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 14, 2013 11:56PM
Crash is coming! Today's economic problems are not about what we are doing today. But they are about what we have already done. For many decades, FED made credit easy, America borrowed. We have inflated the money supply, prices and salaries with borrowed money. Debt has reached excessive levels with FED's leadership. FDIC guaranteed deposits and depositors never questioned bank actions. Fannie, Freddie guaranteed mortgages, banks gave mortgage to every breathing soul. The mistakes are already made. The cause is in place. The effect will follow. Google for "CONQUER THE CRASH KONDRATIEFF WAVE" to understand why. When the developed world has maxed out it's capacity to borrow, we cannot expect smooth sailing. Our problems are far from over. Prepare for market crash. There is no free lunch. Bernanke's printing press is the sign of our troubles. It cannot solve them.
Jan 14, 2013 11:06PM
Normally the stock market goes up when unemployment is low and people are contributing through their company sponsored retirement plans, but the market keeps going up because it is compensating for this decline by injecting the market with unlimited worthless money fresh off the feds printing presses and Obama and his supporters think this is great and he is great, Logically the the only explanation for this is a big giant alien spacecraft came down and shot a "stupid ray" into the white house and the democrat controlled senate
Jan 14, 2013 10:53PM
You forgot the disclosure that Anthony Mirhaydari is in triple short etfs and is wrong every time the market goes up as he only knows how to find indicators to the downside.
Jan 14, 2013 10:45PM


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?......

Jan 14, 2013 10:25PM

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.

Jan 14, 2013 10:16PM
The prerequisite for the nationalization of the banks and their subordination to the needs of society is an independent political movement of the working class on the basis of socialist policies. It is a question of state power.

 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.

Jan 14, 2013 9:32PM
who is this guy and why does he have a pulpit to scare everyone has he have short interest on all positions?
Jan 14, 2013 9:12PM
if i had money and i don't...i would start a company in the united states and build an all american product with raw materials from the united states...and i would pay a good wage to my employees...and i would profit share with them giving them say in the business and make them feel a part of the process and use their ideas on making the product better...it would be tough but i would never waiver from these ideals...and never worry about my stock holders...because this business would be what it is...if it made money and as i stated before them moneys is what would be shared between employees and investors... money would also be reinvested to make this company bigger and stronger and hopefully a benchmark for others...
Jan 14, 2013 9:03PM
To make the statement somewhere-----anyone who can't do anything but pay the interest on their debt IS a "deadbeat" nation. The best soundbite of the whole interview was when BO stated that they think I'm just a "big spending socialist". I noted that the major press didn't pick up on that anywhere? What's new?  It was stated to me long ago----The Whimpy approach. I will gladly pay you Friday for 2 hamburgers today. Maybe? 
Jan 14, 2013 8:55PM
We ended the day basically flat, a bit down, we'd take it any day, especially after the village idiot opened his trap once again and lied to the American people saying the economy is roaring...Oh well, we are used to this arrogant ignorant buffoon talking garbage...The biggest debt creator in American history as usual blaming the Republicans...Like we always tell you, he may fool the people, he doesn't fool Wall Street....We will see what happens tomorrow...Hopefully a bit better than today.
Jan 14, 2013 8:37PM

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!

Jan 14, 2013 8:05PM
I cannot make heads or tails out of what Anthony is trying to get across here. I do know if you want to protect your investments you need to follow the actions of some major Obama campaign contributors and supporters. These are the same people who openly supported higher taxes on the one percent, like themselves. Here is their prescription for financial security in a fickle economy and more dangerous, uncertain political environment that Obama has created. Google and their head honchos shifting nearly 10 billion in revenues to a Bermuda shell company (Isn't this something Obama chastised Romney for during the campaign?). The Washington Post giving 2013 dividends in 2012 to protect investors from paying higher Obama taxes on dividend income. Costco Co-founder Jim Sinegal and Costco board of directors voted to pay a special 7 dollar per share year-end dividend to avoid higher taxes. Jim Sinegal was the mouthpiece that protected Obama on his campaign faux pa, "you didn't build that" quip to small business owners. Facebook Co-founder Eduardo Saverin renounced his US citizenship in order to evade almost 70 million in taxes. Mark Zuckerberg of Facebook who said it was ok to pay higher taxes but has family skirting Facebook shares, estate and gift taxes by placing shares in annuity trusts. This avoidance adds up to 200 million in lost tax revenue. George Lucas of Star Wars fame sold his film company to Disney for 4 billion in cash and stocks to avoid anticipated capital gains tax increases and Obamacare/Medicare surtaxes on investment income. Lucas was a backer of Obama's capitalism bashing rhetoric during the campaign. Andre Young aka "Dr Dre" who was a vocal supporter of Obama, made approximately 100 million last year is using a County Cork, Ireland tax haven to protect his empire subsidiaries from higher US corporate tax rates. If you listened to Obama's rhetoric during the campaign you'd swear these were Romney supporters. WAKE UP AMERICA THE TRUTH IS COMING!!!  
Jan 14, 2013 7:30PM
Can't find anything wrong with the last three comments....Agree 110%.
Jan 14, 2013 7:20PM
As a counterpoint to this dismal attempt at fear mongering, I offer an article from Seeking Alpha,
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.   

Jan 14, 2013 6:51PM
Our economy is rallying.  Even the Tea Partiers realize they can't shut down the government.  When we get past the next two fiscal battles the market will soar like it did in 90's.  It is not people like Anthony that drive the market, it is the real investors that determine what will happen.  Most of us realize we at the beginning of a great bull market.  Get out now and you will regret it!
Jan 14, 2013 6:50PM

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.

Jan 14, 2013 6:44PM

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.

Jan 14, 2013 6:16PM

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!!

Jan 14, 2013 6:06PM
Mom and Pop investor are always the last to dive in and buy at the highs. That is what you are seeing. The next crash and burn is right over the horizon.
Jan 14, 2013 6:04PM

It's okay, Barry Obama has all the answers

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