It was all going so well.
Stocks were ignoring the weakness in big tech and biotech stocks. The large-cap indices were flirting with new record highs. January’s emerging-market wipeout and February’s Ukraine volatility were long forgotten.
The bulls ignored skeptics like me pointing out diminishing participation as fewer stocks ramped to new highs, an over-reliance on the yen carry trade and signs that amid overconfidence and complacency, fundamentals like earnings and macroeconomic data were rolling over.
That all changed Friday as the Nasdaq-100 suffered its worst intraday reversal in years. In the process, it violated three-year-old uptrend support as it closed beneath its 20-week moving average for the first time since 2012.
The problem wasn’t the March jobs report, which came in slightly below expectations. It was rumors out of Europe that the European Central Bank could be preparing to unleash cheap-money stimulus of its own.
While normally that would be good news for this liquidity-addicted market, in the bizarro world that passes for free market capitalism these days, it wasn’t. That’s because the news pushed the euro down against the yen, pinching yen carry trade positions and forcing hedge funds to sell their stocks and other risky positions to close their carry trades (which are short yen/long euro pair trades).
While Friday’s wipeout — which is continuing as I write this on Monday — was painful, the evidence suggests the selloff isn’t finished yet. Here are four reasons why, as well as how to play continued weakness,: