Has the market gone crazy?

A surge of investor inflows despite growing worries has lifted stocks ahead of the debt ceiling fight.

By Anthony Mirhaydari Jan 14, 2013 1:57PM

Stock market copyright Digital Vision, SuperStockThe market schizophrenia has reached a new extreme. Thanks to first-of-the-month retirement deposits, as well as New Year's optimism over the fiscal cliff deal, investors poured more money into stocks in the first week of January than they have in at least a decade, according to Lipper data.


But instead of igniting a sustainable new uptrend, the inflow looks eerily similar to the inflows seen in late 2007 and early 2008 -- a head-fake rebound that came on the cusp of a new bear market. Indeed, money has been flowing out of stocks over the past six months on a scale not seen since that period.


Plus, despite the inflow, there is mounting evidence that something is deeply wrong with both the markets and the economy.


Just look at the market action last Friday, rife with broken correlations and odd behavior. The dollar weakened, which should've been a positive for gold and silver -- but it wasn't. Emerging-market stocks weakened, which should've been a positive for the dollar -- but it wasn't. Treasury bonds strengthened, which should've been a negative for stocks and junk bonds -- but it wasn't. I could name a few more, but you get the idea.



My interpretation is that the market, like an overworked muscle, is suffering spasms as people react to a very dynamic situation.


The business cycle is on the precipice with recessions under way in Europe and Japan. Political risk is extremely high with the Treasury poised to run out of its cash reserves in just over a month, President Barack Obama warning he's unwilling to negotiate over the debt ceiling, and House Republicans threatening to shut down the government. The market is losing faith in the ability of central banks to save us from our overindebtedness and an austerity-driven downturn that looks all but inevitable as hawkish central bank policymakers begin to doubt their own efficacy.


Retail investors have no qualms, apparently. Actively managed equity funds recorded their biggest inflow, in dollar terms, since they were first tracked weekly in 1Q00.




The technical outlook doesn't support this confidence, given that market cycles are shortening, correlations are breaking down, price volatility is increasing (but not the volatility index), and market dislocations are growing more frequent as breadth and volume measures roll over.



Nor do the fundamentals justify this. The Citigroup Economic Surprise Index is rolling over. State sales tax receipts are falling away. The Eurozone looks vulnerable as its core strength, German manufacturers, weakens. Companies like American Express (AXP) and Disney (DIS) are increasingly turning to headcount reductions in a desperate play to boost earnings growth, late in the expansion, as revenue growth stalls -- resulting in an increase in initial weekly jobless claims as well as mass layoff announcements.



And the banks, as illustrated by Friday's earnings report from Wells Fargo (WFC), are suffering from a decline in net interest margins (caused by the Fed's ongoing efforts to reduce long-term interest rates) at a time of swelling deposits.


The context for all this, of course, is the reaction to the kick-the-can fiscal cliff deal two weeks ago. While that avoided the near-term risk of higher taxes for everyone, it added complexity to the upcoming debt ceiling negotiations while also poisoning the dry well of bipartisanship a little bit more. 


Now, in just a few weeks, we face the debt ceiling and a rundown of the Treasury's cash reserves, the end of the ongoing budget resolution (which is funding the government in lieu of a real budget), and the automatic "sequester" spending cuts from the fiscal cliff.


Rest assured, the spasms won't last forever. Directionality will return soon. And I think the direction will be down.


The fundamental catalyst could come from a variety of sources but will most likely start next week as Q4 earnings season heats up and reveals the struggles faced by the corporate sector. Then, as we move closer to February, attention will turn from gun control back to the debt ceiling fight and the rising specter of a debt default and a credit rating downgrade.


The technical catalyst will likely be an extremely overdue pop in the CBOE Volatility Index ($VIX) and the U.S. dollar. The volatility term structure is already beginning to flatten -- an antecedent to an increase in the short-term VIX. So it's already quietly happening.


Traders of overbought dollar sensitives like emerging market stocks and copper are already showing signs they're headed for the exits. In response, I'm adding the ProShares UltraShort Emerging Markets (EEV) to my Edge Letter Sample Portfolio.


Be sure to check out his 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.


Jan 23, 2013 3:18AM

Markets are up more than 1-1/2 points since this article.  Looks like (so far) this article is wrong.  Are we still predicting the "spasms" will be replaced with "down"?  I'm having my doubts.....


