Investors were rudely reminded Tuesday that stocks don't just go up; they can do down, too. And when they do fall, sell-offs tend to be hard and fast. In just days, market corrections wipe out weeks of upward progress.
That's exactly what's happening now that concerns over bubbling inflationary pressures, the end of policy stimulus and the Fed's $600 billion QE2 money-printing operation, and political turmoil in Libya and elsewhere have finally broken the back of the post-September uptrend, resulting in the worst one-day losses since last August. The weakness continues today.
Everywhere you look, critical support was lost, trend lines were broken, and recent patterns reversed. So what's next?
Tuesday's drop was powerful. Breadth was extremely negative. There were 2,360 net declining issues on the NYSE, the worst result since last June. And down volume accounted for 91% of total volume, the third 90%-plus-downside day of the year. There hasn't been a 90%-plus-upside day since Dec. 1. All of this suggests that the distribution that has been under way over the past few months is accelerating in a big way.
Also, the CBOE Volatility Index (VIX) not only jumped over its 50-day moving average (a line of demarcation between stock market uptrends and downtrends) but blasted through its upper Bollinger Band as well. A move of that strength hasn't been seen since last April ahead of a multi-month correction. Given that the VIX, known as Wall Street's fear gauge, is based on S&P 500 options trading, this is a sign that professional investors are frantically moving into put-option protection against an protracted sell-off.
Many retail investors were caught unaware of this looming change in tone. Small option traders recently ramped up their call-option buying to levels not seen since the final days of the dot-com bubble back in 2000. And over-the-country volume in Nasdaq pink sheet issues -- low-priced, extremely speculative stocks -- moved to their highest levels relative to the volume in the larger stocks in the Nasdaq Composite since 2006. Back then, the spike in bullishness was followed by a 10% correction.
I think we could be on the cusp of a drop of similar magnitude now.
So the question is whether the forced of liquidity being supplied by the Fed's $600 billion money-printing operation can override geopolitical concerns, rising fuel and food prices, fiscal budget battles, renewed concerns over the health of the eurozone, and a drop in earnings growth. There is some evidence that the Fed's policy is increasing, being fingered as a culprit in many of the macroeconomic issues we now face, from rising food prices to unwanted currency appreciation in countries like Brazil and unwanted credit growth in countries like China.
Moreover, the policy is nearing its planned phase-out in June. So not only are investors now pricing in a market environment that will soon be without a constant drip-drip of cheap cash, but they are pricing in an environment where that cheap cash is actually seen as an increasingly negative factor.
One thing is clear: Investors sold stocks more heavily Tuesday than they did during the deep one-day drop on Jan. 28. This is a sign that rather than encouraging new demand, higher prices have made traders more skittish and ready to run for the exits at the first sign of trouble. For example, the S&P 500's component stocks lost 11.6 new points Tuesday vs. the 9.7 points lost on Jan. 28.
Unless we see a big reversal a la Jan. 28, which I think is highly unlikely, given the depth and unpredictability of the negative catalysts the market now faces, I've recommended that my newsletter subscribers maintain a net short positioning for at least a few weeks. And I recommend the same to you. At the very least, look at culling your weak holdings, reducing exposure to highly sensitive cyclical sectors like materials and technology, and work on reducing your overall long exposure.
For more, be sure to check out my column this week "Was that as good as the market gets?".
Disclosure: Anthony does not own or control a position in any of the companies or funds mentioned.
Be sure to check out Anthony's new investment advisory service, The Edge. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up.
The author can be contacted at anthony@edgeletter.com. Feel free to comment below.
LOL! Heck I'm aging too fast now. If you want to write me I'm arrowhead1956 at hotmail.com
I live in the north spot of IL. about 12 miles from Wisconsin. West of Chicago in Rockford IL. I also work for the newspaper here. This should tell you how big a tight -wad I am. LOL.
I've taken my investments to a better level. Get in touch and we'll look at your investments if you want. Or I'll keep you up on my picks. All for a friend.I couldn't use the AT sign as they wouldn't allow it.
Looks like just more of the same. The faint of heart will be flushed out while those in the know will pick up the pieces and score big returns again. Leave it to the "experts" to stir the pot and the FED to keep feeding the pot with cheap money, "what me worry".
No reason to avoid the market but be darn sure you have some clue as to what you are doing.
Hi tomami, My main point is folks need to be smart and quit freaking out over every little problem in the world. I'm going to be 55 this April and like you I've lived through these types of world problems. The market will come back as it always does. History shows this to be true. As we know the old saying" If you can't stand the heat, get out of the kitchen" People don't realize it's going to take time to get problems solved. Unless you win the lottery, It's going to take some time. Everyone is in a big hurry and need to stabilize some.
Silver, Gold , and oil is great right now but when the bottom falls many will be holding the bag. Most people can't compete or they hold too long. I've seen it in the past.
I don't usually give my stocks out, but I do favor some like TAL, BGS, CPO, BRE on their progress and dividends. When the market is unstable like it is, I hold my selections in good stock.
Here we go again doom and gloom and everyone tramples to the exit. If you have a good selection of stocks,funds, Then hold tight. This too shall pass. In fact after 40 years of this regime, It's about time Libya frees itself. Quit looking at today and think about tomorrow. When Egypt was in turmoil you all rushed out the exit door only to find yourselves standing there looking dumb. What did you do, Buy back in. Even at $7 a trade you all took a loss. Today I bought more stock. When will you ever learn. The sky is not falling nor will it. Watch the sunset come back when the dust settles. Panic and you loose money. Or should I say waste.
Hello readers,
Anthony's last paragraph is darn good advice. Heed it! I suggest taking 50% of your holdings off the table - the weakest, of course. After all, a 20-25% correction would be healthy but at the same time painful to your wealth.
Chad in CO
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