Dollar weakness rattles markets

A deepening squeeze in the ubiquitous 'yen carry trade' results in the worst stock market selloff since February.

By Anthony Mirhaydari Jun 5, 2013 2:44PM

Is this the big one? For months I've been warning that the persistent rise in stocks was driven not by hard fundamentals, like corporate earnings and economic vitality; but by ethereal factors, like overconfidence, a cult-like worship of central bankers, and an extreme decline in the Japanese yen. And that, as a result, it would all end very badly.


The yen's fall against the dollar unleashed a wave of "carry trades" by hedge funds who sold the yen, used the proceeds to pump up U.S. stocks, and profited from the yen falling and stocks rising. Retail investors piled in, pushing NYSE margin debt to record highs over the last few weeks as insiders slowly started selling.


But now, with the yen surging (on disappointment with plans to revive Japan's economy) and the dollar falling (on poor jobs data), the house of cards is collapsing around the bulls faster than they can take off their Dow 15,000 rally caps. Here's why the downside pressure could persist -- and how nimble traders can profit from it.


Again, this has everything to do with the yen carry trade. The ADP employment report that the headlines are blaming for the selloff wasn't a big deal: Private payrolls came in at 135,000 in May, below the 171,000 consensus estimate.



Yet the chart above shows why markets are so turbulent: The ratio of the yen to the dollar is falling below its 50-day moving average for the first time since October. This, as shown in the lower pane of the chart above, mimics the wipeout underway in the Japanese stock market.


Mature man building house of cards copyright amana productions inc., amana images, Getty ImagesFundamentally, nothing has changed. The economic data continues to disappoint, as it has for the last two months. Executives continue to lower second-quarter earnings guidance at a pace not seen since the dot-com terminus.


What's happening is those soft and squishy factors that sent the Dow to record highs are melting away. And there's no telling when and where it stops. Panic selling begets panic selling; just as greed encourages greed.


Technical indicators offer some guidance. The relative performance of risky stocks vs. Treasury bonds is just starting to roll over. Market breadth, or the number of stocks moving higher, is still deteriorating. Sentiment measures are far from oversold. The CBOE Volatility Index (VIX) is pushing higher as options traders flock to put option protection against additional declines.



Just looking at price, the S&P 500 is so far extended above its 200-day moving average that a test of the 1,500 level would be healthy and normal. That would be worth an additional -7% loss from here. A drop all the way to the lower envelope, shown above, would be worth -12%. Such a correction hasn't happened since the U.S. credit rating wipeout of 2011. 


For conservative investors, my advice remains as it's been over the last few weeks: Harvest long profits and raise cash or nibble at Treasury bonds. Precious metals are also worth a look.


The iShares 20+ Year Treasury bond (TLT) is forming a base of support at current levels as 10-year Treasury yields look set to fall from their current 2.14% level. In early May, yields were at 1.66%. The economy just can't handle a near 30% increase in the cost of money in just a month. There will be consequences. And as a bond investor, you can profit from that. Just be aware that this is a trade, not a long-term buy-and-hold recommendation.


For more aggressive traders, the short side opportunities are becoming more numerous.
Up until a few days ago, it was all about betting against mortgage REITs like Northstar Realty Finance (NRF). But I've taken profits and closed those positions as the selloff widens. Emerging market stocks remains extremely weak as they continue downtrends started back in January.


The ProShares UltraShort China (FXP) is good for new money here. As the selloff widens, broad market inverse ETFs come to life, such as the ProShares UltraShort QQQ (QID), which I'm adding to my Edge Letter Sample Portfolio.


I'm also seeing new short opportunities in European financials. I'm adding a short against ING Group (ING) to my holdings as well.



Disclosure: Anthony has recommended FXP to his clients.


Check out Anthony's new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at anthony@edgeletter.c​​​​​​​​​​​​​​​​​​om and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.

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Jun 5, 2013 3:32PM
You cannot print your way to prosperity, no matter what the imbecile Obama says....
Jun 5, 2013 3:15PM
the feds have been trying to draw the dollar  down  for  3 yrs  now   and this is  big  news
Jun 5, 2013 3:23PM

and heeeeeeeeeeeeeeeeeeeeeeeeeeeere we go! QUICK!! QUICK!!! more Quantitative easing please!!!!!! aka bullshyt kensian fictional money printing quick fix, that never works, but, more, more more!!! QE 12345678... well you get the picture, depressing ainit it??


meanwhile susan 'the bullshyt artist and communist liar' rice is appointed heheh is appointed... as hehehhahaha!! hahaha!!! oh God I can't even say it much less WRITE it, look it up yourselves people!! hahahaha!!HAHAHAHAHAH!!! ah!HAHAHAHAHAH!HHAHAHAHAHA....figures though!!