Jan 17, 2013 5:12PM

Very nice day, although the Dow should have ended about 120-125 points up and the S&P about 12-14 points up....Oh well, we knew these scumbags would make a move sooner or later and it came at about 1520 hrs, the good news is that they obviously were not very successful....Lets see how things go tomorrow, Intel just reported good numbers...Will be interesting.

Jan 17, 2013 2:10PM
Other than Boeing, decent news this morning and the market reacting accordingly for a change....Three long hours to go though, like we always warn, do not take anything for granted down here...Things looking good so far though...More later.  
Jan 16, 2013 4:41PM
We have been trying to keep things calm and quiet, boring is good....A bit after 1500 hrs scumbags started to try to bring these markets down....Not a big surprise....Wont be too easy to keep things in the green by the close...Plus, the village idiot opening his trap once again today did not help markets, when does it????....More after the close.
Jan 15, 2013 5:52PM
I'm scared and concerned for our country and our personal safety...I hope they figure it out soon on how to fix this fiasco that can and will lead to country system crash. Aristocracy and nepotism to fill executive leadership positions and creating the wealthy through inheritance just doesn't work to maintain financial and political stability so we need to fire a bunch of people and put into offices, the ones who are qualified and have discipline to do the extremely important leadership management jobs. We do in fact have the home grown talent with potential to shine brilliantly all over our great country with service to protecting our (majority) interests as primary focus of management rather than only serving the top 1% upper crust's interests, but it's being underutilized and underemployed due to corruption, nepotism, and aristocracy ruling the world. 

There is still time for them to set things right as to prevent failure, but it's going to take a totally different peaceful, but effective approach than just having, "Laissez-faire." They must fix it for their money too won't be worth anything more than the cheap paper and computers it's written on. 
Jan 15, 2013 2:11PM
Yes it is crazy, but the sanity arrives around June! -
Jan 15, 2013 12:03PM

All that shidt....And all I want is "cheap good whiskey".....

and a good table to play on.

Not at the same time...

Jan 15, 2013 11:40AM
Jimmy Cliff, "sitting here in limbo, waiting for the tides to change".  And after reading such nonsense as pawning a national monument and Cramer's disingenious confession of not being who he wants folks to think he is what could be next?  The dog  days of January.  Oh then lets talk superbowl.  But we already know New England will win, next idea please.  We have the POTUS in an unbelievable stomping on the 2nd ammendment and nobody seems to care.  Perhaps we need another Jolt of coffee laced with sugar, or Armstrong on his Oprah confessional or even Gore making himself into the Worlds second biggest fraud and hypocrite and  nobody seems to care.  Okay then lets talk gun control because that makes more liberal folk feel good about protecting the innocent children and the whales.  Yes lets save the whales. What we all need most is soft music to keep us occupied while we fritter and waste our hours in an off hand way.  Yawn.  I need to do something constructive.
Jan 15, 2013 10:55AM

Best latest comment: 3/4 ths. of Americans are Bi-polar...


Surprised this Article is still on front page....??

Jan 15, 2013 10:11AM
Even if the market showed to be over the top, doing well, there are 20% less jobs available in the U.S. today than ever before.  To include that many who used to hold positions where they could pay there bills, are no longer able to do so.

And it is only going to get worse from here.  Even if the economy were not such a disasterous mess, more and more jobs will be taken over by technology.  This is already been happening on  large scale.  The three largest corporations in America only have 150000 employees combined, when an older company alone, (without the newest technology) has more employees than those three combined.

If you conduct your research, you will see that things may very likely continue to go in downward spiral for an insurmountable amount of people here in the U.S. 

Again, even if the economy and stock market are off the wall spectacular, the people will be suffering with no jobs and no means of paying bills or buying food.  The stock market is no longer a representative of things possibly getting better for the people of the United States. 

