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.


 

75Comments
May 17, 2012 11:24PM
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clownfeet, another socialist idiot. Let's say we took all of this money you and obama want to confiscate. Do you reaaallly think your clown is going to pay the debt down. You sound like a drug attic. Yea, give me one more hit and then I'm stopping, ye, really.
May 17, 2012 11:07PM
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There are some really good, well thought out commits here tonight. It's almost refreshing.
May 17, 2012 10:03PM
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Thanks, Anthony.  I feel a lot of people are not listening to Anthony let alone following His direction.  I am up 25% in the past 7-8 trading days.  Be critical if you like. I will be thankful for His post.  Thanks, Anthony
May 17, 2012 9:22PM
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This debt problem is so simple if the congress would act on it requiring the wealthy to pay cash to eliminate the budget deficit saving  four trillion dollars over ten years only the wealthy who can afford to pay twenty thousand and up that would not be a hardship to them if they paid, all corporations who can aford to pay a million and up to a bilion dollars, all banks who can, any business, who can afford to pay without causing a hardship to them and giving them tax breaks over ten years on ten% per year  could pay cash and that would save interest money raise as much as possible to pay as much debt as possible, and always apply the interest saved to the debt, it would make it possible to leave taxes alone for now, and that would give them time to reform the tax system!!!

Then let anyone who is having problems with their mortgages to place up to half in an escrow account, and reduce their payment accordingly for ten years this would be the stimulus to lift the economy with all the millions of dollars it would free up that people could use to do other things with it would get the economy going and none of it would be done with borrowed money, or something similar to these ideas!!!

May 17, 2012 9:19PM
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A man's got to know his limitations and when to hold'em or fold'em.
May 17, 2012 9:02PM
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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 17, 2012 8:56PM
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 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 8:55PM
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Everyone in the country worth 300 thousand or more should be required to pay twenty thousand dollars cash on the budget deficit, and the amount of cash paid should go up for people who are worth more like four hundred thousand should pay twenty five thousand, 500,000 pay thirty thousand one million pay fifty thousand, then all banks, corporations, business on a sliding scale would pay fifty thousand up to a  billion dollars cash.

They could raise two trillion dollars over night, and the country would save at least four trillion dollars of interest money over ten years, this would get things back on track much faster, and the ones paying would get tax breaks to cover this over ten years, it would then justify leaving the Bush tax cuts in place for another two years, and give the congress time to reform the tax system without the pressure,  these people paying would not be going through any hardship by doing this, and they also would benefit greatly by it, also they should raise enough to fund infrastructure, and start rebuilding the infrastructure that needs repairs or replaced this will create jobs,  this could be done in a month to get the economy going, and instead of waiting ten years they could do it now and wait ten years for their tax breaks to get their money back that would be working together for the good of the nation!!!

May 17, 2012 8:54PM
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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 8:50PM
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The Epic rise in US stock prices since the crash last August is breath-taking and sent the bears into despair and disgust.

The epic jump is more than 30% and a 20% decline is normal and not so rare considering the US economy is addicted to tens of trillions of dollar liquidity and 0% interest money creation.

May 17, 2012 8:34PM
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how the hell can you go for mining stocks when you have the EPA shutting them down or not renewing the permit. get rid of obama and the EPA and i think you will see a turn around within 6 month's or sooner. got to get rid of the dead weight and stupid weight.
May 17, 2012 8:01PM
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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 7:59PM
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1975:

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 7:46PM
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Why Nov. 1918---WWI had ended in Europe--I don't get it.   What about July, 1975?  No wonder so many have left the stock market. 
May 17, 2012 7:43PM
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You mean, stocks are being dumped while the BS is going on.
May 17, 2012 7:33PM
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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 6:52PM
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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 6:17PM
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Thanks Goldbug09:

 By the way, I liked your metals analogy.

May 17, 2012 5:48PM
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Big daddy,

 

Don't waste your time with people like Undervalueguy.He thinks bailouts,0% interest rates, and endless money printing are free market Capitalism.Some people can't be helped.

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