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.

 

146Comments
Jan 14, 2013 3:41PM
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Anthony,

What facts support your statement of * the market is losing faith in central bank's ability to save us from our indebtness* ?

The market seem to want to continue believing the Do Not Fight the Fed Mantra .

Jan 14, 2013 3:38PM
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The Market is not a "Muscle" - Quit trying to make it something it's not. It is simply the reaction to peoples fears and enthusiasm ! If you simply buy your on Large Iconic Dividend stocks like those Dividend Aristocrats and hold them for the long term you will be fine. Market goes up and down and your Dividend Reinvestments are like Dollar Cost Averaging ! History shows over 11% returns for the long term. No other method will beat this.
Jan 14, 2013 3:37PM
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Anthony,  

What facts support your statement of  * the markets are losing faith in Central Bank's ability to save us from our debts *  The markets seem to believe the Do Not Figtht the Feds Mantra.

Jan 14, 2013 3:31PM
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Because when you idiotic writers predict gloom and doom the little investor now knows better to do just the opposite.  Media outlets have always tried to manipulate the market for big players and you will continue to do so.  Everyone knows the markets are all rising this year.   Keep stating all the negativity you wish.  Market is here for the good for a while.
Jan 14, 2013 3:29PM
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Like I was saying over on Cramers blog Anthony.  We are now a one trick pony.  No where to go to make money and nowhere to hide from inflation except of course this market and God Bless those that think this will work out.  I am just waiting for these street guys to capitilize on this "appearance" of the only game in town.  Folks sometimes forget that to make your money theirs is how many on the Street will arrogantly view this onslaught of cash. I just hate to not have a viable aternative. Does anyone really believe the same games and fraud will not reappear?  I just don't like the fact institutions get their money for nearly free and then use that to bully the small investor who has earned his.  A level playing field is a joke.  JMHO 
Jan 14, 2013 3:22PM
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No its not going crazy...Its just being manipulated by Wall Street crooks same as is has been for the last several years..

But they now have more of your 401k savings to play (gamble) with..

Jan 14, 2013 3:18PM
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You really need to get rid of this idiot, He's always wrong about everything. What a pessimistic jerk !!

Jan 14, 2013 3:07PM
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70% of companies beat their earnings last week.Of course the market should

be up.The market is up 65% with Obama.We`re making a ton of money.Enjoy

the ride.The far right would love to say the market is down, but they are wrong

as usual.

Jan 14, 2013 2:47PM
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LIKE THE ELECTION, PEOPLE DON'T ACT WITH COMMON SENSE.  THEY ARE UNPREDICTABLE, WHICH IS WHY YOU FORECASTERS DON'T HAVE A CLUE WHERE THE MARKET IS GOING.  IF IT GOES DOWN, YOU CAN CLAIM CREDIT, BUT WHAT IF IT GOES UP  THERE IS NO ALTERNATIVE TO MAKE ANYTHING AND EVERY YEAR THE MARKET HAS GONE UP IN THE 1ST QUARTER FOR THE LAST SEVERAL YEARS  LAST YEAR I THOUGHT I WAS SMART AND TOOK OUT 10% AT THE END OF APRIL.  IN MAY AND JUNE I WAS RIGHT, THEN THE MARKET STARTED UP INCLUDING THE SUMMER AND NEVER STOPPED, WHILE I SAT ON MY 10% CASH (90% WAS STILL IN STOCK MUTUALS.

YOU CANNOT PREDICT WHAT PEOPLE WILL DO.  THE FINIANCIAL BUBBLE BURSTING MADE NO SENSE TO ME, BUT IT TOOK 3 YEARS TO GET BACK TO WHERE I WAS IN 2008

THERE ARE MORE BULLS THAN BEARS NOW BUT NOBODY KNOWS OR EVER WILL

Jan 14, 2013 2:44PM
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An article a few days ago said a whole bunch of money from other countries was pouring into the U.S. stock market....okay, which is it? 
Jan 14, 2013 2:34PM
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The jackass states the treasury will run out of money.  That's enough stupidity to make anyone with a brain laugh at this ****.
Jan 14, 2013 2:25PM
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For a guy with a lot of charts, Anthony... it should be obvious that the Prime Risk is how many are on the same wagons without firm grasps of Risk itself. No substance means a collapse could fall all the way to zero. Read the blogs... there are still too many GOP types believing more bailing is possible, but don't raise taxes, don't raise the Debt Ceiling and stop spending on everything except investing and financials. That's just crazy talk and pickled thinking. We're going DOWN. We will hit HARD. People are going to BREAK. Wealth won't SURVIVE.
Jan 14, 2013 2:22PM
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Crazy? No. Crooked and corrupt? Yup. The markets are locked tight with the Far Right and they are bound and determined to destroy America in  the most juvenile way possible. we know what we need to recover America... Me Generation armed GOP socio-psychopaths aren't part of the solution, they are all of the pollution.
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