One-day panic sell-off -- or something more?

Heavy selling pressure on weak economic data is bringing back memories of the market decline of March through May. Will it last?

By Anthony Mirhaydari Jun 21, 2012 3:26PM

Stocks and other risky assets had an ugly, ugly day Thursday as traders reacted so a batch of poor economic data out of China, Germany and the United States, as well as to lingering disappointment over the Federal Reserve's decision to merely extend its existing $400 billion Operation Twist initiative by $267 billion.

 

With Europe under pressure and growth slowing here, Wall Street obviously wanted more. So is that it? Is June's rebound finished? Not quite.

 

 

The evidence suggests this is a typical test of overhead resistance. Trough to peak, the S&P 500 jumped nearly 8% from its low and crossed over its 50-day moving average. Yet investor sentiment has barely budged. In fact, newsletter writers (guys like me) have reached a level of indecision not seen since 1983 according to an analysis of Investor's Intelligence survey data.

 

Ancillary markets are telling the same story. Traders have piled into the U.S. dollar (a safe haven asset) and shorted the euro on a scale that exceeds the extremes reached back in 2010 in the midst of the panic over the first Greek bailout. Options traders are also very nervous: an analysis of put/call trading volumes suggests small, speculative traders have only been this fearful on one other occasion since the March 2009 bear market low. That was June 2010.

 

While confidence has been bombed out, technical data suggests bargain hunters are on the prowl. Market breadth, or the number of stocks participating to the upside, has steadily increased over the past few weeks. The NYSE McClellan Oscillator, which tracks breadth momentum, has reached levels not seen since last October. And cyclical, economically-sensitive stocks have solidly outperformed defensive, non-cyclical issues like consumer staples.

 

These are all good signs.

 

Today's sell-off is showing relatively narrow participation as trader focus mainly on the relatively narrow group of stocks that are declining. As I write this, 78% of NYSE stocks are declining. Yet some 91% of NYSE volume is to the downside. The relationship between these two is used to calculate what's known as the ARMs Index. And earlier today, it was showing its best performance since late December -- a day that, like now, featured a quick dramatic pullback at resistance levels.

 

What about the fundamentals? Well, we already knew the economy was in trouble. Confirmation of this will only put pressure on policymakers at the Federal Reserve, the European Central Bank, and in Germany to support additional pro-growth measures from cheaper credit to direct bond purchases and a relaxation of Greece's bailout obligations.

 

Much of Europe is already in recession, so it's not surprising that German manufacturing activity is stalling hard (lowest level in some three years) or China's export miracle is sputtering. 

 

 

In the U.S., continued weakness will only open the door to more aggressive easing by the Federal Reserve -- as it promised in its policy statement yesterday. And in Europe, the European Central Bank is already softening its stance by agreeing to accept mortgage securities as collateral against bank lending -- a backdoor way to help prop up Spanish banks saddled with bad mortgage loans.

 

Even the Germans seem to be warming to the idea of using the eurozone's bailout funds to push down Spanish and Italian borrowing costs.

 

It's not a slam dunk. But for now, the risks seem balanced to the upside. To be safe, I'm cutting my precious metals exposure in the Edge Letter Sample Portfolio, for now. Once things settle, I'll be looking to add gold/silver positions back in on expectations of more aggressive central bank interventions. Highlights include a near 10% gain in Great Basin Gold (GBG), a 4.1% gain in Market Vector Junior Gold Miners (GDXJ), and a 3.6% gain in Global X Silver Miners (SIL).

 


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.

99Comments
Jun 21, 2012 3:48PM
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To put money in this market, you have to have stones big as bowling balls or just rocks in your head.  This market is full of pitfalls and mine fields.  One wrong move will set you back to square one or worse.  Time to take a breath before taking the next step.
Jun 21, 2012 4:12PM
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Control is being taken away finally. The middle class sheeple can't take it anymore. There spent. They have no money. They make enough to pay bills. That can't buy anything new, only used. They have family living with them. What do you expect. Housing is still sputtering. No one is hiring. People are overworked because of it.

 

Soon the millionaires and billionaires will turn on each other. The global czars are organizing and have been for awhile to create another pandemic or global fear of some kind.

 

Don't be fooled. Stick to your guns. Pay your bills, save your money, help each other out. "Ride the storm out..."

Jun 21, 2012 5:01PM
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CAN YOU IMAGINE IF THE POLITICIAN'S GAVE ALL THAT BAIL-OUT MONEY TO THE AMERICAN PUBLIC, WE COULD HAVE PAID OFF OUR MORTGAGES PAID OFF OUR CREDIT CARD DEBT PAID OFF OUR CAR NOTES AND ANY OTHER BILL WE HAD AND THE ECONOMY WOULD BE YOUNG AND THRIVING AGAIN!!! THEY ALL SHOULD BE FIRED!!!! THIS CAN'T KEEP GOING THE WAY IT IS.. THE END IS COMING AND WE ARE ALL GONNA BE LEFT HOLDING THE BAG!!!!! OR DID THAT ALREADY HAPPEN?? I THINK SO.
Jun 21, 2012 4:45PM
Jun 21, 2012 4:52PM
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The thing that SUCKS THE MOST about all this. NO matter WHO'S in office, we're in this mess for a LONG time, people say get rid of Obama in November yet they forget about the other 2 branches of government, we still have idiots in CONGRESS AND THE SENATE and don't forget the supreme court. Im sorry but for those of you who say Romney is the answer, I don't think so. I think he's the same as the rest of the politicians, only with a different suit and tie. There's a reason why he lost his last presidential bid. I'm not a Democrat or Republican. I just wish people would get serious and vote out ALL POLITICIANS, if you want to prove a point, that would be the only short term way. Voting independent might help to.
Jun 21, 2012 5:21PM
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There probably are not two investors in the USA that dont know that the markets are being manipulated and that investors are be being used by Wall Street. There hasnt been a event since 2008 that should have moved the markets 30 points in any one day. Investors are being robbed by Wall Street!!!!!!!!! i 
Jun 21, 2012 6:02PM
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Well, let's see.  How much money was robbed out of people's 401k's in 2008 and 2009?

