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.

 

Incredible.

 

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.

 

149Comments
Jan 14, 2013 6:04PM
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It's okay, Barry Obama has all the answers

Jan 14, 2013 5:43PM
Jan 14, 2013 5:12PM
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Get ready for the shut down      the new GOP is the old GOP       there going to do what they were voted to do        there just doing their job        the approval rating will go up after the job is done.
Jan 14, 2013 5:10PM
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With a POP on the VIX in late December, after having many mild weeks, and then the DROPS we have had the last couple weeks.....NO SURPRISE if we have another "pop."

 

Only question is Anthony: Will that be good thing or a bad ??

Jan 14, 2013 4:57PM
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"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."

 

I hope you're right.  I just moved a very large chunk of my portfolio into conservative funds based on logic similar to yours. 

Jan 14, 2013 4:48PM
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Yes exactly, the Debt Ceiling raise is for paying the Bills Owed....

But Endeavor is correct in stating we have a Cancer in our Deficit spending that's growing our Debt..

 

The Chemotherapy needed is for the spending cuts to kill the Cancer that is killing us..

I would say the high flying Military Industrial Complex needs a dose...For starters.

The Wars are ending, we do not need another Battleship or more, Soldiers pay will be safe.

And I'm sure there are other Entitlements we could trim, particularily FRAUD..

Trim all the NEEDLess Pork and Fat out of bills...

And do not touch Soc. Sec./Medicare, except maybe a slow minor raise of age limits.

67-69 years on the top ends and less percentage at 62...??

Jan 14, 2013 4:46PM
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Wake up America !

The president this morning in his last talk to the American people said.” The Debt Ceiling is not a Bill cutting proposition, but an obligation to pay the Bills Congress has racked up” It’s immoral, and perverted by the Tea Party, and Republicans in Congress, to suggest cutting the entitlement programs in exchange to increase the Debt Ceiling! The real offender that Americans should never forget is Bush, in his frantic expending during the eight years of his fruitless presidency with no regards to the dramatic damaged he was doing to the American people, and to the future generations by rolling a hugged Budget Deficits that now president Obama is trying so hard to managed without abusing the most presently socially beaten citizens like the middle class, the poor, the sick., the old, the disable. American wake up quickly, and reject all, or any proposed new agenda on the Debt Ceiling topic by worthless Tea Party, and Republican members in this unfortunate House of Congress and Senate!

Jan 14, 2013 4:34PM
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Oh come on now!  Anthony has been positive just as often as he has been negative.   It's always fascinating to me that supposedly highly educated and experienced analysts can look at the same data and come up with opposite conclusions.  It's like paying two fleas to tell you which way the dog is going to go.  If you are right 51% of the time they call you a genius. 

 

As long as the Fed is printing money and giving it to institutions to put into the market, the market will rise.  The money has to go somewhere and it's not being loaned out.  The day they hint that they are going to start unwinding their balance sheet, it will all crash.  So just like it's been since QE1, we are one Fed speech from a market collapse.  It's quite a tenuous existence.   You got to ask yourself how lucky you feel today.

 

 

Jan 14, 2013 4:30PM
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If they do some Christmas Wrapping on the Debt C. deal with some spending cuts.....

 

You are really gonna wish you were in the Markets, in some kind of fashion.

 

If they don't, Oh well, BUT I don't think a Congress with a 12% approval rating is that stupid. ??

Jan 14, 2013 4:28PM
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If Obama voted once against raising the Debt Ceiling was in an efort to kill the money Bush wanted for the Iraq and Afghanistan war budget he knew it will destroy America for nothing!
Jan 14, 2013 4:25PM
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Lemmee see...

First off, Antman, Antman, Antman...? ? ?

Secondly, JustEnter-a-Name....Old Houston Money, never lost their's, it was in the Caymans.

And then we have a "shirtless gay guy" that's calling our President a bastard, and another dikless.?

 

Well,Money coming back to the Markets?, Many of us never really left, or didn't pull too much to the table....It's called "working cash"...Yeah there's bumps, good and bad; But long term trends still seem to be Bullish and many are making money....Sooooo..;

Maybe some investors know or think something POSITIVE will happen...Maybe others don't.??

Jan 14, 2013 4:08PM
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I am Citizen x.  I stand for Truth, Character and Integrity.  I stand for public servants governing with Objectivity coupled with Reason and Logic.  I am not defined by borders, boundaries and subjectivity, but Capitol Hill sure is.  Let’s see how our elected officials handle the debt ceiling issue and a 1.2 trillion dollar sequestration at the same time. 

 

We are not to be taken as fools..

 

Who are you? 

 

www.iamcitizenx.com

Jan 14, 2013 4:01PM
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If we think the the Debt Ceiling is a sickness to America. The Tea Party and the Republican Congress created this unfortunate situation of trying to cut expenses in a power push to barter one thing for another, cut and they will increase the Ceiling. The issue is, the Debt Ceiling increase is to pay Bills not to negotiate Budget cuts for Medicare and the like. To kill the cancer that resides in the House and the Senate we need to cut the disease, cut all Tea Party and negative Republicans from both houses and the country will recover from this permanent sickness that it will ruin our life and our economy!
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Quote

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.

End Quote

 

Quess you missed the Fed and Treasury announcment at the end of last year that they were going to pour money into real estate.

 

The only trouble is the money is flowing into the high end of real estate in my town Houston there are over 20 new $10,000,000 plus houses being built in River Oaks where the old money lives and at least five high rise (10 to 20 floors) $1,000,000 plus condos going up when the existing ones built just before the 2008 crash are 1/3 to 1/10 occupied with at one that busted out and not occupied 19 stories high in clear lake.

 

Yep they are building lots of new homes but for the wrong income level. This means the housing bubble inflated last year is going to bust about the end of 2013 as no one is going to be able to afford the new $1,000,000 plus high rise housing except the retired public workers who get their last year pay bumped up to $200,000 a year and as a result get $180,000 a year pension money havng only paid in about $50,000 into the retirement system.

 

Yep this is all going to be a disaster about ready to pop in housing.

 

And they will need a scapegoat for the coming collapse as the Federal Reserve is no longer going to support US debt and that means the fat lady she is going to be singing at the end of the year and the US dollar drops to zero.

 

Obama is getting rid of all our nuclear weapons ahead of this collapse so the rest of the world is not going to have to fear us like we did when Russia collapsed with over 5,000 nuclear weapons.

 

Get ready to live below the standards of Mexico folks it's about ready to happen.

Jan 14, 2013 3:55PM
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People are finally realizing that buying 10 year treasuries at 1.7% interest is crazy, so they are reversing.  Maybe a bit late, but better late than never.
Jan 14, 2013 3:55PM
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We're off to see Ben Bernanke, The Wonderful Wizard of Oz
We hear he is a whiz of a wiz, if ever a wiz there was
 If ever, oh ever a wiz there was,
The Wizard of Oz is one because Because, because, because, because, because Because of the wonderful things he does
 We're off to see the wizard, The Wonderful Wizard of Oz
Jan 14, 2013 3:55PM
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Sorry Tony, no bear market

Get over it!

Jan 14, 2013 3:53PM
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It's too bad that Anthony's " technical outlook" doesn't support the "incredilbe" optimisn of the market , but, I'll take the " craziness" to the bank anytime over Anthony's never ending meaningless charts.

Jan 14, 2013 3:50PM
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Dear Sir. You are always so pessimistic about any financial topic you publish. Could you get another job with better pay, and leave us thinking the World is not going to end tomorrow!

Jan 14, 2013 3:49PM
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The market is manipulated.  The world is crazy. 
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