The sell-off is just beginning

As Egypt burns, market volatility spikes in what's shaping up to be the worst correction since August.

By Anthony Mirhaydari Jan 28, 2011 3:20PM

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 anthony.mirhaydari@live.com. Feel free to comment below.

21Comments
Jan 28, 2011 5:49PM
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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.

Jan 28, 2011 7:14PM
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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.  

Jan 28, 2011 5:25PM
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This writer of the article is such a ****. Every week he changes his tune on where the market is going by how it does that day or week. One day he saying the market is going to take off...the next its going to tank...check out his past articles...this guy is a total idiot and I have no idea we he gets to write a column regularly...
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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.

Jan 28, 2011 7:16PM
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The stock market has certainly done well and now it has to take some profits from those who think the run higher will never end. Still the fundamentals for solid real economic growth don't seem to be anywhere to be found. Exports of goods and jobs has been the driving force for market growth and those 0 and negative interests loans are helping they are just not helping the man on the streets. We live in an emerging feudal soceity and it is going to get much worse if the dollar loses reserve currency status.
Jan 28, 2011 4:32PM
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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 !

 

Jan 28, 2011 7:12PM
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Dang MSNBC, I was looking for the article you posted yesterday saying stocks were set to really take off after the president's address.... Where did that article go??
Jan 29, 2011 5:21PM
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Cracks me up how these guys want to place a basis on why the stock market is up (or down) 20 points on any given day.  It's akin to saying " my shower took 1.2 seconds longer than usual because my little toe was extra dirty today".   Point being, small moves are insignificant... but these guys make a living reporting on the moves.... Most should be ignored.
Jan 28, 2011 8:45PM
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Just self fulfilling prophecy.  Anthony must have sold short and wants to cash in.  Personally I wouldn't mind a little correction, just so I can buy in more at the expense of the dumb dumpers. 
Jan 28, 2011 9:49PM
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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!!!  

Jan 28, 2011 9:27PM
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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.

Jan 28, 2011 8:56PM
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I have a keyboard and an opinion.  I matter. 
Jan 30, 2011 1:09PM
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Idiots like this guy who flip flop every few days just contribute to the volatility in the markets. People need to not panic based on what the media is pumping out. 
Jan 28, 2011 10:09PM
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The current run up in the markets is just another 1931ish Bear Market Bounce. The S&P 500 average pe (23.37) and dividend yield (1.78) bear (no pun intended) this out. The markets will continue their downware spiral with global deleveraging. The 64 dollar question is how the deleveraging takes place, loan defaults, money printing, austerity programs, rising taxes, or spending cuts. 
Jan 29, 2011 1:11AM
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You wouldn't give out my first comments would you. Like I said these guys come out of the woodwork as experts. They like to act like they have all the answers. Keep your stock and hold the course. Were moving forward and don't listen to the fly by night experts. The market always comes back. Stop the fear. Geez it's a country who has little to offer anyway.
Jan 31, 2011 8:44AM
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This guy is a total disgrace not only to himself but to the editors of MSN money. A freshman business college student has more common sense and more analytical acumen in financial matters than this joker. It's bad enough that the little investor has to endure and cope with a manipulated market that produces billion dollar bonuses for hedge funds and then be confronted by this fool with his desultory garbage. The market will always fluctuate and many many times current events have absolutely nothing to do with the vacillations except to give a fool like this guy something to write about. The real culprits  are the editors who permit these irresponsible articles. This guy's history speaks for itself. He's a quack !!! This is not a case of airing a difference of opinion  - he doesn't have one scintilla of ability to express an intelligent opinion and disguises it under a subterfuge of charts. A real LUSAH.
Jan 28, 2011 9:27PM
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Um, the market is going to correct because the market has increased by about 70% from its low about 2 years ago.  Don't need this guy to say why - though this time he actually points to macro-economic factors that make sense, unlike previous articles, which are full of smoke and mirrors more than anything.
Feb 20, 2011 10:32PM
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Anthony, you blew this call. but I still enjoy and learn from your articles.
Jan 28, 2011 7:25PM
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The Market will be up next week. You can't believe anything these so-called experts write. Today was just a dip and next week will continue to be what the experts said in December, " 2011 will continue where 2010 left off". Remember?
Jan 28, 2011 9:25PM
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These Democrats keep giving into a small pool of radical  extremists they  say no oil drilling no coal mining no nuclear plants . They keep pushing green energy  where`s the jobs manufacturing  jobs our leaving faster then you can say rumple stileskin .These radical`s like Bill Mares think they speak for the people but they think for a small percent of American`s tree huggers  but huggers sea huggers  ect .we need job`s now
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