Will the sell-off continue?
A raft of poor economic data and technical breakdowns suggest more stock market downside.
My patience and skepticism during the recent market melt-up is being rewarded on Thursday as stocks, particularly cyclical, economically-sensitive issues, are pummeled for the second consecutive day. Everywhere I look, what were perfect 45-degree up-trends are being broken in dramatic fashion.
Financial and semiconductor stocks are suffering their first bout of significant selling pressure in months; joining with the material and energy names that have already weakened.
The question is: Will the selling continue? And if so, for how long?
The first consideration is that investors are finally awakening to the deteriorating economic fundamentals I've been writing about for weeks. That's because of the belief among the optimists, that cheap money from the Federal Reserve and other global central banks would paper over all problems. That illusion is being shattered in two places, allowing panic to creep in.
For one, the Fed's recent meeting minutes revealed that the inflation "hawks" on the Fed's policy-making committee -- those increasingly worried about the $85 billion-a-month money pump associated with QE3 and QE4 -- are growing in strength and aggressiveness. Fed chairman Ben Bernanke and vice-chair Janet Yellen are both "doves," in that they believe more should be done to bolster the economy, including boosting the stock market, despite downside risks including possible asset bubbles and higher gas prices.
So the fact that the hawks are willing to take on the top two members of the Fed shows resolve. And indeed on Thursday the hawks continued to press -- with Dallas Fed president Richard Fisher expressing his concern that markets may be hooked on quantitative easing, that he doesn't see a need for any more money pumping, and that he isn't alone anymore at the Fed in questioning the efficacy of QE actions.
He added there are signs the housing market is becoming speculative again. And in an affirmation of the point I made in my column this week, he said the wealth effect of the Fed's action on stock prices has resulted in less job gains than one would expect.
The second point, shattering the illusion that cheap money solves all, was a heavy dose of disappointing economic data Thursday morning. Europe's recession is deepening again, with the Composite Eurozone flash PMI reporting coming in below expectations at 47.3 vs. 48.2 last month. Any reading under 50 indicates a month-over-month decline in manufacturing and services activity.
The French economy in particular is under pressure, as German-pushed austerity measures out of Paris result in higher taxes and less confidence.
Here at home, activity also slowed as core inflation rose -- the exact opposite of what the Fed wants to see. The Philadelphia Fed Business Outlook Survey for February was particularly disappointing, falling well below expectations.
Given the historic level of investment confidence and bullish positioning heading into this pullback, the sell-off should have legs as the global economy stumbles into a new recession.
After focusing on shorts against basic materials and energy stocks in my Edge Letter Sample Portfolio, including a 25.3% gain in Cliff's Natural Resources (CLF) and a 13.1% gain in AKSteel (AKS), I've shifted my focus to new areas -- including capitalizing on the dollar's new-found strength against the euro via the ProShares UltraShort Euro (EUO). I'm adding leveraged inverse ETF exposure to semiconductors, the latest cyclical group to succumb to weakness, via the ProShares UltraShort Semiconductors (SSG).
Disclosure: Anthony has recommended CLF short, AKS short, EUO long, and SSG long to his clients.
Be sure to check out Anthony's 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 firstname.lastname@example.org and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
We call it as we see it people, manipulators took over sometime after 1030 hrs, what you saw at 1300 hrs, the DOW recovering and almost breaking even was just another sucker's rally seen a mile away, its unreal that we have people that still fall for those...The goal we hear as usual is to bring us down triple digits and they have plenty of time to do it...Once again folks, cheating pays in Wall Street and don't think for a minute this is Italy's fault, this is what these crooks want everyone to believe, tomorrow may be Spain and wed Germany...Unreal...More after the close.
When they crash the world economies, they'll just come up with a new world currency, probably the Yuan. Then they'll give all the politicians a raise, wipe the banksters books clean, and deduct 50% off the peasants paycheck leaving them enough to pay for a house filled with Chinese goods and a car made in Japan.
Anything left after that will go into the emperors private fund to keep the control machine moving along.
Here we are, 6 billion Guppies in a pond with 5 Bass and everyone is scared s**tless of the 5 Bass. LoL!
"they know nothing ... nothing"
They were raised during a prolonged prosperity and learned to invest while fiat money was printed to artificially stoke THEIR economy. What do you expect from Generation Train Wreck?
Get the biggest ammo magazines you can and KEEP PRACTICING. Don't become another one of the sheeple nursing neanderthal out-dated big government like in other countries. The control freaks serve at our pleasure, must live in fear of us, and must be reminded continuously.
Just too much going on here to even consider....
Would rather watch a good show or movie on TV...And see what tomorrow brings..?
Tomorrow %%%% Tomorrow %%%%%
Just wonderin... Financial markets far too complicated for me. I just like to read about the market fundamentals you bring to light in your column..
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