Has the market gone crazy?
A surge of investor inflows despite growing worries has lifted stocks ahead of the debt ceiling fight.
The 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 firstname.lastname@example.org and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
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.....
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.
All that shidt....And all I want is "cheap good whiskey".....
and a good table to play on.
Not at the same time...
Best latest comment: 3/4 ths. of Americans are Bi-polar...
Surprised this Article is still on front page....??
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.
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.
OMG.......They walk among us..!!
Or they think the others walk amongst us.....??
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