Stocks cross the red line

Worries over a Greek exit from the eurozone, Spanish banking woes and signs of a new global slowdown push the market through key support levels.

By Anthony Mirhaydari May 14, 2012 11:12AM

We'd all like to believe the fairy tale that the stock market is a sober, efficient arena where investors and capitalists meet to swap cash at prices determined by things like earnings, dividends and interest rates. Of course, it doesn't work that way. Prices tend to fluctuate around some abstract concept of "fair value" based on things like fear, greed, the strength of the dollar and, according to some people, even the phases of the moon.

 

Thus the popularity of things like chart watching among Wall Street practitioners, even if it's pooh-poohed by academics. It works because everyone else is using it. On Monday, technical analysts had plenty to look at as stocks crashed through key technical support levels, putting a massive head-and-shoulders reversal pattern into play while setting the stage for a drop to levels not seen since December.

 

 

Monday there was more evidence of trouble. European industrial production dropped unexpectedly in March as output in Greece, Italy, Portugal and Spain dropped sharply (by 5.7% year over year or more). In Greece, hopes of a pro-bailout unity government are failing, setting the stage for big gains by the anti-bailout radical left Syriza in a second round of voting next month.

 

That's the context for the big breakdown that's under way.

 

The Dow Jones, the S&P 500, the Russell 2000, the NYSE Composite and the DB Commodities Index (DBC) have all fallen through key multi-month support levels. Crude oil is plunging back toward levels last seen in October. The CBOE Volatility Index ($VIX) has jumped to levels not seen since February.

 

 

Emerging-market stocks in the iShares Emerging Markets (EEM) have fallen to levels not seen since January. Stocks in the Materials SPDR (XLB) have lost their 200-day moving average. Energy stocks in the Energy SPDR (XLE) have returned to their December lows. Even defensive stocks are being punished, with the Consumer Staples SPDR (XLP), which includes stocks like Kraft (KFT) and Wal-Mart (WMT), has moved below its 50-day moving average for the first time since November.

 

By all indications, the market sell-off has entered its most dramatic, most precipitous phase. If you're a conservative investor, look at increasing your allocation to cash or Treasury bills and bonds. If you're a nimble trader, there are plenty of opportunities to profit on the short side.

 

For the past two weeks, I've been expanding the short exposure of my Edge Letter Sample Portfolio with positions against materials, semiconductors, energy and financial issues. Highlights include a 14% gain in Citigroup (C) short, a 13% gain in the Direxion 3x Semiconductor Bear (TZA) and a 12% gain in steelmaker Gerdau USA (GGB) short.

 

With Europe far from fixed, a new recession threatening and investor sentiment damaged by the loss of technical support levels, these positions should continue to chalk up gains for the next week or two before I'll be looking to book profits. 

 


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.

 

 

38Comments
May 14, 2012 12:17PM
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So again, wasn't it Ben and the Fed that bought all those Euro's with our tax dollars?  Shame on the Fed again!

 

I am always amazed that there are so many economic smart people that think they know what is best for our country.

 

Remember:  November 06, 2012

Boot all elected officials from office...we need new blood, even if they are not brilliant, common sense will do just fine!

May 14, 2012 1:00PM
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All the problems in the World caused by Irresponsible lawyers (politicians) that fooled the morons of society with false promises of the Radical Liberal Socialist Agenda's entitlement programs. We are indeed headed down the same road as Greece, Spain, Italy, Ireland  & Portugal. Deficit Spending and Government Debt  will destroy whatever is left of the free market economy unless we re-elect; Not 1 US Senator, the Obamination in the White House, Not 1 Congressman who has been office for 4 or more years, and most importantly - not 1 State & Local incumbent, who have doubled local taxes in just 10 years.  Tea Party AGAIN in 2012. Puerto Rico is on the RIGHT track, why not us? There are none so blind, as those, who will not see.   
May 14, 2012 2:09PM
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Wall Street  does not live in the real world and I think the world is catching up with it .

I really feel heart broken for those who have more money than they know what to do with.

I live in the real world where money is hard to come by.

May 14, 2012 3:57PM
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USA Joe you are exactly right. We desparately need to clean house and get rid of the corrupt bottom feeding scum that is getting filthy rich off the working class tax payers of this country. We don't have four more years, so this election is probably the most important in history.
May 14, 2012 4:10PM
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In May go away.  It has been like this for years.  The market will loose all of it gains and eventually it will find some fairytale reason to rebound in October or November.  Nothing will change until this country goes back to work.  I know Barry is trying to shift the focus from unemployment to gay marriage and class envy, but anybody with an once of sense knows nothing has changed fundamentally since he took office, except rampant spending and the growing monster call the Federal Government.  Barry, the purpose of government is to provide an equal opportunity for everyone, not make everyone equal.  Remember a little bald guy that tried that "social engineering" experiment in 1917, in a country call Russia?  That worked out real well didn't it?
May 14, 2012 1:49PM
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I would like to hear these financial specialists speak more about how to make the market like the first sentence says, instead of giving us gambling advice. 
May 14, 2012 5:01PM
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You are spot on Anthony, the DOW is headed for a drop of at least 800 to a 1000 points in the next 4 to 5 months. Ignore these other posters, they are pissed because they are to dumb to know how to make money in todays trading world. 
May 14, 2012 3:30PM
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The Fed is the pawn of the global banking consortium.  The were charged with:

1) separating the American middle class from the equity in their homes. (check)

2) devaluing the US dollar every chance they get (check)

3) separating the American middle clase from the wealth the had obatin in the form of their 401K's and IRA's (check)

4) creating the banking crisis so they could validate that the US government was bent over a barrel and would do anything to keep one of it's big banks from failing ( Goldman Sachs was the sacrificial lamb but you can bet no other bank will be allowed to fail).  This allows them to take ever increasing risks to line their greedy little pockets while providing zero to spur real growth.

