Why investors should fear the sell-off

The market is in the most significant downtrend initiation since September. The yen carry trade and investor complacency are 2 reasons to worry.

By InvestorPlace Jan 24, 2014 3:03PM

Image: Broken-Pencil (© Christian Zachariasen/Jupiterimages)Updated 4:30 p.m. ET


By Anthony Mirhaydari


Suddenly, investors who were lulled into a warm, comforting sense of complacency in December are being hit in the face with the arctic chill of reality.


No, not all is well. No, cheap money cannot solve all our problems. And no, the ongoing tapering of the Federal Reserve's QE3 bond purchase stimulus is not as benign as the bulls would have you believe.


Stocks were falling hard Friday, with the Dow Jones industrials ($INDU) down 4.3 percent from its ridiculous New Year's Eve melt-up, falling through its 50-day moving average and closing below the psychologically important 16,000 level to 15,879.


This is the most significant downtrend initiation since September, when the market started worrying about the October debt ceiling deadline -- a deadline that was pushed back to February, unleashing a powerful market rebound.


Unfortunately, the current pullback has many more catalysts, which means it won't be so easily reversed.


Here are a couple of reasons you should be worried and be prepared for a more protracted decline.

The unwind of the yen carry trade

One of the main catalysts for the severe selling pressure is an unwinding of the yen carry trade -- the selling of the Japanese yen short by hedge fund types, who then used the proceeds to plunge into U.S. and European assets. That helped fuel the U.S. market melt-up and has pushed down peripheral eurozone bond yields, effectively ending all of the concerns over the health of Greece, Spain and Italy.


As long as the yen was falling, and as Tokyo actively weakened its currency via cheap-money stimulus in a last-ditch effort to reinvigorate Japan's economy via increased export competitiveness, everything was fine. In Japan, the drop in the yen was encouraged by the assumption that the Bank of Japan was set to unveil an expansion of its quantitative easing program, perhaps as soon as this spring.


But now, as the yen surges, things are not fine. Traders are scrambling to close these positions, dumping everything en masse. The yen looks less desirable as a one-way bet as current efforts have attracted the ire of trading partners, such as South Korea, and have failed to boost wages as Tokyo desired. Instead, food and fuel prices are rising, pinching consumer spending power.


The ultimate end game for Japan, which is heavily indebted and vulnerable to any increase in government borrowing costs, casts a long shadow over the situation should any reduction in the pace of quantitative easing cause turmoil in the Japanese government bond market.


Just look at the way the proxy for the yen carry trade, the ProShares UltraShort Yen (YCS), is falling out of the sky.

Investor complacency

Heading into this pullback, the level of mindless bullishness had reached historic extremes.

Investors Intelligence had the ratio of bulls-to-bears at levels not seen since 1987. Retail investors started pulling money out of bonds and putting it into stocks for the first time since the financial crisis -- a classic warning sign that the "dumb money" was getting in. And cash on the sidelines, whether in money market mutual fund accounts or in cash reserves held by mutual fund companies, dwindled to nil.


All the while, market breadth kept narrowing as the foaming-at-the-mouth bulls focused on fewer and fewer stocks to keep the major averages aloft -- such as biotech stocks (above) and transportation stocks, which went vertical over the last few weeks. The percentage of NYSE stocks above their 50-day moving averages peaked at 85 percent in October and has been sliding ever since. It spent most of January near 70 percent.


It'll take some severe price damage to reset the situation, and that will put fear back into the hearts of investors.

You also can read about three other indicators that don't bode well for the broader markets here.


More From InvestorPlace

As of this writing, Anthony had recommended TMF long and BBY short to his clients.

175Comments
Jan 24, 2014 3:23PM
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LETTERMAN’S TOP 10 REASONS TO VOTE DEMOCRAT


 
#10. I vote Democrat because I love the fact that I can now marry
whatever I want. I’ve decided to marry my German Shepherd.
 
#9. I vote Democrat because I believe oil companies' profits of 4% on
a gallon of gas are obscene, but the government taxing the same gallon
at 15% isn’t.
 
