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.

By Anthony Mirhaydari Feb 7, 2013 1:57PM

 Arrow Down copyright ImageSource, PictureQuestClearly, 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.

 

There's more.

 

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

116Comments
Feb 7, 2013 9:04PM
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It could have been a lot worse, the market once again showed resiliency; manipulators got their way but weren't as happy as they could have been at the close...Oh well, lets see what tomorrow brings us.
Feb 7, 2013 8:51PM
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I love Anthony Mirhaydari's posts. I use his prompts as a contrarian input to my own research. When he says sell, I buy, when he says buy, I generally sell. It has worked for me quite well for the past two years. That said, I give this rally about another month, will then sit out for 3-4 mos, and get back in the market in the late summer/early fall... but only if Mirhaydari says sell once again.... I vividly remember his chartology last fall and when he said there was an epic Bear maket forming. So I bought. Now he is proving his wisdom once again with charts designed to back up his opinions. Stretch axis Y a little, shrink axis X a little and shazaam, its time to panic. Not just yet. At least not for me.
Feb 7, 2013 8:46PM
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Please, Please someone get this moron off my computer. I have never commented before but this is ridiculous. I had to... hey mirhaydari, here's one for ya, the stock market will go down and then back up...brilliant huh. Somebody please check when this brain started whining. If you would have "booked long profits" when he started chirping you would have missed a huge run. And who is not surprised it will pull back some??? What ever you get paid pal is robbery
Feb 7, 2013 8:36PM
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The Tea Party Patriots are trying to encourage the established Repubs. and RINO's in Congress to let Obama's Sequester take effect....The Messiah created and owns it......It really is a 10 yr. spread that will not affect anything.....smoke and mirrors but it will be a small step towards fiscal responsibility....

 

If weak investors sell out of fear....good....smart investors will buy low and reap the rewards.....yuk yuk.

Feb 7, 2013 8:29PM
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If you knew so much about the market, you would be sitting on a beach in Tahiti, not writing blogs for MSN.
Feb 7, 2013 7:50PM
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Funny how MSN pulled the article the other day when the market was up. Yes, the sky is falling, and yes the market may come crashing, but, geez man, give it a rest. Most on here know your a doomsayer It would be actually nice to see a real money journalist, report here. Out to sell your management service, and MSN gives you free rein, to come up with all kinds of hogwash. I actually believe the market is coming down in the next 2 months. How much?  who knows..I am guessing for a 15% haircut. I am 46% cash right now.

  IMHO the market is overbought, and I will patiently wait for the right buy in's. I will never follow this authors advice, or seek out his services.  So, Anthony, quit crying wolf, and do a constructive article for once.

Feb 7, 2013 7:26PM
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....question to the readers.......

 

If you feel his statements and advise are inaccurate....why do you even read his articles??

 

His opinion more than likely is light-years better than yours!

 

See you at a Dow of mid - 12,000's. I'm shorting and agree with him.

Feb 7, 2013 7:18PM
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Way too early to call it a sell off. S&P still above1500.. Fed. still pumping and banks speculating 0% money.

 

Feb 7, 2013 7:03PM
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Ok, so it's time to buy and hold then? I'd rather not get pulled into short positions for the simple fact that it's what everyone else is doing. Besides, the skeptic in me see's the man with the megaphone as a short-gamer from last year for whom the only chance to avoid heavy losses is to pray for a market-wide sell-off.
Feb 7, 2013 7:00PM
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Hi, when the Stock Market takes a dip, that is when I get the best price on good American Blue Chip stocks, buy at a value and hold them !
Feb 7, 2013 6:45PM
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If you look at all the insider activity here lately, seems most execs and upper management folks are agreeing with Anthony - they are selling big time, at levels not seen since 2008.  In Dec, insiders were selling 8 shares for every share they bought.  Many attributed this to year end tax moves.  However, things got even more drastic last month, with insiders selling 9.2 shares for every share purchased.  Why would all these insiders be selling off so much stock, in January of all months, if they thought the future looked rosy for equities?
Feb 7, 2013 6:28PM
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Oh, yea he is also about 9 months early on the selloff prediction, hang tight, phenominal things to happen in the market
Feb 7, 2013 6:26PM
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i converted 20% to cash @ 14k and will sit quitely on bench till wall street trashes market

Feb 7, 2013 6:26PM
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these guys always talk and all I hear is chatter, when they are right you hear them say they told you so and when they are wrong, you dont hear from them, which is exactly 50% or more of the time. So pointless
Feb 7, 2013 6:24PM
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Tony, you are a goof - the dow just passed 14000.     
Feb 7, 2013 6:00PM
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A.M. isn't a buy and hold guy he is a trader. He did have a buy on for awhile in this last upturn and has now taken it off. I'm not so sure i disagree and have trimmed my positions. The underlying economy and the 2 trillion we spend we don't have, Trillion deficit and trillion from Bennie bucks, doesn't exactly give me a warm fuzzy feeling. I'm not fighting the FED, but i'm sure not lying in bed with them either. Whenever rates go back to normal from being held artificially low from Bennies printing our debt interest is going to soar and be awfully ugly for us at a cost of a Trillion a year.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Feb 7, 2013 6:00PM
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The world was going to end in 2007, then 2008, then 2009 and 2010 and 2011 and last year, in fact, the world has been going to end for thousands of years.  Now it's still here, but no matter, now it's really going to end this year, those other years were just for practice.  So those mired in the religion of "The world is ending", "Woe is me" and "What's the use", don't wait around for all the pain and misery, beat the Grim Reaper to the punch......how.....suicide! 

 

It's painless, it brings on many changes! (courtesy of Mobile Army Surgical Hospital)

 

I don't remember 1929, but I remember October 1987.  Did the world end?  Nope!!!!

Feb 7, 2013 5:54PM
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I think the junkage is almost over. Now we are entering the salvage.
Feb 7, 2013 5:46PM
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It sounds like we have a few Jim Cramers here------buy,buy,buy,buy,buy and buy!
Feb 7, 2013 5:43PM
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please shut up all of you who are speculating about the market..  your opinions can and do cause a movement..  so, please STFU..   or be willing to accept financial liability if your "predictions" come true
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