Jan 15, 2013 9:29AM
This market is as corrupt as Congress!
Jan 15, 2013 9:26AM
The stock market is BiPolar. Like 3/4's of Americans these days.
Jan 15, 2013 9:18AM
Lets stop and think this out. Firstly if you do a little searching you will find much institutional selling going on right now. Secondly you will see this statement of much new money coming in from overseas. With the market basically in a holding pattern we have what going on here? We have the insiders on wall street taking out their money but only in relation to the amount of new money coming in.  We wouldn't think Wall Street would pull the dandiest fraud of all and stand by as their institutional buddies and friends take their money out of this non reality based ponzi scheme but only in relation to the dumb money inflows so as not to create panic. And then of course I don't need to tell you what comes next. Some things change but Wall Street.  C'mon.
Jan 15, 2013 8:41AM
Hi, I dont care what anybody says, I buy stocks from good blue chip American companies and hold them, in a 20 year period there is nothing on this earth that makes more money !
Jan 15, 2013 8:37AM
Sober Reality: Prior to 2007, nearly every Annual Report showed the same scenario- aged executive management with ridiculous shares of stock and additional compensation. They were older and out of touch with the business. From 2003 through 2008, these guys retired, taking that wealth with them. All replacements were hired-in, given similar wealth packages and began putting in place an array of Ivy League and Big Ten alumni. They were equally out of touch with the business but could do stuff like a pretty Excel spreadsheet but had no actual field exposure. Then we had compression. Banks and big auto got publicly bailed, all publicly-traded platforms got bailed by the Fed through QE. During 07 and 08, all these businesses wiped out the careers of the millions of people who made these entities function and were customers. IF there was no QE and bailing, there would have occurred natural and systematic failure. Instead, the influx of electronic cash and creation of two new currencies- Debt Contracts and Derivatives, the shares of publicly traded companies rose and continued to with each new QE through exchange investment, not new sales or restoration of the functional also customer employee. So... you banter about where we are at and what to invest in. Organized business (publicly traded) is hollow. It has no viable assets, no functional personnel, no markets and no sales stream with tangible products. The Debt Notes and Derivatives are fully existent on the tangibility of publicly traded businesses and self-sustaining institutions. Do you get it now? It's a triangle etched on the surface of the planet, not a foundation anchored to it. It has no substance or sustainability. When Japan says it will invest in Europe, know that the Yen was 300 to the Dollar less than two decades ago and Japan's economy was dismal in those years. So what is it investing? Nothingness. Not one job will be created from it and not one family-sustaining job has been created here in America since 2003. The markets crashed in April, 2001 and miraculously recovered through hikes in the Debt Ceiling and Fiat Money Printing that went directly into the markets. Through 2011, this was the standard operating procedure. If you're intelligent enough to READ and not LISTEN to shock jock interpretations, you can match this same pattern to three historic events-- Inflationists eliminate the work force, over-print the currency and buy the Debt Instruments, then cause inflation to bolster the instrument value. Unfortunately, the industries required to accomplish the cycle no longer exist. They are platforms invested in by YOU and otherwise incapable of function without functional personnel- who are destitute now. All these guns, gold, political action committees and artificially-inflated stocks don't really exist without Main Street functioning to make them so. The Me Generation is adamant and arrogant, but piled on the same band wagons. Thumb me down all you want. Sober Reality is a bitter pill to swallow. You can only lose by continuing to maintain the 20th Century's concept of prosperity. It will thin out until it dissolves and YOU will still be alive, just not functional. Functional won't be unable to revive much at all unless it begins now. You partied... you have to pay the bill. Better to be known for fixing what is broke and passing on with respect, than causing and maintaining the train wreck. Your choice.
Jan 15, 2013 7:37AM
You're so stupid as to ask "Has the market gone crazy"? Just as I suspected.
Jan 15, 2013 7:37AM
The call to out Jamie Dimon has been made. Goldman Sachs is installing fully detached people into roles they can only run by arrogant ego, they know nothing- otherwise. Money is leaving the markets because people look out their window and don't like what they see. "Big" isn't doing well. Without BIG, funds, groups and institutions cannot maintain. It was easy to follow someone else here, but now that you are going back on your own, the road looks completely strange. Watch out for who lurks behind the trees, they know the territory far better and know what you don't.
Jan 15, 2013 12:38AM

Seems like Anthony's itching for a bear and trying to "talk" the market into it so his recent call of an "epic" one will vindicate him. Anything's possible, but in fact he knows what's ahead no better than anyone else does. Yes, it is curious how different educated analysts can look at the same data and come up with opposite conclusions. If Washington (read Republican Congress) blows a debt ceiling deal, we might be looking at one, but at this point I find more reasons to believe otherwise.

Jan 15, 2013 12:22AM
It's funny !! All the business media is bipolar, short term thinkers and people listen; invest from the words of these so called GURUS. Bad dog! Smart investors set their plan and go long for slow, steady gains. This procedure has worked handsomely for me. Quit being so manic!
Jan 15, 2013 12:09AM

OMG.......They walk among us..!!


Or they think the others walk amongst us.....??

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