The bulls are foaming at the mouth over the debut of Twitter (TWTR) and the second coming of the dot-com mania. But things aren’t going according to plan.
Everything looked set for a surge to take the Dow Jones Industrial Average up and over multimonth resistance on a flurry of greed and hype of the kind not seen since the late 1990s.
Only this time, we have the added impetus of the “never will it end” monetary policy stimulus. This was amped up pre-market by the surprise decision by the European Central Bank, in response to rising deflation risk and massive youth unemployment in countries like Italy and Spain, to cut its policy interest rate to a record-low 0.25%.
This, like the Federal Reserve’s “no taper” decision in September, was a complete surprise as most expected action in December after updated economic forecasts were released.
Click to Enlarge Yet European stocks melted lower, and an overnight ramp in U.S. equities futures has been completely reversed. The Russell 2000 small cap index has lost its 20-day moving average for the first time since early October debt ceiling scare. Emerging-market stocks are in even worse shape, with the iShares Emerging Markets ETF (EEM) losing its 50-day moving average for the first time since August.
Part of the problem is that stimulus fatigue is setting in. Another 0.25% off of Europe’s short-term interest rates isn’t going to do much when total production in Italy has fallen back to recessionary lows and youth unemployment in places like Spain and Greece is off the charts.
Foreign favorites like Baidu (BIDU) are also suffering.
That’s creating opportunities for short sellers in a weakening market as portfolio managers apparently need to sell older names away to add Twitter to their holdings.
The technical breakdown underway in the broader market is significant given how extreme bullish sentiment had become. Jason Goepfert at SentimenTrader notes that the sentiment of newsletter writers like me has reached levels that haven’t been seen since at least 1997, active investment managers are carrying their heaviest load of market risk in seven years, and the ratio of assets in Rydex’s bull and bear funds has reached levels preceding the last three market corrections.
Today, I added a short position in Facebook to my Edge Letter Sample Portfolio — which includes a short in Tesla that’s up 15% since I added it on Oct. 29.
Anthony Mirhaydari has recommended TSLA short and FB short to his clients.