The market tranquility is over

Poor economic data and volatility shake investors out of their complacency.

By Anthony Mirhaydari Apr 15, 2013 3:06PM

For months, financial markets have been quiet. Almost too quiet. A flood of cheap money from the major central banks had squeezed volatility and risk aversion out, creating the conditions for a slow-motion grind higher in the Dow Jones Industrial Average ($INDU).


Sure, there were blemishes including narrowing participation and pitiful volume. But investors didn't care, preferring instead the lull into a dreamy state of complacency. Measures of market risk, from the CBOE Volatility Index to the credit-default swaps on eurozone bonds, suggested all was well.


That's ending now. And it's not pretty.


For weeks, I've been saying that reality didn't match what the markets were pricing in. Economic data was disappointing. Big structural issues, from the budget situation in Washington to the eurozone debt crisis and Japan's efforts to escape decades of deflation, remained unresolved.


Arrow Down ImageSource PictureQuestEmerging market stocks have been underperforming for months. And beneath the surface, there was evidence professional traders were already heading for the exits with cyclical, economically-sensitive stocks lagging behind defensive, non-cyclical issues.

 

Monday, the logjam appears to have been broken.

 

It seems to have started because of the intense volatility in Japanese government bonds (JGBs) -- in the wake of an unprecedented decision by the Bank of Japan to double its monetary base over the next two years. That, accompanied by recent weakness in the yen, looks to have resulted in forced selling of JGBs.

 

We're also seeing intense volatility in precious metals. Some of this could be connected to the JGB selloff, as banks and other institutions are selling gold and silver to shore up their JGB positions. And some of this is related to chatter that Cyprus could be required to sell its sovereign gold reserves to fund the ballooning cost of its bailout program.

 

 

Now, the selling pressure has finally hit the once sheltered U.S. equity trade, with small cap stocks in particular receiving the brunt of the damage. The Russell 2000 Small Cap Index has fallen below its early April lows and is trading below both its 50-day moving average and its lower Bollinger Band. The CBOE Volatility Index is spiking over its 50-day moving average, a precondition for market downtrends. And the selling is concentrated in cyclical areas like energy and materials stocks, suggestive of eroding economic growth expectations.

 

 

In response, I'm adding short positions in Herbalife (HLF) and CEMEX (CX) to my Edge Letter Sample Portfolio, along with the ProShares UltraShort Basic Materials (SMN).

 

Disclosure: Anthony has recommended SMN and HLF short to his clients.

 

Be sure to check out Anthony's new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at anthony@edgeletter.c​​​​om and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.

5Comments
Apr 15, 2013 3:51PM
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I've agreed with your reasoning for far too long, while the market just kept proving you wrong.  Perhaps it's your timing BUT I have lost money agreeing with your negative conclusions.  I'm surprised that with your valid reasoning that you also didn't factor in all the money printing going on.  It would have saved me alot of money, that's for sure.  I'm glad I didn't listen to you about gold.  I sold 350k in gold early last year because I felt the party was over.  As for your call that inflation is coming.  Why is gold going down then?  I think we're in a deflationary debt trap, which is why I sold off the gold last year.  The market will eventually correct, we all know that.  But it won't be when you forecast it.  Your timing sucks and unfortunately, investing is all about timing.  You know, entry and exit points.  The correction will happen when we give up on waiting for it, final word!
Apr 15, 2013 10:43PM
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Yep, markets are at all time highs and it's easy to say they haven't pricedin reality but if you'd been thinking like Anthony you's lost lots of money too.
Apr 15, 2013 5:10PM
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You nailed it again Anthony! Buy low sell high. Piece of cake.
Apr 15, 2013 11:07PM
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If you buy and hold you will be broke and old.
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