Jun 5, 2013 4:30PM

They better trot out stammering bubble-headed Bernanke to assure the wall street welfare crowd that he will always come their aid and back them up no matter what, and that he will continue to rip-off the American peoples' savings and purchasing power so that wall street can keep stealing their money. Then stocks can go up again for a while.  

Jun 5, 2013 4:04PM
Panic selling begets panic selling ,just as irrational exuberance begets irrational exuberance just as greed encourages more greed. Cycles that repeat themselves over and over and nothing really has changed ,or will....
Jun 5, 2013 4:25PM
This is not about the weakness of our dollar it is because of running the printing presses when ever the President needs the market to go up. Maybe now people will realize that the meteoric rise of the stock market over the past 3 years is not because our economy is stabilizing. It is because it has been artificially inflated by round after round of free money, call it a stimulus or quantitative easing whatever you want, to the tune of $85 billion per month. This along with the failure of Obama and the Democrats in Congress to do anything about our run away spending. The only action that has been taken by our President and the Democrats is to raise taxes. I wonder what his next plan will be.
Jun 5, 2013 3:39PM
Jun 5, 2013 4:28PM
After reading a few of these comments I must say that the lack of any intelligent discussion is just another testimony to the utter failure of the US education system. 
Jun 5, 2013 4:36PM
Time to recognize that QE doesn´t work, it just creates distortions that are sustainable only while money is being printed. One may say that unemployment got lower and housing prices recovered some, but the truth is once they stop pumping money into the economy, it will all subside. That being said, I wonder how Bernanke is going to react to reality. I´d think he will stick to QE, what I don´t know is whether he will be able to do it or even increase the amount of printed money.
Jun 5, 2013 3:59PM
Jun 5, 2013 5:09PM
Generally you can ascertain the intelligence of a poster when they immediately dive into a political blame game and fall all too easily for it, not caring or not realizing in oblivious bliss that it's way beyond the point of finding fault.  Too little, too late.  It's a boring and lazy excuse for wasting one's energy on anything besides bettering their own finances and lives, and utterly failing to realize they are a complete tool of the media actually believing that "one side" is better than the other when the track recrords clearly prove otherwise.   Major fail to those who are so bitter about their own life shortcomings that all they can do is play the futile political stupid game, completely missing the point that the markets especially could care less.  Guess an economic system always needs fools who love to chase their own tales and act like sheep heading for slaughter.
Jun 5, 2013 4:47PM

Should read Obama weakness rattles market.

Jun 5, 2013 3:43PM
How come no one is yelling --gold gold gold---ha ha ha--Gold---
Jun 5, 2013 4:35PM

When market is down

Anthony comes to town

Showing his charts and tables

Touts gloom and doom like a clown


Jun 5, 2013 4:56PM

....stats show Anthony is probably correct on this one........


Panic will beget panic. The down days will increase exponentially over the next few weeks. Perfect time to short on the way down. Hit bottom at 13,000 or so and then get back in during the late fall of 2013.


May the best guesser win!

Jun 5, 2013 3:55PM
Jun 5, 2013 3:42PM
Look for a way out.Just think if it wernt for 401ks---buy at the new bottom---5300--:)
Jun 5, 2013 4:16PM

oh and gee the Hilton decided to cease room service, hmmm wonder why??? could it be that nobody is renting hotel rooms anymore???, and this is in New York for God's sake, and there's no need for room service???, all this BOOM!! BOOM! BOOM Economy??  it's in recovery???


obama done fixed every thaaaaaaaaaaaaaaaaaang! didn't he???? hehe


Oh man, I could write a book on the stupid asinine American voter and people would be crappin' themselves from laughing so much, except for one thing, this economic DISASTER is REAL and not funny at all, but gotta laugh to stay sane.....!!!!  but keep voting democrap you pathetic nihilistic vermin libs and burn with us all! at least I'm content knowing you've gained ZERO!! over the rich or anyone that's remotely better off than you, you pigs, you rancid vermin, mid elections coming up soon, You're Toast!!! and I'm laughing already....'braying' as some idiot obamazombie said, I'm cool with that too!

Jun 5, 2013 4:18PM
The same guy that run the Weimar Republic must be Obama's economic adviser! Fire up the presses and throw more dollars at Wall Street! The more you print the more worthless they become. Wheee ain't this fun!
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