Is the rally over?

Europe's never-ending crisis threatens to thwart the post-June uptrend.

By Anthony Mirhaydari Sep 26, 2012 12:48PM

Arrow Down, ImageSource, PictureQuestThe selling pressure continued Wednesday as the situation in Europe devolved into political bickering and social unrest. Tensions are rising on the streets in Spain, Greece and Portugal. And Eurozone and International Monetary Fund officials are becoming increasingly incensed with each other over disagreements on issues like a new Greece debt write-down, the Spanish bank bailout and the ECB's new bond-buying program. 

 

Stocks fell out of their multiweek stasis Tuesday with all the grace of ducks filled with bird shot as the U.S. dollar rallied against the euro. The drop in the euro unseated the entire risk-on complex of equities, commodities, high-yield bonds and precious metals, threatening to end the long post-June uptrend.

 

I'm recommending my readers and newsletter subscribers book profits (especially those big gains on precious metals), raise cash and consider a few short ideas in key areas of weakness, including retail, transportation and select industrials. 



 

Why the change of heart? The economic data still looks good. Indeed, consumer confidence surged and U.S. home prices posted their best year-over-year gain since early 2010. The economic data keeps surprising to the upside, yet stocks and bond yields haven't really followed, as shown in the chart above.

 

 

Yet some short-term measures have become overbought. Cyclical, economically sensitive sectors are weakening against defensive noncyclicals. Inflation expectations -- a proxy for growth expectations -- are falling off. T-bonds are rallying. And options traders are becoming increasingly pessimistic, pouring into put-option protection.

 

I can't say how long the downtrend might last. But with signals becoming mixed to negative, it's prudent to "turtle" your portfolio for now.

 

To take advantage of the situation, I'm adding new short positions in FedEx (FDX) and Rockwell Automation (ROK) to my Edge Letter Sample portfolio

 


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

 

28Comments
Oct 10, 2012 9:04AM
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It's over under Romney hood:

Romney ' WHERE'S THE BEEF' to your 5 point economic plan, all fake.

Romney the numbers don't add up. 8 Trillion means BIG tax increases for middle income.

Romney "47% of the people, I'm not interested in them their victims."

Romney Bain mgt style was corp raider not empathic at all to people.

Romney State run healthcare isn't balanced and fair it's a circus.

Romney Mass. came in 47 of 50 states for job creation, when you were gov'r

Romney "let GM go bankrupt", isn't a plan it's a Bain corp raider tactic

Romney immigrants "let them self deport" ...

Romney "women have there place"....

Romney is King.....of 'FLIP FLOPPERS' is the only reality here.....

Sep 26, 2012 5:06PM
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Gee, Mirhaydari's "epic rally" barely gets started, then he does an about-face because of a few down days. 
Sep 26, 2012 4:39PM
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Spain & Greece are a mini USA in government charities. Their is a president who gives it away today and some other president will need to cut it off & clean up the mess. The original depression was cause by loose lending on stock options by banks. It was fine as it went up,up. But when it went down, down their went the money. Loose lending by banks on experimental home financing failed but mortgage insurance saved banks. The slicing & dicing of mortgages into bonds and giving them a high ratings by the raters took down the stock market. Another depression.  Banks & the stock markets are pure self centered greed without regulations.  Romney has it made already. Stepping up to help  his country while a president in charge leads us to an ending like in Greece & Spain with reckless fed credit is commendable. The money will run out and those on food stamps, welfare and over paid government pensions will face the music. Plan ahead for self protection & survival.
Sep 26, 2012 4:30PM
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Hi Anthony;  I have reposted my original post from Aug.  16th. He he.  You gotta say it.
Sep 26, 2012 4:29PM
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Aug 16, 2012 1:34PM
Okay Anthony my take is.  We will get to maybe 13,500 to 13,600 and then we will have a gazillion naked shorts, shorts, puts all attempting to take the pension funds;  the last real true investments in any volume,  for anything they can.  I see maybe down around 11,800 and stay for a bit and then back up for election time.  JMHO
Sep 26, 2012 4:19PM
Sep 26, 2012 3:36PM
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Anthony should run for political office. He flip flops as skillfully as the best of them.
Sep 26, 2012 3:00PM
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puff,puff,pass, yeah rallys over dude!!!!!!!!!
Sep 26, 2012 2:52PM
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Rick S. reported yesterday that a lot of what has been holding up the market is that when people pull out of mutual funds and the funds are forced to sell stock, companies have been buying back their own company stock. I think he said 81% of the buys can be attributed to that.  Also, I read a couple of weeks ago that if Obama gets back in, profits from stock sales and dividends will be taxed heavily: so, companies will stop increasing dividends and buy back their own stock.  That will keep the price up and keep people happy with their companies.  Americans will always find a way; it just takes a little time to figure it out.  I'm mostly out of the market until I can get the lay of the land .  I think that is happening with a lot of people.  You can't blame them.  Many of us depend on our savings because we are retired, and we sure can't draw any interest income on CDs or such.
Sep 26, 2012 2:46PM
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I really don't like to admit when I'm wrong, and Anthony M. is right, but dammit, he's played this market like a fiddle over the last few months.   I personally feel that people of his ilk who treat the stock market like their own personal playground are one of the major problems  why Wall Street has the massive credibility problems they now face.  HOWEVER, this is the game, and Anthony is playing the game well.  I don't like it, but carping about it isn't going to change things.  Playing the old buy and hold strategy still works, but you better prepare yourself for major major anxiety along the way. Day traders, speculators, and computers  will eat your lunch on a daily basis.  At a personal level, you need to decide whether you are a true investor, and act accordingly.
Sep 26, 2012 2:24PM
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Before reading this article..... Yes, the rally is over.  Here's why.

