Will the sell-off continue?

A raft of poor economic data and technical breakdowns suggest more stock market downside.

By Anthony Mirhaydari Feb 21, 2013 5:06PM

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 anthony@edgeletter.c​om and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.

 


 

66Comments
Mar 2, 2013 11:07AM
Feb 25, 2013 6:17PM
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We warned you on friday after the close to be cautious this week, that it would be interesting; we knew manipulators wouldn't stay action less for long, well, today's last 30 minutes was theirs and only theirs...They brought us down 216 points, why? Because they could, and it could have been 300 if the closing bell didn't ring. Please stop listening to the crooks that want everyone to believe this is Italy's fault, that's just a distraction...We can always say Obumme'rs lies earlier today are also to blame...The fact is that when manipulators take over on and off the floor things can change in a NY minute and today they did. There was nothing anyone could do about it sadly. We were outnumbered and that's all she wrote. Lets see if we can come back a bit tomorrow, have no doubts these cheating crooks will want to continue doing their thing, after all they have been quiet for about 7 weeks.
Feb 25, 2013 6:15PM
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Next stop, 1470 S&P 500, if the bulls can hold the line there...
Feb 25, 2013 3:48PM
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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.

Feb 25, 2013 12:50PM
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We are comfortably in the red now, what a surprise and the liar in chief opening his trap to bs the American people doesn't help at all....Like we always say, the socialist arrogant may fool the people, he doesn't fool the markets...Like we said earlier, low volume and plenty of manipulators makes it another uphill battle...Lets see if this afternoon things can get a bit better
Feb 25, 2013 11:37AM
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Be alert this morning....Yes, we opened up over 70 points but wont last long, at least we don't believe so....Plenty of manipulators and the first call to sell already came and down we go...Be cautious, volume not optimal and with so many crooks, never a good thing...More later.
Feb 22, 2013 9:48PM
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Sweet close, mainly because we had volume...Next week will be interesting....Have a great weekend all.
Feb 22, 2013 4:13PM
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Anthony is an inveterate short - short in mind and short in theory. The market has an inexplicable rhythm and momentum all of its own which defies economic theories and which Anthony tries to justify with some asinine graphs. It's incredible that MSN retains this guy.
Feb 22, 2013 4:05PM
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Since Europe closed we've had new money coming in these markets....HP and IBM doing very good among others.>..A long hour to go though...Like we always say, never ever underestimate these cheating crooks...So far so good...More after the close.
Feb 22, 2013 2:46PM
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You only write your doom & gloom columns when the market falls a day or two.  So, with the market up today (2/22), I guess you have the day off.
Feb 22, 2013 11:01AM
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Don't want to spoil your day but be careful this morning, yes, we are up 60 some points on the Dow but it doesn't feel right at this point...Plenty of manipulators, not good volume and it is friday...Just be cautious...Hey, we want to bring this market up big but, not always possible...Just be vigilant.
Feb 22, 2013 10:00AM
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The sell off will NOT continue until the FED stops printing 85B a month.   

While they continue to massively inflate, the money printed has to go somewhere, and that means the stock market, specie, farm land, foreign currency or foreign investment.    If you invest in bonds, CD's or cash you will get crushed over time.

The dollar is rallying, and that is a good thing.  Just remember the dollar's rise is more indication that major overseas countries are printing even faster than we are...  

King dollar, smaller government, balanced budgets are the key to economic growth!

You cannot Tax & Print your way to prosperity, nor can you Borrow and Spend your way out of debt, no matter that the imbecile Obama and his Donkey minions say...


Feb 22, 2013 7:37AM
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Don't worry people! It's all part of the plan.
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!


Feb 22, 2013 7:26AM
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"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?

Feb 22, 2013 2:42AM
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Market has already priced in the good news and money printing. Google for HAVE WE SEEN THE BOTTOM IN STOCKS to understand why stocks are over valued and can crash big time! Be cautious! Be afraid. In fact, be very afraid. Will be good for your finances.
Feb 21, 2013 9:48PM
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Now that Congress is directing the CBO to change the economic modeling to "dynamic" from "static", it doesn't matter what diarrhea dribbles out of the mouths of Obama and the Republicratic leadership in Washington regarding debt and deficits.  We are going over a much larger cliff while our liberties are eroding away.

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.

Feb 21, 2013 9:32PM
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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 %%%%%

Feb 21, 2013 9:31PM
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If you buy into the proposition that Corporatism consists of electeds engaged in doing the legal work for the establishment of the New World Order then you should have a confident level that they must protect the wealth class but only until their support is no longer needed. So I would say throw away any logical market calculations and agree the market will be protected and supported until the present Guberment decides they no longer want to. Now tell me what might cause that? And if you know that answer, and when they will stop goosing it, then you should short this thing silly? Correct? Let me know the answer if you hear it. :)
Feb 21, 2013 9:23PM
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Trump Plaza in Atlantic City was built for 210 million in 1984. It was just sold for 20 million. Times are definitely bad when you can get over on the Trump like that. Analysts can claim whatever. The fact is that the thought of QE easing or ending sent the market into a tailspin. As of now, it hasn't recovered. The Fed is propping it up. No Fed and where she goes nobody knows? Wayne Newton brought his show to the casino in Wheeling WV and Paul Anka canceled on the Mountaineer Casino in Chester WV. Never heard of Newton anywhere but Vegas? Simply, It's not good yet.
Feb 21, 2013 8:58PM
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So maybe he is right. So, i'm just wondering.... Timing is everything. So your predictions may be coming in just a little late.. .I'm not in stocks or other financial market type investments. But I'm wondering about investors that have been taking your advice and buying into the short side of things? If so, haven't they been losing money up until now, as the market has been going up? So even if the fruits start to bear (parden partial pun), don't they have losses 1st to make up the last few months?
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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