#8. I vote Democrat because I believe the government will do a better
job of spending the money I earn than I would.
 
#7. I vote Democrat because Freedom of Speech is fine as long as
nobody is offended by it.
 
#6. I vote Democrat because I'm way too irresponsible to own a gun,
and I know that my local police are all I need to protect me from
murderers and thieves. I am also thankful that we have a 911 service
that get police to your home in order to identify your body after a
home invasion.
 
#5. I vote Democrat because I'm not concerned about millions of
babies being aborted so long as we keep all death row inmates alive
and comfy.
 
#4. I vote Democrat because I think illegal aliens have a right to
free health care, education, and Social Security benefits, and we
should take away Social Security from those who paid into it.
 
#3. I vote Democrat because I believe that businesses should not be
allowed to make profits for themselves. They need to break even and
give the rest away to the government for redistribution as the
Democrat Party sees fit.
 
#2. I vote Democrat because I believe liberal judges need to rewrite
the Constitution every few days to suit fringe kooks who would never
get their agendas past the voters.
 
…And the #1 reason I vote Democrat is because I think it's better to
pay $billions$ for oil to people who hate us, but not drill our own
because it might upset some endangered beetle, gopher or fish here in
America. We don't care about the beetles, gophers or fish in those
other countries.
Jan 24, 2014 3:14PM
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So how many investors do you think received calls from their financial advisors "advising" them of this sell off?  Probably none as they are scrambling to keep their clients from bailing out the market.
Jan 24, 2014 3:20PM
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Who said it?
 
1) "We're going to take things away from you on behalf of the common good."
    A. Karl Marx
    B. Adolph Hitler
    C. Joseph Stalin
    D. Barack Obama
    E. None of the above

2) "It's time for a new beginning, for an end to government of the few, by the few, and for the few...... And to replace it with shared responsibility, for shared prosperity."
    A. Lenin
    B. Mussolini
    C. Idi Amin
    D. Barack Obama
    E. None of the above

Answers
(1) E. None of the above. Statement was made by Hillary Clinton 6/29/2004
(2) E. None of the above. Statement was made by Hillary Clinton 5/29/2007
Jan 24, 2014 3:52PM
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"Liberalism is a mental disorder…Common sense is the cure."  
                          -  Ronald Reagan


Clint Eastwood's One Sentence Editorial --
 
"We Americans are so tired of being thought of as ****es by the rest of the world that we went to the polls this past November and removed all doubt."
 
Jan 24, 2014 3:21PM
avatar
Who said it?

3) "(We).....can't just let business as usual go on, and that means something has to be taken away from some people."
    A.  Nikita  Khrushev
    B.  Joseph Goebbels
    C. Boris Yeltsin  
    D. Barack Obama
    E. None of the above

4) "We have to build a political consensus and that requires people to give up a little bit of their own ... in order to create this common ground."
    A. Mao Tse Dung
    B. Hugo Chavez
    C. Kim Jong II
    D. Barack Obama
    E. None of the above

Answers

(3) E. None of the above. Statement was made by Hillary Clinton 6/4/2007

(4) E. None of the above. Statement was made by Hillary Clinton 6/4/2007
Jan 24, 2014 3:53PM
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NOW THAT OBAMA HAS PROVEN HIMSELF TO BE A LIAR SINCE WAY BACK WHEN!!!

I FEAR THAT THE REAL DANGER IS NEVER FINDING OUT HOW MANY LIES HE HAS REALLY TOLD!!!!!!!!!


 "The fact that we are here today to debate raising America's debt limit is a sign of leadership failure. It is a sign that the US Government cannot pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government's reckless fiscal policies. Increasing America's debt weakens us domestically and internationally. Leadership means that, 'the buck stops here.' Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better."
   ~ Senator Barack H. Obama, March 2006


"PERIOD"
Jan 24, 2014 3:58PM
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This guy is a total joke.  Anyone that has listened to him and followed his advice regrets it BIG!  He's a doomsday shill, and has been wrong for so long, he mis-forecasts sundown.  The market may go down (it always does), but if you had listened to this jerk last year, you'd have missed the huge run up. 

