Stocks finished mixed on Monday, with bonds continuing their recent string of weakness, as the big action was over in the currency markets. In the end, the Dow Jones Industrial Average lost 0.2%, the S&P 500 lost 0.3% but was able to hold the all-important 2,000 level that it’s been flirting with for weeks, the Nasdaq gained 0.2%, and the Russell 2000 gained 0.2%.
A combination of detonation in Japanese economic data, new cheap money stimulus measures in Europe and the rising potential for a Scottish independence vote all undercut foreign currencies. The U.S. dollar soared as a result.
Also boosting the dollar is ongoing concern over the situation in Ukraine, where a tentative cease fire appears to be holding despite reports of sporadic artillery fire from both Kiev’s forces and pro-Russian separatists. At this point, it seems to be a matter of when, not if, the cease fire is broken.
A strong dollar is good news for consumers since it will lessen the cost of imported goods and will weigh on energy prices. Indeed, crude oil dropped out of its two-month trading range to test below $92 per barrel. Energy stocks dropped in sympathy, with the Energy Select SPDR (XLE) losing 1.6% to return to early August lows.
That drop boosted the put option positions in the energy sector that I’ve recommended to Edge Pro subscribers, including bets against oil services outfits Schlumberger (SLB) and Halliburton (HAL). The September puts against those two names are up 68% and 48% respectively since I recommended them last week.
October contracts against Exxon Mobil (XOM) are up 22%.
Today, I recommended new bets against automakers Ford (F) and General Motors (GM) after Morgan Stanley downgraded the pair. As a result, Ford is suffering a technical breakdown of a severity not seen since last December as prices return to levels last seen in June. GM has been a weaker performer, given the overhang from the recall debacle, and is testing down to its post-March lows.
With the S&P 500 mired near 2,000, high-yield bonds continue to roll lower as nervousness grows about the sustainability of ultra-low interest rates given the strength of the U.S. economy and the solid pace of job construction (despite a somewhat disappointing payroll report on Friday). The Federal Reserve’s QE3 bond purchase program is on track to end next month, setting the market up for the first period without active Fed purchases since 2012.
Historically, when junk bonds have weakened stocks have quickly followed.
Other evidence suggests investors are more nervous than the S&P 500’s persistence near 2,000 suggests. For one, the CBOE Volatility Index (VIX) has been steadily creeping higher as options traders move into put option position to protect against stock market losses. That’s a sign of apprehension and nervousness; not confidence and greed. The VIX has crossed over its 20-day moving average for the first time since July and has been drifting higher for three weeks.
Also, fewer and fewer stocks are participating to the upside. With the Dow Jones Industrial Average challenging the highs set back in July, only 63.6% of NYSE stocks are above their 50-day moving average — down from 65% last week and more than 83% back in July. You can see this dynamic in the chart above.
Add it all up, and investors would do well to remain cautious here.
Disclosure: Anthony has recommended XOM, HAL, and SLB puts to his clients.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.
