Market's tumble is far from over
Tuesday's sell-off, driven by political turmoil in Europe and weak economic data, knocks out major technical support levels.
Stocks dropped Tuesday as investors belatedly reacted to weekend electoral victories by anti-bailout, left-leaning politicians in Greece and France -- wins that threaten the German-led austerity-focused status quo in the eurozone. The losses would have happened on Monday, but chatter of a potential bailout of the Spanish banking system tempered the selling pressure.
No matter. They happened Tuesday as the leader of a potential far-left Greek coalition government chafed against the German-led austerity-for-bailouts status quo that has plunged Greece into its fifth year of recession and pushed the unemployment rate to a record 22%. Markets are not happy and have taken out critical support levels in the process. As a result, stocks are threatening to return to levels not seen since December.
All this is being driven by some disturbing headlines of out Greece. The pro-bailout New Democracy party, part of the current coalition government, has failed to secure enough support to govern. That gives the second-place far-left, anti-bailout Syriza party a chance.
Now the leader of the party has claimed the election nullifies Athens' bailout pledges, has threatened to halt new budget austerity measures and debt payments, and is exploring nationalization of the banking system.
After years of European leaders doing and saying things to placate the markets, this was rather shocking for people. The euro plunged against the dollar in response as traders headed for the exits. That was enough to push the exchange rate down through the critical 1.30 dollars per euro handle at one point, a level that's been an important line in the sand since 2006 -- with excursions, such as the initial 2010 panic over the first Greek bailout, quickly reversed.
There was weakness everywhere as the euro-dollar exchange rate acts as an important source of capital for hedge fund carry trades, on which people sell dollars to buy risk-on assets like copper and crude oil. As the euro weakens and the dollar strengthens, these traders must be reversed frantically.
Thus commodities, which are particularly sensitive to the undulations of the dollar, are being smashed. The U.S. Oil Fund (USO) fell 1.3% toward mid-December lows.
But the real dramatics happened in the stock market as the NYSE Composite ($NYA) broke neckline support of a big multimonth head-and-shoulders reversal pattern. The pattern traces down to mid-December levels and suggests the sell-off is far from over.
You can see this in the way cyclical, economically sensitive sectors and small-cap stocks are leading the decline. That's a sign investors are in risk-off mode. And it provides short side opportunities for nimble traders.
For conservative investors, I recommend moving to cash.
I expanded my Edge Letter Sample Portfolio's short positioning Tuesday morning with the addition of three new short ideas: Nabors Industries (NBR), Freeport (FCX), and HollyFrontier (HFC). Both NBR and HFC are in energy. FCX is in materials and is being pulled down by the drop in copper and gold.
Disclosure: Anthony has recommended NBR short and GBG short to his newsletter subscribers.
Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up. Contact Anthony at firstname.lastname@example.org and follow him on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
DJIA in review:
1-day chart: ahhh the sky is falling!!!
1-month chart: wow this is a lumpy upward trending roller coaster
3-month chart: this roller coaster is still kinda lumpy but not really very exciting
YTD chart: hmmm generalized upward trend with a few dips
1-year chart: bit of a dip in mid-late 2011 but hey, we're actually looking pretty good...
5-year chart: wow we hit a bad point in 2009, but my god look at how far we've come
to all the chicken littles, maybe if you quit running in circles like the proverbial headless chicken, cease with the incessant overreaction to every little market burp, and focus on a longer-term trending, maybe we could ride this out with some sense of decorum and a degree of success...?
just a thought.
or we could go with pointless mass hysteria. rioting is so much more fun when you're with the right people, so let me know before we all start.
One would think that with all of Anthony's doom and gloom, one should just kill themselves.
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Try as the bears might, they couldn't break US stocks. But investors still face frothy prices and considerable headwinds.
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