Stocks fell on a broad front Wednesday and were led by interest-sensitive sectors. Defensive groups took the brunt of the selling with consumer staples, health care, telecom, and utilities down over 1.5%.
The Dow Jones Utility Average has taken the worst hit of all major indices, off 9.8% for the month of May. The 10-year Treasury settled at 2.125%.
At Wednesday’s close, the Dow Jones Industrial Average fell 107 points to 15,303, the S&P 500 was off 11 points at 1,650, and the Nasdaq lost 21 points at 3,468. The NYSE traded 721 million shares and the Nasdaq crossed 401 million. Decliners outnumbered advancers by 3.6-to-1 on the Big Board and by 2.5-to-1 on the Nasdaq.
The 10-year Treasury bond jumped from 1.66% early in May to Wednesday’s high of 2.17% (see chart on May 28), the top of a yield bull channel that began in July. A break through Wednesday’s top would target the twin peaks of 2.41% and 2.4% made over a year ago.
Panic selling of yield-based securities has driven the Dow Jones Utility Average down more than 10%, to its 200-day moving average, in less than a month. But from a technical point of view, prices were extremely overbought in April, even penetrating a wide bull channel as investors rushed to purchase higher-yielding stocks in a low-interest environment. By falling to its 200-day moving average, the index is merely dropping to its “mean level.” In other words, it has adjusted to a more normal price level.
While utilities — usually considered the “safe” stock investment — were being drubbed, there appears to be little fear in the overall market. The most common measure of fear, the CBOE Volatility Index (VIX), is up slightly but has not even reached the midpoint of April’s average — a mere bounce from its May low.
Conclusion: The support on the S&P 500 at 1,635 to 1,650 is holding (see May 28 chart). Only those investors who sought what they thought was the safety of high yields by purchasing bonds, bond funds, utilities and other high-yielding securities are in a panic despite the fact that they are still in a bull market. The correction has merely dropped prices back to a reasonable “mean level” around which prices will probably fluctuate.
The sharp correction in yield-based securities has prompted some commentators to say that “good news is bad news for the market” in response to higher rates from better economic numbers. Hogwash! The good news is that the market may finally be able to make it on its own, which was the Fed’s goal — the achievement of economic independence without the help of the Fed. The impact of a strong economy could launch stocks into the next leg of a monster bull market.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.