Welcome to the sell-off
Once again, warning signs from high-yield bonds and emerging-market stocks prove prescient as equities tip over into a new downtrend.
Clearly, as outlined in my recent columns and blog posts, I've been skeptical of this move to Dow 14,000. The fundamentals weren't there. The technicals weren't there.
And sentiment had reached extremes not seen since the 2007 and 2000 bull market tops.
With political uncertainty over the horizon (elections in Europe, budget fights here at home) and signs that savvy traders were already headed for the exits (weakness in foreign stocks and "junk" bonds), I recommended that my readers and clients book long profits and add new short positions ahead of a pullback.
Thursday, for the first time in months, the Dow Jones Industrial Average (INDU) tipped into a new downtrend. Here's why I expect it to continue, and how you can profit from the return of reality to Wall Street.
Not only has the Dow dropped below its recent trading range, but technical directional indicators, from the Coppock curve to the percentage price oscillator to the parabolic stop-and-reverse, have all flipped into downtrend mode. So that's one red flag.
Another has been the recent weakness in leading indicators of the strength of the market.
Emerging market stocks, which are very sensitive to changes in the trajectory of global economic growth, peaked in early January and have been drifting lower ever since. Now, they are falling out of bed with the iShares Emerging Markets (EEM) slicing below its 50-day moving average for the first time since November. The iShares China (FXI) is on track for its firs close below its 50-day MA since September.
High-yield "junk" bonds topped out two weeks ago and have been sliding lower -- even as stocks repeatedly bashed their head against Dow 14,000. Now, the iShares High Yield Corporate Bond Fund (HYG) is on track for its first sub 50-day MA close since November.
And relative to defensive, consumer staples stocks, the Morgan Stanley Cyclicals Index ($CYC) is falling at a pace not seen since November.
In response, I continue to recommend my clients hold short positions against key materials stocks, including U.S. Steel (X). But I'm also recommending new short against Europe via the ProShares UltraShort Europe (EPV) as well as the energy sector via the ProShares UltraShort Oil & Gas (DUG). I'm adding both DUG and EPV to my Edge Letter Sample Portfolio.
Disclosure: Anthony has recommended EPV, DUG, and X short 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.
The oldest and best adage is never try to time the market! It does not work! You may miss a downturn but you will also miss a sudden up turn. If you keep predicting a downturn you will eventually be right just as if you keep predicting an up turn you will eventually be right.
This guy should know that but he has to do something to justify his possition.
I would be this guy is right less than half the time and you would lose your shirt following his advice.
I have some snake oil abd prime florida swamp land for you!
Sooner or later , Anthony....there WILL be a fire , as you 've yelled " FIRE " enough to be right
at some point . The only people buying your " Letter " must be those who want to know what you're
thinking .....so they can do the opposite . Pathetic ; really ......
You are in good company. I refer to Mr. Karlgaard, publisher of Forbes, in his WSJ articale, "The Stock
Rally That Isn't, 02-06-13." But you have prepublished him with some of your other articles.
William B. Smith
Copyright © 2014 Microsoft. All rights reserved.
These companies won't soar like other plays in the sector, but they make for great income sources.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.