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.
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 .
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.
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..
You really need to get rid of this idiot, He's always wrong about everything. What a pessimistic jerk !!
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
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
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These hot movers could rise by double digits in coming months.
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