May 14, 2012 5:43PM
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Hey Bozos - when the market hits 13000, move all funds to fixed. When it drops to 8000, move back into stock. Simple!
May 14, 2012 2:34PM
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The US is like a company.  Too Big to Fail.  So what happens next?  Smile
May 14, 2012 3:52PM
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It's interesting that when the market drops and the 99% lose money, "The market is making a correction," but when the 1% lose money it's the "Great Recession."

 

Their greed is coming full circle and is about to start biting them in the keester. To big to fail? To big to exist! As the Queen of Hearts said, "Chop off their heads."

May 14, 2012 5:54PM
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This pretty much tells investors to look at anything but stocks forever. They have not produced a single gain since 1999 for long term investment. Wall Streets party is over. It is time to look at Wall Stree in the rear view mirror!!! It lost it ability to function as a financial enitity!
May 14, 2012 1:58PM
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You cannot pin the cause of it on one person. It takes a fool to follow a fool. Of course I am not calling out the fools. They know who they are even if they are in denial publically. I of course being of sound mind and body will stand on my assets and not part until hell freezes over. A bird in the hand is worth two in the bush any day . People should have held on to their values "teachings from older days" instead of believing that some upstart child had a great idea to use an exploit to make money. It is one thing to use market saavy to turn a profit on commodities based on the occurances known . It is another thing to feed on others by luring them in claiming you will manage their money and losing money for them but making money for yourself. Yeah I know it takes two to tango. Back to my lemming statement in sentence 2...... My uncle was a broker and I watched exactly what it does. Worthless BS. created by trust and turned into someone I wouldnt trust with my garbage. Not just the brokers but outside affects like organized crime and more. In a world with so many people due to a lax of rules and standards once again history is repeating itself by allowing criminal activity to make its way in under the ideals that it is new and innovative ideas.

  Let me ask everyone a question. Who thought it was ok to twist the moral ethical truth into something profitable at the expense of their reputation ? This seems to be a normal acceptable activity now days but it will pass . People who fall into the trap will fund the recovery of the ones who knew how to hold their ground and not compromise their principals. I said it before and I will say it again even though it stays plastered all over the media as acceptable . Gambling is an addiction  disease.  Anyone who thinks it is ok to lie , decieve, coherce immorally and unethically and then blame a person's trust that was supposed to be held high as a weakness they had which was used as a tool to gain and throw them under the bus is the problem. Then in order to gain support knowing what they did was wrong they rally their friends and attack the trusting person if they question the morals accusing  them of being butthurt for losing.

  You all want to know what is wrong with the world ? Entrusting of power into the arms of a poorly raised child. Look at the People profiting right in the worlds face and then simply retiring to that island where there is no bad weather and no one can get to them. No I was not really amused by condescendning statements made by some of the 1percenters. they are nothing but wusses if they have to leech and then make comments on how someone makes too much even if they are another leech like the media . We were entrusted to not allow media to dictate and that is what has happened except some of the media who still holds the morals high. yes you know who you are . Just because they report something with drama and flair doesn't mean it is the whole story. They lost that ability many years ago when they too put these same crappy excuses for people in charge except again for some who are doing their jobs. I like reading the truth because  it makes me feel informed.

Nerd

Good Day.

May 14, 2012 4:43PM
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Long term investors are pissed right now. Traders are licking their chops.
May 14, 2012 5:49PM
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And if you rotate counterclockwise on your left foot with Pisces ascendant it clearly shows we're all doomed. Ack! The Great Correction approaches!

 

As for me, I've already rebalanced in May and gone away...

May 14, 2012 1:32PM
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Yawn.  Technical analysis is such BS.
May 14, 2012 6:55PM
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Yep the banks/bankers keep saying i/we are sorry, not sure where the money went, we are soooo sorry, we will never do it again....... we mean it this time,,,,,honest.....trust us and give us our DAMN BONUSES you peasants! This is beyond insane. I guess today's lesson is: steal with a pen, hey we sorry, steal with a gun, don't drop the soap :}
May 14, 2012 1:23PM
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All is BS.  Chart on .... will not mean a thing as anyone with anyone brains knows by now.  Go ahead and 'scalp' the 401 K's and pension plans already in place as 'progressive' entitled comes more to the forefront.  Sure, we believe anything you decrepit 'phonies' wrtite with such amazing charts and absolutely 'wothless' credibility.  Hey, head-on with the 'manipulation' and giving out totally 'manufactured' reads in charts.  I have a pen and peice of paper and can easily do the same thing.  Get lost with this. 
May 14, 2012 7:10PM
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The solutions to Americas economic problems are available, however, there so radically different from what we are doing today that it is not possible to put them into effect now. We still have to go farther in the hole before we face the reality that we have to find other answers. I get a kick out of stockholders, they believe this recovery is just like all other recoveries. It is not. Our economy is out of date for the world we live in today. If America solves this economic crises we will be an extra ordinary people and democracy will make a leap into the future.
May 14, 2012 4:07PM
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Yeah, Minhaydari, you "Short" all of it like the rest of the crooks on Wall Street that are squeezing the blood out of the turnip while us poor middle class folks watch our pensions disappear and 401k's dwindle and stagnate. SHORT, SHORT, SHORT SELL! If that is not creating money where there is none, go buy a few Credit Default Swaps while you are at it too. The Fed will print money to cover them and save your greedy asses!
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