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 email@example.com and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
Regardless of all the noise and deception. The market is on the heals of 4 year highs and historically there has been a drop from those highs stemmed from profit taking and fear. Greed is prominate in all investors based on little more than a emotion of HOPE !!! Although consumer confidence is Up Investor confidence is ?
In the next few days we will see if the investor with confidence and hope stand fast or run for the hills.
My guess is that there will be a correction once the fear and profit taking starts but until then watch for continued favorable company reports and if your investments are gaining value that is equivalent to the market pulse or out performing the market. That is a sure sign of which direction to go in....remember we are at the highs and the market does go up and down. Whats your risk level?......
It's funny how the MSN writers no longer hardly even talk about the European debt crisis etc. I guess all is well in Greece, Spain, Portugal, Ireland, France, etc. etc. These writers grope for any positive thing so they can hype it up but won't talk about all the negative economic news. Some of the economic data is so negative that even the "spin doctors" at MSN can't turn this crap into something positive. Take away all the gov support and let the market truly be a "free market" and then you will what reality really is.
No capitalist government can or will carry out this task. What is required is a political and revolutionary struggle to establish a workers’ government.
What is required is a coordinated offensive by the international working class on the basis of a socialist and revolutionary program that aims to reorganize the global economy to meet social needs rather than the profit imperatives of the various national elites.
This guy really does not make much sense; in one weeks time he will write an article why you should buy and then less than a week later he will tell you why you should sell. Do yourself a favor and do not take this authors advice for buying and selling stock!
The articles do not appear to be intended for day trading and he certainly does nothing for a long term investors. He writes articles for the sake of writing, there is no long term goal or point here.
Who wants to see a graph of what my toilet looks like when it gets flushed? Oh, its swirling to the rights everyone! Be ready to sell big time, trouble, trouble, trouble, the earth is coming to an end soon!
Arkansass, The Tea Party Patriots are the people that invest in the Market....we support Capitalism, Limited Government and Fiscal Responsibility...
You need to give credit where it is due......OWS Idiots, Freeriders, Leftwing Socialists and the Democrat Party....
The Libs love the Party of "Create a Crisis" and we have a taxpayer funded Solution.
entitled 7 Bullish Signs for Wall St.....
In case there are some too dim to figure out links, like SRT Driver, here are the major highlights:
The first sign is news out from Dell () that it is talks with two private equity firms for a possible buyout, sending the stock sharply higher in early afternoon trade.
News of this sort is an indicator that high-technology stocks are undervalued, and may fuel a rally in the sector -Hewlett Packard () was also sharply higher following the Dell news.
The second sign is that Apple's stock has been rebounding after an early sell-off, holding firmly above the $500 mark, an indicator that markets may have already discounted all the negative news about the company.
The third sign is bidding wars for takeover plays, as has been the case with companies such as Sprint Nextel (), Dish Network, Clearwire Corporation (), and Knight Capital. Bidding wars are usually bullish for Wall Street as they push market valuations higher.
The forth(sic) sign is a wave of job cuts at large firms: 11,000 at Citigroup (), 5,400 at American Express (), 1,600 at Morgan Stanley (), and 290 at Campbell Soup () -- to mention but a few. Job cuts are certainly bad news for Main Street, but they are bullish for Wall Street as they add big to the bottom line. They further allow companies to recruit new talent as they replace unprofitable with profitable product lines.
The fifth sign is dividend hikes: 100% at Ford (), 12% at General Electric (), 10% at Boeing (), and 7% at Intel. Dividend boosts are usually an indicator of improving financial situations at companies and make their stocks more appealing to investors, especially in this low environment.
The sixth sign is a stabilization of European economies and a rebound in the Chinese economy -- a positive development for commodity and materials companies that sell a big chunk of their output to China.
The seventh sign is liquidity. Record low short-term and long-term rates leave Wall Street as the sole haven for superior returns, as confirmed by the record inflow of funds into equity funds.
...AND YES, there is an 8th sign: President Obama - having turned out to be the only adult
in the room- will no longer allow intractable political philosophies of the Right, who have thus
far managed to badly mangle the general economy and savage the wealth of a nation, to
turn fiscal deliberations into petty debates over meaningless detours solely to further their
own political 'careers'.
Thank you, President Obama. Let the 'rally' continue, despite 'short snorters' like Mirhaydari
who only seem interested in selling you the latest options fund, and their misaligned
negative ramblings. Carry forward, people.
SRTDRIVER:Let me respond without name calling as the far right seems to always
do.I own my house and car with no mortgage because I pay as I go.The Dow was
at 8158 when Obama took office.Now it`s over 13,000.Facts.I know the far right hates
to hear facts, but, If you missed the market upswing you`re bitter.Try learning.
And really GayDriver....No ONE (well except maybe 4) are interested in listening to your extreme shidt..
You apparently lost....And are CURLED UP into a Ball in the corner....Sorry about your luck...
Actually about 7 morons now...now 11..
And as far as your explanations of others, either shows your "lack of intelligence" or very poor "upbringing" by your Momma.....Certainly manners were not high on the list in your household..!!
Now do your best, to move into real Society, without licking yourself in Public.
hmm interesting, I point out the fact that, that criminal marxist filth pelosi, reid and obama voted against increasing the debt ceiling when the Bush administration was in office and it somehow gets deleted from the thread, not surprising, TRUTH HURTS LIBS!!! skewers their collective azzess, they wanted to defund the Iraq war so they didnt' vote on increasing the debt ceiling, now all off a sudden this bastard pig obama claims that raising the debt ceiling now has nothing to do with spending increases hahahah!!! 'we have to pay our debts' yea the debts that pig muslim incurred during a 4yrs nightmare term!! !hahahahaha!!! we're headin' for 17trillion in debt now!!!
oh man!! are these pig democraps something or what?!! hey scumbag osama voters how're those smaller paychecks makin' you feel?? well ,those of you that work, wait till the taxes go up even more on the mid class, oh the hoops they'll be jumpin' thru to justify that!!
let me ask you people something, if you ran your household like these motherfckes are runnin' this nation how soon would you declare bankruptcy? hmm, you sure as hell wouldn't be gettin' "bailed out" by the neighbors that's guaranteed!!
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