Market suffering rare meltdown

For only the third time in history, stocks are being hit with sustained selling pressure within a bull market. What does it mean for investors?

By Anthony Mirhaydari May 17, 2012 12:09PM

Image: Stock market crash (© Doriano Solinas/Getty Images/Getty Images)Another trading session, another big intraday reversal by stocks into negative territory as the Dow heads for its 10th loss in 11 days. As I discussed Wednesday, this is a big sign of weakness by the bulls, since they've been unable to retake the major technical support levels that were violated Monday. This is a very bad sign.


But the persistence of the selling pressure is also unusual, especially with the Dow still trading above its 200-day moving average. That's the traditional line in the sand between a bull and a bear market. Looking back, this has happened only two other times in the history of the market. What the market did after those two wipeouts might just surprise you. 

The previous occurrences were in November 1918 and in July 1975. In both cases, stocks surged higher after testing the 200-day average.



Still, the evidence suggests we've yet to see the final lows. For one, the Dow is still more than 300 points from its 200-day average. And as discussed Wednesday, there are a plethora of unresolved structural issues from a weakening economy here at home (look at Thursday's dismal Philly Fed report) and a second round of balloting in Greece that is expected to elevate the anti-bailout, radical left party into a dominant position in Athens.


Yet there are signs the end of this acute, short-term decline is coming into focus. For weeks, I've been saying the catalyst for what could be a very violent rebound would be new stimulus measures from the Federal Reserve and/or the European Central Bank at their June policy meetings. Once that happened, the market's expectation of future inflation would spike and provide relief to precious metals, which have been bombed out this month as the U.S. dollar strengthened against the euro.


Well, guess what. It's starting.


Thursday, the International Monetary Fund hinted that the ECB has room for additional stimulus efforts, given the recent drop in crude oil (fuel price inflation was a recent bugaboo) to late October levels. Spokesman David Hawley took it one step further by saying the ECB should increase its direct purchases of eurozone sovereign debt.  

Gold and silver, and the related mining stocks, surged from deeply oversold levels on the news. As a result, I think it's time to start adding some exposure to these areas, continue to book profits in old short positions and prepare for what should be a short relief rally.



Trading update

I've started to close some of the Edge Letter Sample Portfolio's short exposure. I'm covering Gerdau USA (GGB) with a 14% gain, selling Direxion 3x Semiconductor Bear (SOXS) for a 27% gain, selling Direxion 3x Small Cap Bear (TZA) for a 18% gain, selling Direxion 3x Energy Bear (ERY) for a 16% gain, and selling Direxion 3x Financial Bear (FAZ) for a 19% gain.



I'm adding precious metals exposure with a new position in the 3x leverages VelocityShares 3x Long Gold (UGLD). For less-aggressive investors, there is also the unleveraged Gold Trust (GLD). I am also adding exposure to the mining stocks with the Market Vectors Junior Gold Miners (GDXJ). Should the rebound in gold continue, I will be looking to add individual stocks to the portfolio.


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


May 17, 2012 8:56PM
 I don't need a chart too see whats happening. The lies are going to be over soon folks. I got out in "09" just hope my savings will be more useful then I fear. This mess is GLOBAL . So it will be much worse then the great depression. I would like to thank the lying thieves in the banking industry for what our world is about to go thru. The financial instruments they invented that created this mess will bring all of us to our knees.  They should all be TRIED for TREASON.
May 17, 2012 8:01PM

You ain't seen nuttin yet!

Consumer Debt has slyrocketed over the past 3 months, the unemployed are using plastic and will not be able to repay it.

Greece is just the start the meltdown of the Euro

Demand for goods and services will negatively effect the U.S and Chinese economies. (the only 2 that are keeping things aflost right now!)

Oil is nearing $90 per bbl, when it reaches that point the bottom will fall out of it and all other commodities.

I am looking for DOW 9,000 in the not to distant future.