 

Hit "DELETE" on his articles.

 

Jan 24, 2014 3:44PM
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Long-term passive investors laugh.

Who cares?
Jan 24, 2014 3:54PM
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So it's basically Wall Street who is making the problem here. Or as they call the Hedge Fund Shorters! The American Public suffers on account of a bunch of moron's at Wall Street!!!!
Jan 24, 2014 3:54PM
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I moved almost all of my investments to Cash back in December for fear of a bad earnings month.   I'm very happy for that decision. Soon I hope to be looking for a few bargains.
Jan 24, 2014 4:19PM
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I am not worried and not moving a thing...go ahead and bail out and keep missing the "RETURNS". No thanks I will HOLD FAST!!!
Jan 24, 2014 4:38PM
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Welcome back Anthony! Back to your Doom and Gloom predictions I see.
Jan 24, 2014 4:16PM
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This is absolutely not a problem, the stock market fluctuates all the time, this is normal, since it exists there has been thousands of corrections like this one.
 
And if you are planning for retirement and are still buying stocks you should not want a stock market that's getting ahead of itself, you're far better when corrections like this one occur.
 
But should you choose to listen to the doom & gloom and be scared into selling crowd then too bad for you...
Jan 24, 2014 3:26PM
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52 weeks ago the DOW was at 13,779


Today we're at 15,876.. and falling


Does someone see a problem with this math.


 


 

Jan 24, 2014 3:48PM
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How about we concentrate on all the good things in OUR economy and let the Chinese and other world markets take care of themselves. Why does their bad news have to be our bad news? I'm getting tired of all the negativity in our investment community. 
Jan 24, 2014 4:33PM
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Too many "common folks" have made some serious money in the past year...The True Controllers of the market have decided to shake the tree again and flush out all the "riff-raff"....then they buy again at good prices. Tell me this isn't rigged!
Jan 24, 2014 4:41PM
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By the way, you all notice that MSN has dropped this clown from their regular Money columns, right?  He's a total SHAM. 
Jan 24, 2014 4:25PM
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The market is rigged. Someone farts and it creates mass panic.
Jan 24, 2014 5:04PM
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To "worry" about this as the article says is a complete waste of time and energy. What will be will be.
Jan 24, 2014 8:45PM
avatar

First President to apply for college aid as a foreign student, then deny he was a foreigner.

First President to have a social security number from a state he has never lived in.

First President to preside over a cut to the credit rating of the United States .

First President to violate the War Powers Act.

First President to be held in contempt of court for illegally obstructing oil drilling in the Gulf of Mexico .

First President to defy a Federal Judges court order to cease implementing the Health Care Reform Law.

First President to require all Americans to purchase a product from a third party.

First President to spend a trillion dollars on shovel-ready jobs and later admit there was no such thing as shovel-ready jobs.

First President to abrogate bankruptcy law to turn over control of companies to his union supporters.

First President to by-pass Congress and implement the Dream Act through executive fiat.

First President to order a secret amnesty program that stopped the deportation of illegal immigrants across the U.S. , including those with cr imi nal convictions.

First President to demand a company hand-over $20 billion to one of his political appointees.

First President to terminate Americas ability to put a man in space.

First President to encourage racial discrimination and intimidation at polling places.

First President to have a law signed by an auto-pen without being present.

First President to arbitrarily declare an existing law unconstitutional and refuse to enforce it.

First President to threaten insurance companies if they publicly speak-out on the reasons for their rate increases.

First President to tell a major manufacturing company in which state they are allowed to locate a factory.

First President to file lawsuits against the states he swore an oath to protect (Az, WI, OH, IN)

First President to withdraw an existing coal permit that had been properly issued years ago.

First President to fire an inspector general of Ameri-corps for catching one of his friends in a corruption case.

First President to appoint 45 Czars to replace elected officials in his office.

First President to golf 73 separate times in his first two and a half years in office.

First President to hide his medical, educational and travel records.

First President to win a Nobel Peace Prize for doing NOTHING to earn it.

First President to coddle American enemies while alienating Americas allies.


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