For the first time since September, the market is coming under significant selling pressure. Dow 16,000 has been lost. The CBOE Volatility Index (VIX) is breaking out as traders rush into put option protection against continues losses. Breadth is collapsing.
For many — including the so-called “Dogs of the Dow” — it’s not looking pretty.
There are many catalysts, from overextended sentiment to a reversal of the ultra-popular yen carry trade. But above all, it’s the creeping realization a “Dectaper” looks increasingly likely, with Q3 GDP growth surging (albeit on unsustainable inventory accumulation) and the job market firming enough that the Federal Reserve, if it wants to preserve its credibility, will be forced to pull back on its ongoing $85 billion-a-month bond purchase stimulus.
Three Dow Jones Industrial Average components already are rolling over. These Dogs of the Dow should be avoided at the very least, and if you’re feeling aggressive, consider these as short opportunities.
Dogs of the Dow #1: Verizon (VZ)
Click to Enlarge Verizon (VZ) — actually the best-performing of these three Dogs of the Dow at 13% gains year-to-date — has dipped into a downtrend in a significant way for the first time since May as shares lose their 200-day moving average.
Taper-on concerns in the Treasury bond market, which is pushing 10-year yields back toward 3%, are no doubt playing a role considering the last “taper tantrum” back in May hit dividend-focused, bond-like stocks such as VZ pretty hard.
While it does carry a 4.2% yield, VZ suddenly looks less attractive should the 10-year yield keep rising.
Dogs of the Dow #2: McDonald’s (MCD)
Click to Enlarge McDonald’s (MCD) has been mired in a downtrend channel since April, setting a pattern of lower highs and lower lows as investors lose interest in the fast food giant amid stagnant same-store sales growth, rising competitive pressures and what its CEO warned is a “very soft” environment right now.
Other concerns include a somewhat loopy initiative to sell McCafe-branded coffee in stores, a focus on keeping prices down amid a nervous consumer base, and an ongoing labor clamoring that resulted in a 100-city strike against fast-food wages on Thursday demanding $15-an-hour wages.
MCD is already lagging the market at 8% returns this year. I’m looking for shares of this Dow dog to drop to at least $92 a share — a 4%-plus loss from here.
Dogs of the Dow #3: AT&T (T)
Click to Enlarge AT&T (T) is suffering from the same dynamics pulling down Verizon — namely, the fact dividend stocks are looking less attractive given the bump up in Treasury yields. Other factors include a recent analyst from JPMorgan from “overweight” to “neutral” and comments from the company CFO that margins are under pressure due to higher capital spending — necessary in the now mature but highly competitive wireless space.
AT&T is the worst of these Dogs of the Dow with mere 2% gains year-to-date. I’m looking for a return to at least the September low — a 6% loss from here.
As of this writing, Anthony Mirhaydari did not hold a position in any of the aforementioned securities.