May 17, 2012 9:02PM
it useless to work hard to make money today because there is no secure place to invest it and you going to end up loosing it to the fever of the system because the market is completely not stable any small wrong move in today market can wipe out your asset
May 18, 2012 1:49AM
Vote the bums out, get some people in office that will answer to the people and do their jobs, not play these games with people's lives. Vote for no incumbents!
May 17, 2012 1:47PM
What we need is jobs, not more Bernanke!! Until we make major restructuring of the economy we not going to have jobs.
May 17, 2012 1:17PM

The big money market manipulators are pushing the market lower to look like it needs help so Bernake will dump a load of QE3 into the hog trough for them to feed on. It's all about stealing as much money from John Q Public as Bernake will allow.

 I say let the market tank and let the big money players lose out and it will all correct itself. Someone new will step up to fill the "gone broke"crowds shoes. But it has to be allowed to crash to begin fixing itself.

May 17, 2012 6:52PM

Thanks Bigdaddy.


Believe me,I've been laughed at,dismissed,ignored, and called unpatriotic for my views on the global macroeconomic picture;however,I refuse to participate in such a corrupt,broken system clearly headed for a collapse.What we are all living through is historic and once the seminal economic event (whatever it is) occurs, our lives will be radically transformed  forever.I'm just trying to maintain some realistic perspective as well as mitigate the damage for myself,my family,and my friends.

May 17, 2012 8:54PM

1918  was the conception of the Weimar Republic and the concurrent "Reichenmark" hyperinflationary event of 1923,which led to the rise of Adolf Hitler.Massive war debts were prevalent everywhere.Germany itself was flat broke,couldn't pay war reparations, and was looking for debt forgiveness.This was the official end of the Second Reich under Otto von Bismarck.


The United States also had its own issues.It melted down over 270 million ounces of silver  coinage and converted it to bullion for payment of  our own war debts to England.The Pittman Act of 1918 required that U.S. replace the coins with new coins,hence the Silver Morgan Peace Dollars.


Two points of interest:


1)the Federal Reserve Bank was only 5 years old.


2)All governement issued money was still anchored by gold.


As we all know by now,the speculation of stocks in the roaring twenties led to the the stock market crash of 1929 and the great depression of 1929-1941.It seems we never learn.Only problem is,now we have TRILLIONS IN DEBT,QUADRILLION IN DERIVATIVES,AND NO PRODUCTIVITY TO SUPPORT IT.

May 17, 2012 2:48PM

When are people going to realize that this four year rally is nothing more than financial fraud?Fraud,I might add,that will eventually destroy the dollar and all fiat paper attached to it.


There is no trend,chart,technical analysis,index, or historical precedent that can provide answers as to where this market is headed.The whole thing IS BEING PROPPED UP BY THE INTEREST FREE MONOPOLY MONEY OF THE FED.The entire world,moreover,is also supported by the actions of the Fed.Well,the stimulus high has worn off now.The deflation occurring is the free market trying to bring equilibrium to the fiscal insanity now accepted as normal market fluctuations.The reason there is no velocity of money or more inflation is because every single bank is insolvent.Actual,legitimate market moves ended in 2008.Productivity was replaced by Central Bank debt schemes to keep the ponzi scheme,fractional reserve system going.


The size of the OTC derviatives market is well over $1 quadrillion dollars.This is the canary in the coal mine.Those of you stupid enough to participate in this market controlled by computer algorithms,derivatives,and endless free money, can expect much more volatility.But fear not,the Fed will implement more QE before the summer is over.The zombie banks either get more human flesh to feed on or they will die.


There should be a nice bump for a few days with the FB IPO tomorrow.Beyond that,though,the war between the immutable laws of the free market and this fascist,crony capitalistic business model  benefitting the elites will continue.

May 17, 2012 7:43PM
You mean, stocks are being dumped while the BS is going on.
May 17, 2012 2:58PM
This meltdown should not be a big surprise to anyone that has been following the market.  The only question is " how far down is it going to go? "   Time will tell.  For now hang onto your panties.
May 17, 2012 2:09PM

Called this as we broke thru the 1375 resistance level on S&P. Pull back should end around 1275-1300 area where significant resistance lies.


The pull back, actually doesn't make much sense (unless it's forcasting something). Earnings were much better than expected for Q1. I'm actually positive on this pull back as it allows some better buying opportunities.


