It was an ugly, ugly session on Tuesday. Which seems strange considering Washington got its act together to pass a debt ceiling deal -- with not a day to spare. August 2 was the deadline. And the bill was passed into law August 2. How's that for cutting it close?
Stocks plunged anyway, with the S&P 500 dropping more than 2.6% in its worst one-day loss in nearly a year. And it caps an eight day 6.7% losing streak for the Dow Jones Industrial Average -- the worst run since May 2010, a month which featured the "flash crash" and the panicked start to the euro zone debt crisis.
Investors are reacting to a number of big negatives: The fact the debt bill probably won't save America's AAA credit rating, the fact the economy is on the edge of falling into outright contraction, and the fact that the euro zone crisis is spreading like a disease into Italy and Spain.
As a result, significant technical support was taken out, clearing the way for a very nasty and dramatic market meltdown over the next few days. Here's why.
I'll have more to say about the economy and the debt deal in my column tomorrow -- so for now, let's set those issues aside and focus on the market action. And boy, is there plenty to talk about.
The most important chart is the one shown above, which shows that the S&P 500 has violated the neckline of an epic, six-month-long head-and-shoulders reversal pattern. This pattern is one of the most well recognized by Wall Street chartists -- who were no doubt closely watching the 1,260 level today. Violation in the final minutes of trading triggered a wave of selling pressure as stop losses were hit.
Here's the bad news: The pattern traces to a price target of 1,150, which would be worth another 8.7% drop from current levels.
Other markets tell a similarly dour story. Copper, which is said to have a PhD in economics for its ability to anticipate shifts in the business cycle, has just fallen out of its consolidation range.
Bond traders are also gearing up for a period of economic disappointment and price deflation -- a sign they expect a period of sub-par growth. You can see this in the ratio of inflation-protected Treasury securities vs. traditional Treasury securities. The chart above illustrates this with the iShares TIPS (TIP) and the iShares 20+ Year Treasury Bond (TLT). Translation: Inflation expectations have dropped, on growth concerns, to levels last seen in December.
Bond traders are abandoning risk as high yield bonds come under selling pressure. Drops in these so-called "junk bonds" closely follows the vagaries of the stock market -- with the deepest market selloffs accompanied by sizable drops in junk bonds.
What are investors to do?
If you're a risk averse long-term buy-and-hold type, the best advice is to move to cash and wait for fairer weather. There is too much political and economic uncertainty. There is too much market volatility. And while we may get a rebound rally, the technical setups suggest the bottom could very well drop out of this market. It wouldn't take much. Maybe a U.S. credit downgrade from AAA to AA will be the catalyst.
For more nimble traders, there are plenty of opportunities on the short side -- although many sectors have already made their move. Health care, for instance, was leading the decline but looks overextended to the downside now. Materials and consumer discretionary stocks, which are just beginning to show relative weakness, could be the next market laggards.
Thanks to targeted short positions in consumer, health care, and materials stocks, my newsletter subscribers have limited their month-to-date decline to just 0.6% vs. a 3% loss for the S&P 500. Highlights include a 7.5% gain in high-end retailer Saks (SKS) and a near 4% gain in CarMax (KMX) over the last few days.
Both SKS and KMX will be added to my Edge Letter sample portfolio -- which tracks a selection of picks for my MSN Money readers in real time here.
Admittedly, my performance could've been better if it wasn't for my short precious metals positions. While my shorts in metal miners have done well, my gold futures short underperformed as gold zoomed to a new high despite a rebound in the U.S. dollar. Word overnight that the Bank of Korea increased its gold reserves -- which still remain a very small percentage of the central banks overall assets -- sent gold prices surging.
While I still believe precious metals are vulnerable to a pullback on a stronger dollar, I must respect the market's will in this case. Precious metals are highly speculative, and when a headline like the one out of Korea drops it pushes all the right buttons for the gold bugs: Currency debasement, abandonment of the dollar reserve standard, etc.
Disclosure: Anthony has recommended KMX and SKS short to his newsletter subscribers.
Check out Anthony's 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. You can view his current stock picks here. Feel free to comment below.
idiots running the country...
the political puppet masters
alan greenspanlarry summersben bernankehenry paulsonfranklin rainespaul volkerdonald reganwilliam donaldsonrobert rubinjoseph cossanomartin j. sullivanrichard fuldchristopher coxscott talbottfrederic mishkintimothy geithnermartin feldsteinwilliam c. dudleyjohn thainr. glenn hubbardstan o'neallaura tysonruth simmonslewis sachsdr. richard portesrahm israel emanuelmary shapiromark paterson (aig)
i hope this blows up in all their faces..idiots running this country..now the FAA is in trouble too!! its like sailing without a captain!!!morons...
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