Signs of market trouble emerge
After a few weeks of impressive buying, risky assets are starting to weaken again.
Just as the digital ink dried on my last post, explaining why stocks have rallied so strongly through the end of November, the bulls decided to start giving up. Over the last few days, persistent selling pressure has slammed the brakes on what looked like a classic Santa Claus rally to take us through the end of the year.
What happened? Hopes are dimming over an easy short-term compromise deal on the fiscal cliff. Negotiations are deadlocked over the issue of statutory vs. effective tax rate increases on the rich and which party will propose necessary cuts to entitlement spending first.
But the biggest source of worry is what's happening deep within the market. Here's why.
Various technical indicators are starting to roll over. The CBOE Volatility Index ($VIX), Wall Street's "fear gauge," has popped back above its 50-day moving average -- a prerequisite for a downtrend in stocks. Options traders are starting to snap up put option protection against stock price declines on a scale not seen since the September market top. And cyclical, economically-sensitive stocks are bleeding lower in a way that hasn't been seen since the March market top.
While it's still true that some of the economic data is getting better, the market is apparently looking past that into what lies beyond in 2013 given unresolved political issues here at home (fiscal cliff and debt ceiling) and in Europe (how to reaccelerate growth and draw a line under the debt crisis).
Investors have also gone from extreme pessimism in November to aggressive confidence now. By one measure, people are feeling as good now as they have in the last four years. That's looking at the amount of assets invested in the major inverse market ETFs, such as the ProShares Short S&P 500 Fund (SH).
That's a big swing, and justifies at least a short-term pullback.
For now, I'm selling all my remaining long positions and adding some exposure to safe haven assets including the Direxion 3x Treasury Bull (TMF) and looking for short exposure with the ProShares UltraShort Russell 2000 (TWM). I'm adding both to my Edge Letter Sample Portfolio.
Disclosure: Anthony has recommended both TMF and TWM to his clients.
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