The street (i.e. traders, bankers, economists, etc) hasn't been this bearish since March 2009. One general rule I try to hold myself to is what the "herd" is predicting, rarely, if ever comes to pass. They all thought 2008 was just a blip till it crashed, they all thought it was all over in 2009, then stocks rallied 100%, They all thought beginning 2010, and 2011 that we were out of the woods, they all thought it was over again last October (only to see a 30% rally).


Gold may snap back a little, but I have the feeling it could be facing more headwinds than people think. It's persistant below it's 200-day MA. Something that has only happened 1 other time in the last 10 years. Last time was under forced market selling pressure. This time, obviously isn't. It got pushed under back in March (with no forced market liquidation).


The Feds talk in the last few weeks does look a little like they could be preparing the market for another QE. But if it's in mortgages, I don't think the impact is going to be the same as it has been in their bond buying, treasury buying.


May 18, 2012 8:31AM
what does it mean to investors  ???  well to me it means if the feds don't  bail the market and banks out agin  it will collapse  like it should of  2 yrs  ago  and we would  be on the road to recovery  by  now  there is  no money  alll paper  and   greed  time to  face  bullet
May 17, 2012 7:59PM


This recession lasted sixteen months (November 1973-March 1975). OPEC is blamed for quadrupling prices for a few months in 1973. It alone didn't cause such a deep recession. Several factors contributed. First, the U.S. went off of the gold standard and printed more money. This created inflation, as too many dollars chased too few goods. Second, President Nixon instituted wage-price controls. This kept prices too high, reducing demand. Wage controls made salaries too high, which forced businesses to lay off workers. The result was stagflation and three consecutive quarters of negative GDP growth: 1974 Q3 -3.9% (-3.8%), Q4 -1.6% (-1.6%), 1975 Q1 -4.8%(-4.7%). Unemployment reached a peak of 9% in May 1975, two months after the recession technically ended.

May 17, 2012 7:33PM
As confidence levels of the consumer decline .. the double dip recession is accelerating towards a deep economic bottom.  The fiscal cliff, brought to us by a dysfunctional Congress and a regressive European austerity plan, is the step over the edge for the free fall of economic collapse.  It will take a coordinated effort of BOLD moves by the Fed, Central Banks and ACTIONS from Congress that stimulate economic recovery.  Those that do not remember the Great Depression of the 1930's are about to get a refresher coarse of what it means, with bankers bailing out of windows and Hooverville shanty towns.
May 17, 2012 12:39PM
It means Anthony the speculators have been over-speculating for a year or so now, and the market is should drop, it needs to be around 10,000 (a realistic number).
May 18, 2012 7:43AM
Greece wants a sugar daddy to give it a credit card.
May 17, 2012 4:49PM

Red billy,


Gold and silver are manipulated.That's why governments,central banks,private investors,billionaires,and hedge funds like PSLV run by Eric Sprott have been buying by the tonnes for the last 3 years.Utah now recognizes gold/silver as legal tender,India has been trading gold for Iranian oil,and the Shanghai Exchange for gold futures just started trading,so the move of gold and silver toward the financial system has commenced.And since only 1% of ALL finanical assets are in PM's right now,what do you think will happen to the price in your precious fiat dollars once that number inevitably reaches 5 or 10% investor participation?I love these experts who continue to deride the precious metals investors.Metals have only crushed the stock market for the last 10 years!


Unlike the manipulation of the sheeple via ZIRP and the DOW,the price suppression schemes of AU/AG make the metal very,very cheap to buy these days.The nominal value of PMs in dollar terms does not matter.It's the medium of exchange and wealth protection that drives metal investors.Nothing would make me happier than to see $500 gold and $8 silver again-I would load up!


You can keep those increasingly worthless,debased dollars printed into oblivion.The demise of this monetary system put into play on Aug 15,1971 is closer than you can imagine.Good Luck.

May 17, 2012 9:19PM
A man's got to know his limitations and when to hold'em or fold'em.
May 18, 2012 7:25AM
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