For weeks, I’ve known something was off.
High-yield bonds have been coming under intense selling pressure, no doubt related to the approaching end of the Federal Reserve’s QE3 bond purchase stimulus next month. The U.S. Dollar has been absolutely soaring, pinching euro-dollar carry trades and pummeling commodities including crude oil and precious metals. And internally, within the stock market, breadth has been narrowing dangerously as buyers find fewer and fewer stocks attractive at these levels.
Well, on Thursday, something finally snapped.
As a result, the S&P 500 plunged below its 50-day moving average for the first time since July while the Dow Jones Industrial Average lost more than 260 points as it fell back below the 17,000 level. This is all coming as a shock to many people. For one, stocks had just set new record highs last week. And two, there just hasn’t been much selling over the last two years, with the S&P 500 not even suffering the indignity of touching its 200-day moving average since 2012.
But that’s changing now. Apple (AAPL) is playing a role, given disappointment with the iPhone 6 Plus “bendgate” scandal and the poor implementation of the iOS 8 rollout. Energy stocks are getting crushed on reports that Russia could nationalize foreign assets in the country, a response to economic sanctions from the West.
Above all this, however, is what’s happening in the high-yield bond market. Selling pressure intensified today with the iShares High Yield Bond Fund (HYG) collapsing below its 200-day moving average for the first time since August 2013. That’s a big deal because this market has been supporting stocks by facilitating cheap debt-fueled share repurchase programs — one of the primary reasons stocks have been racing higher so enthusiastically.
That race is ending. And stocks are sucking wind as a result.
For weeks, I’ve recommended investors get defensive by raising cash and trimming positions ahead of what was going to be a bumpy autumn. And I pointed out there were opportunity for profits in the weakest areas of the market, such as energy, via inverse ETFs like the ProShares UltraShort Oil & Gas (DUG), which is up more than 10% for Edge subscribers since September 9.
More aggressive plays have included the October $97.50 puts against Exxon Mobil (XOM), which are up more than 163% for Edge Pro subscribers since September 4.
New opportunities are in stocks like American Airlines (AAL), with the October $36 puts up 32% so far for subscribers.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.
