Stocks dropped hard on Wednesday on another batch of terrible economic news and sovereign credit downgrade for Greece. The Citigroup Economic Surprise Index, which measures how growth is faring against Wall Street expectations, is in the midst of its most violent decline since the 2008 financial crisis. And with the end of the Federal Reserve's $600 billion "QE2" money printing initiative just a few weeks away, investors are running scared.
There's good reason for this. A rise in inflationary pressures has been the main reason why economic data has been so terrible lately -- a situation I've covered at length in my columns and blog posts going back to February. Additional Fed stimulus would only make the problem worse, effectively shelving hopes for a third round of direct asset purchases by the central bank. A "QE3" would only make the problem worse.
After months of banging on the table that all was not well with the economy and the markets, I'm slowly beginning to see glimmers of hope which suggest that the broad market selloff -- which entered its third month today -- could give way to a relief rebound rally. Remember that the time to get cautiously bullish is when there's blood in the streets. Right now, there's a sea of red.
The strongest sign that today's selloff was a terminal event comes from the ARMS Index or TRIN for Short-Term Trading Index -- which closed at the highest level seen since last August. This is a very bullish sign.
The TRIN was developed by Richard Arms in the 1960s and is a measure of breadth calculated by taking the ratio of advancing issues vs. declining issues and dividing by the ratio of up volume to down volume.
High readings, like we had on Wednesday, as associated with panic selloff events that typically occur at market lows. Why? Because a high reading happens when the up volume/down volume ratio is much smaller than the advancing/declining issues ratio. Translation: Fearful investors sent a ton of volume through stocks on the decline while bargain hunters were quietly, stealthily on the prowl for opportunities.
There's more. Emerging market stocks, which tend to lead the U.S. market, have been perking up lately. Chinese equities in particular have been on the move. Leading, economically sensitive sectors like materials, energy, and semiconductors (though they're down today) have been showing strength over the past week.
As you can see in the chart above, smaller, riskier stocks in the Nasdaq Composite are also moving higher against the 30 conservative, blue-chip mega-cap stocks in the Dow Jones Industrial Average. When this happens, the overall market tends to move higher.
And finally, economically critical commodities like lumber and copper have stabilized over the past few weeks and are pushing higher. As a result, the two have formed what chartists call a "positive divergence" with stocks. Historically, when this has happened, the commodities tend to tell the truer story.
With all that said, I must admit: Attractive opportunities on the long side are few and far between. Developed with the help of Fidelity's Wealth-Lab Pro back testing toolset, my technical screens have suggested a handful of new ideas -- the best of which I've already recommended to my newsletter subscribers (who are up more than 10% over the past month vs. a 3.4% decline for the S&P 500) . The focus has been on emerging market stocks and ETFs as well as precious metals.
Individual picks include China National Offshore Oil (CEO), Tanzanian Royalty Exploration Corp. (TRE), and the Global X Colombia ETF (GXG). All are still good to go.
Disclosure: Anthony has recommended CEO, TRE, and GXG to his newsletter subscribers.
Check out his new investment advisory service, The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up.
The author can be contacted at anthony@edgeletter.com and followed on Twitter at @EdgeLetter. Feel free to comment below.
solefire
Did not realize bohama and the senate saw the light , turned conserveative and joined the repes party. Let alone all those socialist department head
COOL
Wow, apparently MSN and Anthony are in total cahoots!!! Why? Because, about 2 hrs ago, I posted a message completely free of profanity, etc. but admittedly critical of this author's article. And the comment was removed!!! What a crock!
Here is my comment again:
In the very first sentence of the article, the author wrote, "The selloff I've been warning of for months has reached new depths." The problem with that statement is that you've been incessantly warning of this correction since last fall!!! Since the markets are still higher than they were then, your prediction was indisputably wrong. You are doing an incredible disservice to the average reader of your articles when shooting from the hip and speaking in such bold absolutes, when your track record proves one would be foolish to listen to any of it. If anything, your market timing and honesty seems to be below average.
We would all be better off if you quit pretending to be able to time the markets, and take a page out of Markman or Jubak -- who have always professed to know nothing about such, but a whole lot about the future of specific businesses and companies.
How about instead of deleting this post, you address it with a response -- for which you have every right as I do for speaking my position.
Blood in the streets? A sea of red? C'mon, Anthony, what are you looking at? At today's close the DJIA is about 4% below its recent highs. That's not even much of a correction, yet. I'd be surprised if we don't at least test the 12000 level. It's not unusual for the market to be sloppy in the late spring and early summer. It's hardly a big catastrophe. A little sense of perspective would be useful.
Copyright © 2011 Microsoft. All rights reserved.
Quotes are real-time for NASDAQ, NYSE and AMEX. See delay times for other exchanges.
Fundamental company data and historical chart data provided by Thomson Reuters (click for restrictions). Real-time quotes provided by BATS Exchange. Real-time index quotes and delayed quotes supplied by Interactive Data Real-Time Services. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Gradient Analytics. IPO data provided by Hoover's Inc. Index membership data provided by SIX Telekurs.
Japanese stock price data provided by Nomura Research Institute Ltd.; quotes delayed 20 minutes. Canadian fund data provided by CANNEX Financial Exchanges Ltd.
StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.
Top Picks
Read Full Article »