There's no denying it anymore: The low-volume, no-volatility, narrow-participation uptrend of the past few months is coming to a dramatic end. The NYSE Composite has sliced below its 50-day moving average as well as its lower Bollinger Band on a scale not seen since November. Cyclical, economically sensitive stocks are leading the decline. Ancillary markets are singing the same sad song, from commodities to junk bonds.
This is classic new downtrend behavior.
Why is it happening? The Goldilocks scenario -- seemingly stronger economic data, but not so strong as to rule out additional cheap-money easing from the Federal Reserve -- is ending, to be replaced with a nightmare stagflationary future as growth slows yet inflation remains troublesomely high with gas prices hovering near 2008 and 2011 peaks. Not only will that pressure the Fed to hold its fire on another round of quantitative easing, but it's putting pressure on foreign central banks, too.
Indeed, overnight, higher-than-expected inflation numbers out of China pushed back expectations for a reserve requirement ratio or interest rate cut by the People's Bank of China.
But the real catalyst for Monday's sell-off was Friday's disappointing U.S. jobs report, confirming what I've been saying for months: The recent "strengthening" of the labor market was a mirage created by retiring workers and disillusioned jobseekers leaving the workforce and pulling down the unemployment rate while an extremely warm winter artificially boosted payroll gains.
The proof that something wasn't right could be seen in the way inflation-adjusted real incomes dropped in three of the past four months (something that hasn't happened in a nonrecessionary environment) as consumers drew down savings to pay for higher and higher fuel prices.
This is the bane of stagflation in action. And there are no easy solutions, since it's combined with an ongoing balance sheet recession caused by $8 trillion in excess debt in the West, according to Credit Suisse estimates. More money printing, which the cheap-money addicts on Wall Street are clamoring for, certainly isn't the answer.
When the Fed launched QE1 and QE2, Brent crude was trading around $40 and $75 a barrel, not the $120+ it costs now. Consumer price inflation was running at annual rate of around zero and 1%, respectively, not the nearly 3% it's running at now. And the big banks were holding $1 trillion or less in excess reserves, not the $1.5 trillion they hold now.
They'll do it anyway. Fed chief Bernanke won't want to take action too close to Election Day, for fear of being cast an explicit supporter of President Barack Obama's re-election team by any means necessary, including violent debasement of the dollar's value.
That sets the stage for a monthlong downtrend into the Fed's policy announcement on June 20, when it's likely to announce or tease QE3, which is widely expected to focus on the housing market via targeted purchases of mortgage securities. Bernanke hopes slowdown fears will take crude oil off bubble and create enough of a pullback in inflation to justify additional easing.
But with so much inflation already primed in the system, and monetary policy quickly losing its effectiveness, aside from igniting a massive relief rally in the financial markets, it's unlikely to restart the heart of the economy. That's because the heart remains consumer spending. And unless wages increase via new high-quality jobs, higher food and fuel prices will just continue to erode real incomes and savings until consumers are tapped out.
For now, I continue to recommend conservative investors move to cash to protect wealth against this nascent downtrend. For more aggressive traders, there are a plethora of opportunities for profits on the short side. Over the past few weeks, energy, industrial metals and emerging-market stocks have been the place to be. The Edge Letter Sample Portfolio has been holding positions in these areas.
Examples include shorts in National Bank of Greece (NBG), up 32% since February, and PennWest Energy (PWE), up 12.2% since March 28. Short ETF holdings include Direxion 3x Daily Energy Bear (ERY), up 14.4% since March 22.
The next stage of the pullback seems to be focusing on semiconductor stocks. Recent additions in this area include a short in Vishay Intertech (VSH) and the Direxion 3x Daily Semiconductor Bear (SOXS).
I'm adding two new shorts to the Edge Letter Sample Portfolio: Cemex S.A. (CX), a cement maker being pummeled along with the rest of the materials sector, and Brocade Communications Systems (BRCD), a networking equipment provider.
I found CX and BRCD with the help of technical screens developed with Fidelity's Wealth Lab Pro back-testing tools, which you can find here. (Fidelity sponsors the Investor Pro section on MSN Money.)
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.com and follow him on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
The Eternal Pessimist, Mr. Mirhaydari is back on his doom and gloom soap box...
The fed has been printing dollars faster than drunk counterfeiting monkeys. They've decided not to call it QE this time around just print and keep their mouths shut. The inflation has been finding its way into the economy and they've been able to hide it by using adjusted CPI and PPI numbers. This causes and the deflator number to be misstated and it leads to numbers that look like a real recovery instead of the phony recovery it is. This is causing a cluster of errors among businesses right now. These mal-investments will further hamper any progress toward a real recovery.
Little has changed regarding the velocity of money so far other than the higher prices of food and gasoline. As more of the feds monopoly money enters the economy (and it will) the velocity of money will increase. That increase will cause more, not less of the money to spill out into the economy and unless there is drastic action inflation could run away from the planners in a hurry.
Whether or not the fed will act in time is debatable. While Ben Bernanke has assured congress that he could act in an instant it is doubtful that he can. It should be considered also that the higher interest rates that would be required to quell an inflationary spiral will cause the federal debt to soar quickly since the majority of government paper is short term.
Good luck out there
JAY60 ,Thank you for your kind words and youre correct in the taxes paid per gallon of gas, but in the very recent times
I saw that the crude dropped $4-5.50 and the gas went up before opening the next morning. I admit I am not as learned as
Read Full Article »