The sell-off is just beginning
As Egypt burns, market volatility spikes in what's shaping up to be the worst correction since August.
Stocks were plunging Friday in reaction to political turmoil in Egypt and a weaker-than-expected GDP report. With the financial news networks broadcasting images of chaos in Cairo, along with big declines in the major stock averages, I can't help but think of the similarities between today and the May 6 flash crash meltdown that occurred during protests in Greece.
But really, the upheaval in places like Tunisia, Egypt and Jordan is merely providing the catalyst for a sell-off. The underlying conditions for a correction were already there. There have been plenty of signs over the past two weeks that investors were becoming overconfident and that stocks were rising on narrow support. I talked about some of these in my column this week as well as in blog posts here and here.
So now what? By one measure, stocks appear to be entering their worst market correction since last summer. Here's why.
For the benefit of the subscribers of my newsletter, The Edge, a few months ago I created a market direction and strength model that uses a variety of momentum and breadth measures. The tool, which I've dubbed the TREND Indicator, gauges the strength of rallies and corrections. It also identifies major market turning points.
Today, on an intraday basis, the model flashed its biggest sell signal since Aug. 11 -- which marked the beginning of the final summertime decline before the current five-month uptrend got started. The S&P 500 went on to lose an additional 4.6% before turning tail and moving higher.
Before that, you have to go all the way back to the April 27 sell-off to see a sell signal of similar strength. The S&P 500 went on to lose nearly 15% in the months that followed.
To be sure, investors suddenly have a lot more to worry about:
- Austerity measures in the United Kingdom have plunged the economy back into recession.
- Japan just had its sovereign credit rating cut for the first time in nine years as that country grapples with unsustainable debt loads, troublesome budget deficits and an aging workforce -- the same pressures faced by the U.S. and Europe.
- Inflation is forcing emerging-market economies like Brazil and China to raise interest rates and tighten monetary policy.
- Earnings growth is set to slow.
- And the eurozone has yet to resolve the problems with Ireland, Greece and Portugal as borrowing costs start to rise again.
For conservative investors, at the very least I recommend holding off on new stock purchases. Ideally, they would increase their cash allocations to protect against continued declines. I would continue to avoid bonds, despite the bounce they may see from haven buying in the coming weeks, because the long-term outlook for fixed-income investments is cloudy at best.
For short-term traders, I recommend looking for short ideas in the emerging markets. Not only are the stocks of places like China and Brazil suffering as policymakers there grapple with rising inflation -- just look at the spike in China's inter-bank lending rate -- but foreign stocks will suffer as investors push up the dollar. This happens when hedge funds and other institutional traders move out of foreign assets due to currency translation losses.
Good candidates include the ProShares Short Emerging Markets (EUM) and the ProShares UltraShort Brazil (BZQ). For more specific ideas, look at these two Brazilian bank stocks: Banco Bradesco (BBD) and Itau Unibanco Banco Multiplo S.A. (ITUB).
Disclosure: Anthony does not own or control a position in any of the companies or funds mentioned. He has recommended BZQ and EUM to his newsletter subscribers.
Be sure to check out Anthony's new investment advisory service, The Edge. A two-week free trial has been extended to MSN Money readers.
The author can be contacted at email@example.com. Feel free to comment below.
You can't keeping paying off debts by getting more debt!! The end result will be catastrophe. This economic system is in it's final weeks/months. We have exported the most important part of our society which is manufacturing and jobs! How does one expect people to keep spending when their jobs have been given away, all in the name of globalization and free trade. The so called emerging markets of Asia are emerging because they have been given our jobs, plain and simple.
All the men in suits will end up in sackcloth.
WOW!!! While most of us don't necessarily disagree with a lot of what you have to say, ultimately, your conclusions are reckless. Tony, just 24 hrs ago in your lastest column you advised investors to consider these two ETF's: DTO and ZSL. I hope no one followed that advice! Each was down about 8% today!!!
What is so odd, but more importantly so dangerous to the average investor reading your stuff is that you (and your editors) can put together a nice article, but your advice seems to contradict your premise more often than not.
Considering the events in the Middle East, why would anyone double short oil?!
Considering the threat of "runaway inflation" [your words] all over the globe, why would you then advise double shorting Silver?! -- a hedge to inflation.
Soon Bernanke will be too busy printing money solely for use in buying US T-bills that he will not have any spare time to do anything else.
We are just about ready for the next leg down in the stock market and this time there will be no coming back. Get ready to say goodbye to the rest of your 401K pension plans.
The US economy is getting worse and not better. We have been defaulting on our national debt since WWI people. Borrowing money to cover the interest payments on the national debt is not paying the debt back folks. Every time we rise the debt ceiling we are defaulting on our national debt.
Just do simple math --- the US national debt in 2008 increased from $9.008 trillion to $10.025 trillion or $1.027 trillion while the official deficit was suppose to only be $445 billion so why did the debt increase by an additional $582 billion ??? Answer we had to borrow money to pay the interest on the national debt which cost $582 billion. We are so doomed.
Investors, beware about recent double dip in housing market also. Another indicator to stay away from stock for a while. Bernarke's crew can't seemed to dump the cheap money fast enough, Oh, No, printer malfunction !
Having scanned your pervious articles over the last month or so, you are all over the place. Market looks good, no, wait, market looks bad, no, now it's going to get better, no, hold on, things don't look so good.................. give us a break!!!
One of the longest rallies on record has just ended. Investor psychology and the market have been outrunning the real increases in earnings. See the bull-bear ratios. The S&P 500 PE ratio. I'd post the links but they won't allow it here.
It's hard to time the market -- but I'd bet on a real correction to both investor optimism and PE ratios.
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