 

Since then, the 401k contributions have been deposited in every pay day and people are finally crawling back to where they were.  With their hearts full of hope.

 

Yep.  The pig is fattened up once more.  And now, time for another barn yard slaughter.  It's deja vu all over again.

 

 

Jun 21, 2012 4:09PM
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Something much worse. This Admin. is completely out of touch with the American people and how to stimulate growth in this environment. The president is too busy campaigning  and hiding facts from the American people regarding drug running programs to concentrate on Jobs. I for one will be pulling my money from this market and encourage anyone else to do the same thing. I had to lay off two employees last week because I could not afford to keep them. Things have slowed to a crawl!!!
Jun 21, 2012 4:55PM
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The markets are over rated and over priced! 

 

When it comes down to it I bet half of these companies are just another Enron in the waiting. 

 

How can these companies keep saying they are making money when no one has any money to purchase their goods in the first place?

 

It's just a big ponzi game and the FED has pumped a bunch of money into it to keep it afloat.!

Jun 21, 2012 5:19PM
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Come on, get a clue. The big dump is so the Market folks can make things look as bad as possible to get QE3 soon as possible. Good grief. It's all a put on.
Jun 21, 2012 4:02PM
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And if the liar Ben Bernenke had started QE 3 the market would have rallied. The market phenominom is dictated by one small groups policy. How absurd. More trouble ahead, until we get a real crisis to cleanse this corrupt financial system  America and the world is just spinning its wheels.
Jun 21, 2012 4:13PM
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I do believe Mr. Mirhaydari does not understand the complexitity of Europe. The Germans are going to kick those countries who are not carrying  their weight into the sea. And who owns most of this debt-- France. It'll probably turn into an economic WW III.  Nobody knows what will be left when this tidal wave passes. Running to U.S. Treasuries is about the dryest position, if you like the AA rating. There is no way the equity markets shouldbe anywhere near the pre-recession highs. I'd stay away from commodities. You got to think it's best to stay in dollars until this passes.

Jun 21, 2012 6:04PM
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That the DOW and S&P 500 indices aren't down at least 20% is due to the Fed's money printing which has created an equity bubble. Wall Street expects more money printing in order to keep the bubble fully inflated. The global economy is significantly different from the economy duting the Clinton eara. Money printing has less of an effect on equities because the money is hotter than ever - it flows to a greater variety of global markets such as Brazil, China, Russia, etc...It will take continued printing of money to maintain the DOW at approx. 13K and the S&P at 2600-2800. The downside is massive inflation which will come sooner or later.
Jun 21, 2012 4:05PM
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Anybody want to "SPECULATE" on what a gallon of gas will cost next week?

 

How long will the oil companies keep trying to line their pockets before they

will be forced to lower the price.  It is still over $ 3.60 here in certral Indiana.

 

It is down $ 27.00 a barrel from its recent high.  That is a 25% drop.

 

I'd say it should be headed for $ 3.25 or lower.  Does anyone think it will

get there?

 

Jun 21, 2012 4:39PM
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No, Money, No Job, can't make mortgage payment. Let the banks suck wind!!!

How much does one person need over a lifetime 1 million, 10 million, more?  Why can't we see the big picture for all to have good jobs and wages that can have society working and enjoying life instead of struggling to keep up with the "Jones" and images as portrayed on TV in commercials for cars, houses, vacations that most people can't afford. As far as I know there are no replays. No one lives forever. Some of the legislature and laws that are being proposed you would think these people believe they will live forever!!. remember at the end were worth same.

Jun 21, 2012 4:28PM
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It's rather comical the explanation the Cramers and Mir concoct to help prop their own interests. There is no logical explanation on this planet to explain why any person would ever in a million years put money in the market. The plea today was for people to stop being so bearish on the long run. Please stop thinking short term when investing in the market. 

I have a couple questions. 

1)   How long is the long run and short run?
2)   According to investor lore, when is it ever a good time to get out of the market?
3)   If we are to live for the long run and my long run ended today, would the last thirteen years of hell in the market been construed to be the long term or short term. 

In the past 13 years the stock market has crapped nothing but losses upon losses. My long run ended this year with retirement but my broker told me to leave it in there to recoup my losses. So I asked him when my long run was over. He looked at me and said, " When you die". I said but I could be broke by then. He said," You know the risks of the market. You know if you are patient it will come back.". I said I am 69 years old, when is it coming back?  He said just ride it out.
Jun 21, 2012 4:04PM
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No worries, tomorrow we can count on 'Hope'.
Jun 21, 2012 5:35PM
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Wall street is just a slot machine.  Me?  I gamble where at least I can get a free Makers Mark and coke.
Jun 21, 2012 5:00PM
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Once the car buying slows down in the next year or sooner the **** will hit the fan.

Most people have replaced their 10 year old cars and then its over for GM and Ford.

Coudn't get a loan at a bank but the auto company gave me a car loan.

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