by Anthony Mirhaydari | February 3, 2014 4:43 pm
The bears aren’t messing around anymore. After watching stocks melt higher throughout 2013 — on a narrowing base of support and with increasingly ridiculous justifications (such as the December post-taper spike) — the sellers are dumping everything not tied down. Even the tech-heavy Nasdaq Composite.
The Nasdaq, which could-do-no-wrong and was lifted in recent days by a last-minute spurt in biotech stocks, has collapsed below the 4,000 level — violating a dot-com bubble style uptrend going back to 2012. It’s on like Donkey Kong, as the kids say.
There are many catalysts in play and sentiment is far from an oversold extreme — suggesting additional price damage in the days to come.
One by one, the supports for the uptrend have been knocked out.
The global tide of cheap money is waning as the Federal Reserve tapers its ongoing QE3 program and the Japanese, who have been actively and desperately pushing down their yen, realize that competitive currency devaluation is not their path to salvation. That’s forcing emerging markets to hike interest rates, quite dramatically, to stabilize their currencies, fight inflation and try to prevent a 1997-style crisis.
That led Turkey to jack interest rates to more than 12% last week, which fueled a short-lived relief rebound on the mistaken belief the emerging market turmoil was over. Not so fast: Such a dramatic increase in the price of money will hit an already beleaguered economy hard, further weaken stock prices and increase credit defaults. We’re likely to see bailouts from the International Monetary Fund before this is all over.
That’s forcing many of the assumptions that drove stocks higher in 2013 to reverse, such as the idea that the yen-dollar and yen-euro exchange rates could only go down. The reason the market snapped so violently Monday was that the yen jumped higher as Japanese stocks fell during the Asian session — with “Abenomics” in trouble with food and fuel prices rising faster than inflation, Japan’s trade deficit ballooning and a necessary sales tax hike looming.
Corporate earnings have been disappointing at the Q4 reporting season has rolled out. Just look at Amazon (AMZN), which is down more than 14% during the past two sessions after reporting for its worst performance since the 2011 debt ceiling/credit downgrade scare.
And for those who made light of currency troubles in Turkey, ignored bubbling credit problems in China, or assumed the epic money printing would reverse a slow-burn debt/demographics nightmare in Japan, global pressures are starting to hit the U.S. economy as well. On Monday, we learned that U.S. factory activity growth is slowing at a scale not seen since 2011.
In just a few weeks, all eyes will turn towards Washington as another round of the recurring debt ceiling/budget battle in Washington gets set to start with the U.S. Treasury set to run out of cash as soon as Feb. 28 — threatening Social Security benefits, military pay and the country’s credit rating.
These are big serious issues with no easy fixes. And that’s why stocks are suffering the largest technical breakdowns we’ve seen in years.
For now, I continue to recommend investors remain cautious with a focus on safe haven assets like U.S. Treasury bonds. The leveraged Direxion 3x Treasury Bond Bull (TMF) is up more than 14% since I added it to my Edge Letter Sample Portfolio on Jan. 10.
For more aggressive traders, there are plenty of new short-side opportunities including solar stocks like Trina Solar (TSL). Or you can play the breakdown in the Nasdaq via the ProShares UltraShort Nasdaq (QID).
In January, thanks to a skeptical outlook, the Edge Portfolio gained nearly 16% vs. a -3.5% loss for the S&P 500.
Anthony Mirhaydari is founder of the Edge, an investment advisory newsletter, as well as Mirhaydari Capital Management, a registered investment advisory firm. As of this writing, he had recommended TMF, QID and TSL short to his clients.
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