 

1. Everyone thinks the notion that QE3 will help the economy is a myth.  That's the buzz (whether it's true or not), and that opinion will only grow, like a you-tube video gone viral. It's called "groupthink".

 

2. Earnings season is closing in, and the fundamental realities of the economy did not change over-night just because Ben announced QE3+. All the companies who had exaggerated earnings forecasts will be lowering expectations shortly (if they haven't already), so that they can "surprise" you when the actual data gets released.   This can only serve to reinforce investor's perception that QE won't do anything.  (even though it's too early to make that judgement, I never said investors follow logic.)

 

3. Election will get ugly. With Obama pulling further ahead, Romney is getting desperate. Expect lots of mud slinging, focusing on how terrible the economy is under Obama.

 

4. (Most importantly) PE ratio's hit a high mark a few weeks ago.  Anything higher would be "exuberance".  You can't have irrational exuberance pushing stocks in the over-priced range while psychological factors are working in the opposite direction.

 

I believe it will get better later, but for now, best to stay away from stocks.

 

Sep 26, 2012 2:13PM
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What upward trend? I got an upward trend for ya Wall Street....it's my middle finger. Both of them.
Sep 26, 2012 1:59PM
Sep 26, 2012 1:58PM
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Another attempt by the Media to manipulate and influence the market  ... this has got to stop
Sep 26, 2012 1:57PM
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What did you expect. Take a QE3 pill and the next morning wake up like you'd taken a laxative.  No the FUD mongers, hedge funds and shorts, aren't going to let that happen. They're going to go right back to creating FUD until after it quite obvious that the globe's quantitative easing is actually working and then they'll start the inflation FUD. So strap on your seat belts until Romney's turned into bacon, the Democrats and Republicans have yet another fiscal crisis baby and the EU destroys itself.
Sep 26, 2012 1:54PM
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Is the rally over???? You mean all these 'feel good' and 'we're saved' rallies with no basis in reality whatsoever? why yes, Virginia, they are over because THIS IS REALITY AND WE ARE IN A DEPRESSION!!!
Sep 26, 2012 1:50PM
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Ricky Reitz, I’m with you pal. But, here are a few things to note about Wall Street.

 

Two weeks is a lifetime,

90 days is like a millennium,

One year is equivalent to infinity,

No one feels one iota of accountability or concern for what they said yesterday,

and that disclaimer of theirs, Past performance is no guarantee of future results, is the understatement of the millennium.

 

Sep 26, 2012 1:42PM
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as the facts and cirumstances change so can  the mind.the news one day is everything is going to be fixed .then we find out different .so do you hold on to positions and risk getting buried or reevaluate the current coditions .we like in a news driven environment .not everything is reported both good and bad and not all things are reported accurate depending the the twist or illusion the writer wants to project in your head. a mont ago things looked better but now reality is more predominate . this is what happns when the fed and central banks artifcially try to prop the markets up.
  markets are supposed to fluctuate .trying to play god and keep them from dropping onlyworks for a while.reality will rear its head and ballance things as always
Sep 26, 2012 1:39PM
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The reason the rally is over is because it's unsustainable at less than 4-5% GDP growth.   You can't sustain a news-based or politically-based rally.  It has to be economically-based.  I know there are people out there that just wet themselves over the idea of 2.0-2.5% GDP growth but with the nearly 9% drop we had in the recession we should have had several quarters of 8-10% and we had none like that.  In addition, it took 16 months just to get back to pre-recession GDP levels.  Compare that to the 1982 recession which was far worse and reached pre-recession levels in 7 months.  Big government is not the answer.  Never was, never will be.
Sep 26, 2012 1:12PM
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Hey Anthony....

When are you going to start focusing on your creditability!  Your article from 1 month ago (Aug 16), proclaimed "An Epic Stock Market Rally is under way, and it SHOULD Continue"!

 

Maybe someone at MSN money should start proof reading what you write...it's absolutely insane how quick you flip your stories!

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