Market sell-off is just beginning

Last week's optimism fades as structural problems and trouble in Europe re-emerge, threatening a months-long downtrend.

By Anthony Mirhaydari Feb 4, 2013 2:18PM

Well, that didn't last long. Friday's celebratory blast above Dow 14,000, fueled by mediocre data, extreme optimism, and classic first-of-the-month automated inflows into retirement accounts, was being reversed Monday as traders were reminded that deep structural problems remain.


The focus was on Europe, where bank stocks and sovereign bonds were being hammered as political scandals threatened to bring down pro-austerity governments in Italy and Spain. Elections are due in Italy and Germany later this year, elections that could destabilize the current focus on budget cuts and bank rescues. With youth unemployment in Spain above 56%, Greece falling behind on its budget targets and former Italian Prime Minister Silvio Berlusconi promising tax cuts if he returns to power, the situation is primed for another scare.


A scare that, just a few days ago, seemed so remote.


I just returned to Seattle from the Orlando Money Show, where, amid widespread bullishness and a general postponement of disbelief, I focused on the fact that fundamentals didn't support this advance. No surprise I was in the minority. Economic data remains weak. The U.S. unemployment rate will likely jump over 8% in the months to come as GDP shrinks. German retail sales have fallen into recessionary territory as manufacturers there struggle with a strong currency. The United Kingdom is headed for a triple-dip recession.



Sentiment has reached an extreme as people were just unwilling to consider anything besides the meme that cheap money from global central banks could push stocks to infinity -- no matter what happened in the real economy. That explains things like the after-hours ramp in Amazon (AMZN) last week as its trailing 12-month earnings went negative (which has since been reversed). It explains why speculative, non-commercial long futures positions in the Russell 2000 small cap index have reached a near record.


And it explains why stocks could march higher, in a perfect 45-degree uptrend, on pitiful volume and breadth numbers as a narrower and narrower group of stocks pushed higher.



That's all ending now. Eurozone sovereign bond yields have ended their eight-month downtrend (Italy 10-year yield shown above) as two truths reemerge. One, cheap cash from the European Central Bank has not healed the root causes of weak banks and weak economies in places like Spain and Greece; and besides, the ECB is now starting to withdraw some of that cash. The issue is economic competitiveness and the need for exports and tourism, not liquidity. Two, the political calm in the region, as budget-cutting technocrats have taken power in the peripheral countries, is being shattered amid scandal and restive, recession-fatigued populations.


So there's all that.


But there's also all the issues we face here at home. In less than a month, we will be hit with the budget sequestration that was postponed as part of the New Year's fiscal cliff deal, worth $1 trillion in spending cuts. Then, at the end of March, we face the end of the continuing budget resolution. Republicans were successful in pushing through the "No Budget, No Pay" legislation that will withhold Congress' pay if each chamber doesn't pass a budget.


Expect another epic food fight over spending and tax issues.



And there are a multitude of technical reasons to expect the market breakdown to continue. Cyclical, economically sensitive stocks such as steelmakers are rolling over for the first time since November -- a precursor to market downturns. Net declining issues has returned to levels not seen since November today as pent up selling pressure is unleashed. High-yield "junk" bonds are in a full on downtrend -- a more mature and less volatile market that tends to act as a leading indicator for stocks.



In response, I continue to recommend investors position themselves defensively via the UltraShort Basic Materials ETF (SMN) and short positions in material stocks like AKSteel (AKS). I also believe the market is underpricing volatility, calculated in the CBOE Volatility Index ($VIX). I have push an aggressive bet on a rising VIX, dubbed Wall Street's "Fear Gauge," by adding two positions in the VelocityShares 2x Daily VIX (TVIX) to my Edge Letter Sample Portfolio.


Disclosure: Anthony has recommended SMN and TVIX 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.



Feb 4, 2013 3:08PM

Well we have captain always wrong Crammer telling us just how great things are, then we have captain pulls charts out his butt Anthony telling us how horrible things are...... imagine why the retail investor might be confused and stay out of the market?

Ah to be an "expert".

Feb 4, 2013 2:55PM
Brokers and traders will do anything to try and stop their clients from bailing out. Including a fake rally when they figure out that light they saw was actually a freight train.

Feb 4, 2013 3:18PM

If I had listened to you in early January, it would have cost me the biggest January rally in years.

You know what they say about missing the market's up days:  DON'T!!

Feb 4, 2013 3:35PM

"This is the year that the world decouples from the US dollar and the dollar, yen and euro are all going to collapse and things are going to get much mcuh much worse than even the Great Depression."


 I agree. Funny thing though... if you paid attention to my non-traditional commodities posts, you'd know that China also controls the price of metals and guns and ammo are useless. Commonsense stockpiled throw-away goods that will become in short supply. With all our wealth stuck with unskilled or too old people and very few people under 50 with genuine life craft skills... this will get very rough.

