. Now the to big to fail are 5 times larger and have made obscene profits since 08, as the middle class tanked. Did it really stimulate the economy, free up credit? Trickle down has never worked and 08 housing prime lending crash was the largest Ponzi scheme ever perpetrated on the worlds economy. Congress is to stupid to allow to control the economy but we should never have turned the economy over to the Fed. The magic money printing press they own has spoiled Wall Street, this sugar tit has to stop and not let them throw a tantrum and force the continuation of the QE3 or 4 by the Fed.
Feb 3, 2014 7:10PM
After all this time, Old Anthony is finally on the right side, at lest for the moment.

Way to go, Anthony!
Feb 3, 2014 7:21PM

Don't worry stock people, Yellen is putting on her cheer leaders outfit and getting her pom poms and will be out shortly to cheer you up. Two four six eight, lets' pump the dow to 20K! Yay!

Feb 3, 2014 6:52PM

Here come the profit takers, right on cue. 

We knew it would happen.  Look for a 12,000 to 12,500 bottom, in six to eight weeks. 

Feb 3, 2014 7:01PM
Good news for the everyday consumer is Brent Crude Oil is down $1.55 a barrel to $106.40.
Feb 3, 2014 7:15PM
I don't think the kids say that anymore.
Feb 3, 2014 8:11PM
As a card carrying member of the 47%, why should I care about the stock market or Wall Street? Glass Steagall should have never been repealed, the home town commercial banks are what needed to be funded in 08, not Wall Street. They just wanted to flush out the rest of the chumps in 2013 so enjoy the ride suckers, 2014 will be a wild ride!
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