Reality has caught up to the runaway market. Economic data here at home are starting to disappoint as the temporary tailwinds of savings drawdown and inventory restocking fade. Witness Tuesday's retail sales miss or Friday's poor trade report. Data are weakening overseas as well, with activity slowing in key economies, including those of Japan and Germany.
The situation in Europe is deteriorating, with analysts at Moody's downgrading the credit ratings of a number of countries Monday night, becoming the first agency to call into question the creditworthiness of the United Kingdom. Greece is fast approaching the precipice. Its coalition government is weakening from the intense popular uprising against additional budget cuts. Participation in its critical debt restructuring deal is reportedly weaker than expected. And now, a chorus of eurozone officials, including the finance ministers of Germany and Poland, is playing down the negative effects of a Greek default and eurozone exit.
With investor sentiment at extreme highs, this sets the stage for a dramatic market reversal as it becomes increasingly clear that central bank interventions -- such as the actions by the Bank of Japan and the Bank of England over the past week -- can no longer solve the structural problems at hand. We're already seeing signs of this.
For one, professional traders are scrambling to protect themselves from a market decline in a way not seen for months. It started last week when the CBOE Volatility Index (VIX) surged up and over its 20-day moving average for the first time since November.
But here's the really interesting thing. History suggests the losses are just getting started. The folks at Sundial Capital Research crunched the numbers. Looking at examples like now (a VIX spike after stocks set a six-month high, resulting in a shock stock market close at a five-day low) since 2009, it's happened six times with loss of at least an additional 3.8% at some point over the next three weeks.
This has happened 10 times since 1969, when investor sentiment was very optimistic, as it is now. Looking 19 days after the event, the S&P 500 was positive only 2 out of 10 times, with an average maximum loss of 6.2%. Not good.
You can also see the change in the way super-sensitive cyclical stocks like steelmakers are rolling over and playing dead. These stocks, and the industrial metals that underpin their pricing, are affected not only by economic growth expectations but by the vagaries of the U.S. dollar as well. When haven inflows push up the greenback, as they are doing now, it acts like a double whammy on the sector.
Right now, I'm recommending agile, nimble traders adopt a mild, cautious net short positioning focusing on materials stocks. For this reason, I'm adding shorts in Mechel Steel (MTL), Tech Resources (TCK) and AK Steel (AKS) to my Edge Letter Sample Portfolio. All three look headed for big declines in the days and weeks to come.
I found both MTL, AKS, and TCK 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.)
Disclosure: Anthony has recommended MTL and AKS to his newsletter subscribers.
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.
Sign in with your Windows Live ID, or create a new one.
You all have made some good arguments the fact remains that steady eddie will always out play the knee jerk reaction of action jackson.
I would suggest if you are driven by fear and not your own research and experience. That when you make your move to sell that you consider what has worked even in this volatile market "Dollar cost averaging"
Here is another tidbit. In this volatile market it has been proven that Profits have been erased year after year for the last 13 years. Remember the lost decade 2000 - 2010 well the saga continues.
What you can do to maximize return is "Dollar cost average" I also have a cash account that accumulates cash that can be invested in the valley floor that will allow you to test your timing and make it a little more interesting.
You can also reduce you risk at the top but that's even more risky if your timing stinks....beware of the smoke and mirrors.
This whole recovery in markets is brought to you by the US Federal Reserve and collective government interventions in debasing global currency. This will eventually end badly for the stock market yet again. Anthony makes some good points but timing of the market is difficult when they are manipulated by governments. One only needs to look at the money printing to see where the market is going. As long as the US, Europe, Great Brittan, etc..dump cheap money into the economy it must go somewhere. The wealth is getting sucked out of the main street economy where responsible people work, save and take entrepreneurial capital risk. This will end when the market consumes the money supply or inflation hits the bond market and the governments can no longer borrow cheaply. The bulls should be more nervous than the bears at this point. We have markets pushing record levels again but housing down 30% and still declining, real unemployment near 16%, wage stagnation, European defaults, Iran, crude at $100 bbl. and trillion dollar annual deficits. Wall street is cheering the government handouts but this does not ring good times for our nation.
Go right ahead and ignore Anthony ... at your peril. You want a bull market so badly, you're almost on the verge of wishing one into existence. The irony is that you're actually in a cyclical bull, but it's in a structural, long-term bear. Suck it up. Enjoy it while you can, because it's surely ephemeral. We live in a world, wall-papered in money. I'm guessing that some of you still believe in V-shaped recoveries and buy-and-hold. That breathless tachycardia you're feeling? It will eventually pass when reality sobers you up. Get ready.
It's funny how this guy comes out makes claims and tries to come up for reasons to short this market, just before a bull market, so you can get your face ripped off on a short squeeze.
No thanks, anthony, save your bear case for another day!
No you shouldn't sell any of your long term positions....You should ride them all the way to the bottom!
That way I can take every dime you got by shorting this market!
If your in the market your a fool!
Let me see,
I should sell my holdings that I have strategically positioned for the long term because the market is going to have a correction some day?
Warren Buffet says that he looks for bargains, and Buys, and never Sells.
A investor or trader would learn more from Warren than Anthony even on Anthony's best day.
Read Full Article »