Things are intensifying on Wall Street as the stock market drops into its most serious pullback in years. The Dow Jones Industrial Average lost another 1.4% to close at 16,321, down more than 1,000 points from the record high set in mid-September. The S&P 500 lost 1.7% to bring its three-day decline to 4.8% — the worst performance since November 2011.
There’s more. Oil prices have fallen to near four-year lows. The global economy is under pressure with Germany and Japan at risk of falling into technical recessions, China slowing, and U.S. corporate profits and exports in jeopardy from the recent surge in the U.S. dollar.
This is the real deal.
Not only is significant technical support levels being taken out, and not only are volume and volatility ramping up in a way not seen in years (and resulting in jaggy, “flash crash” like washouts such as Monday’s ugly trading into the close), but we’re seeing investors starting to question the very basis of this bull market in the first place: The infallibility of the central bankers.
From the European Central Bank to the Federal Reserve to the Bank of Japan and the People’s Bank of China, the idea that stimulus will paper over any and all economic threats is being revealed as threadbare. Merely the fact that the Fed is set to end its QE3 bond purchase program later this month has been enough to rattle the global financial system.
Just imagine what an interest-rate hike, which hasn’t happened since 2006, would do.
Just look at Japan. The Japanese can’t print more stimulus because the weaker yen is punishing Japan’s consumers via higher food, fuel and import costs as they are reeling from the first sales tax hike since the 1990s.
Or the Europeans, where the ECB has been bluffing the market into believing a large-scale sovereign bond purchase stimulus was forthcoming. Now that the need is here (with the German economy faltering), the bluff is being called (it can’t happen because it might be illegal, and the Germans are against the idea).
Throw in Ebola, the looming midterm elections and the fact that multiple measures of investor sentiment had recently soared to multidecade highs at a time of record margin debt and low cash reserves, and the situation was vulnerable to a washout.
And that’s exactly what’s happening now.
The fact is, most of the market peaked back in July. But regular investors are paying attention now that the selling pressure has washed over into the mega-cap names that have been holding up the Dow, including Intel (INTC) and big-tech momentum glamor stocks like Facebook (FB).
All of this suggests the selling pressure should continue. For weeks, I’ve been warning conservative investors to prepare for trouble by increasing their cash allocations. That advice still stands.
For the more aggressive, there are plenty of opportunities on the short side. The October $75 Facebook puts I recommended to Edge Pro subscribers 10 days ago are already up nearly 200%. The October $35 Intel puts are up 220%. New recommendations include puts against Google (GOOG) and Bank of America (BAC).
If you’re looking for ETFs, the ProShares UltraShort Financials (SKF) position recommended to Edge subscribers on October 7 is up more than 4.3% already and is gunning for more as bank stocks look to be the last domino to fall.
If you’re just looking for stocks to buy, consider nibbling on gold and silver stocks, which are benefiting from some safe haven inflows. Examples include Agnico Eagle Mines (AEM), up 2% for Edge subscribers since recommended last week.
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Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.