I'd rather know how to grow a lucious garden on urban or suburban soil than to "text" everyday and on Sundays. What a worthless fad those clever Chinese gave us cheap devices to engage in.

Feb 4, 2013 3:32PM

If you shop for the nessessities, then you already have known this news for at least a year. ANYTHING that eats grain, grass or has to be trucked from farm, mill or production plant has been climbing. It isnt just the central banks or wall street that is the problem - its the speculators. AND dont forget the governments that print lots of money to try and spend the a country into the black side of the books - hint look at Zimbabwa(?). The bills are due folks and I dont care if you paid SS for 50 years or 1 year, I dont care what kind of shelter you have for your retirment nest egg - we are all going to loose. Even if you can hold on to what you have saved - the value is going to be worthless. It was only last year that an article posted here said if you dont have 1.5 mil by retirement you might fall short. So if the dollar really weakens how much more do you have to have?? 3 or 4 mil?

My Plan is to continue to spend localy, grow my food (at least I know whats in it!) and watch our government position themselves against the people.

Feb 4, 2013 3:30PM
Grow dependency, grow the democrat base.

Like I have been saying for a long time and now Bernanke is saying finally there is a limit to massive injection of pretend money into the Western banking system.


All ready China is trading in yuan having abandoned the dollar as unsafe at any level. They have already successfully used their US T-bills as collatoral for the massive building that they have just completed so when the dollar goes south they will quit paying the construction notes and let the lenders collect on worthless US T-bills. A very brillant strategy turn a liablity US T-bills into real tangible assets buildings on China soil.


This is the year that the world decouples from the US dollar and the dollar, yen and euro are all going to collapse and things are going to get much much much worse than even the Great Depression.


Feb 4, 2013 3:29PM
Name a stock that isn't artificially positioned in value by 90% fiat money? There aren't any. There is every potential for a chain-reaction collapse the SEC can't stop because it's too broad. When there is a fire, people rarely move orderly-like to the exits. Best to leave early when the place looks like a tinder box filled with gas fumes and chain-smokers.
Feb 4, 2013 5:45PM
Anthony is actually sticking his neck out calling today the turn.   Don't see much of that in these articles.  Personally I have been waiting for the turn for over a year and I'll keep waiting.  It hasn't made sense to me for a long time.
Feb 4, 2013 4:32PM
.Anthony's "Epic" predictions seldom materialize.
Feb 4, 2013 4:53PM
Lets talk about something positive for investors.  Have you noticed falling off of support for high fructose corn syrup.  Doing a lot of chemistry in my job has really awakened me to the damage and dangers of this cheap product.  Much like the cigarette manufacturers and adding nicotine to cigarettes this stuff has and is horrible for the diets of hundreds of millions just in America.  What can we safely use as a substitute for this product that contributes hugely to childhood obesity.  Try this test.  If you feel thirsty for sweet buy some cane sugar coke from Costco; made in Mexico if you can understand that, and drink three or four ounces. It is true you will have less desire for sweet after drinking the cane product rather than the high fructose product.  Chemists say the molecular need for sweet is better satisfied with cane sugar than the cheap fructose.  Many supporters of the cheap fructose say it isn't true.  Try for yourself.  It is amazing. Consequently those Companies that understand and act on this ensuing "value" will undoubtedly be more profitable than those who refuse to change.  JMHO
Feb 4, 2013 4:44PM
If the market had been up another 100 today, he would have said the buying is just beginning.
Feb 4, 2013 4:37PM

The corporations and the government (and the stock exchanges) are in this for themselves and not middle America!  I posted this from last week on one of your articles.


"Mr. Mirhaydari, I object to the first line in your article, the recession ended in the middle of 2009.  Either you have someone paying for your food, sundries, gasoline and the like, or you are REALLY out of touch with Americans.  The recession is progressively worsening and the Middle Class is shrinking.  I have been to Third World countries and have noticed there is no middle class, only the poor and the rich.  This is what is happening to the United States of America.

Remember the date:

August 28, 2013 - the Middle Class Rights March on Washington D.C. will change everything!"

Feb 4, 2013 3:22PM
Anthony, your scenario makes sense to me, but what about that old saying, theory, principle, or whatever you want to call it, "The Stock Market Climbs a Wall of Worry?"  
Don Moore
Feb 4, 2013 4:28PM
I am a long term investor, so ups and downs don't concern me unless there is a major buying opportunity. Everything else is pure fluff and a product of the latest headlines.
Feb 4, 2013 2:56PM
Feb 4, 2013 3:08PM
I never believe anything that this idiot says!
Feb 4, 2013 5:55PM
How can you believe anything from these bone heads?    I believe in what I see with my eyes wide open.  This economy is based on money printing and public misinformation.   How far does your money go these days?   Anyone been to the grocery store?  
Feb 4, 2013 5:33PM

But, but, but... I thought everything was alright in Europe last Friday.


Feb 4, 2013 5:25PM
V_L is correct.  Here it comes.  Your dollar is going to be worthless.  Better get it while it's good.
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