Bulls Struggle to Stop Stock Market Slide

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Mercifully, the bulls were able to get up out of the mud Tuesday and get back into the fight and prevent the recent market selloff from becoming a crushing rout. They didn’t exactly cover themselves in glory, but merely kept the bears honest for a day. After the worst three-day drop since 2011, that’s a small victory worth celebrating.

While the Dow Jones Industrial Average lost a fraction after trading with gains of more than a 140 points earlier in the session, the rest of the major averages finished in the green. But just barely: The S&P 500 gained 0.2%, and the Nasdaq Composite gained 0.3%. Small caps did better, with the Russell 2000 adding 1.2%.

But the small guys are still down on a year-over-year basis.

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Volatility is increasing markedly, with swings of 3%-4% in small caps and transport stocks as market liquidity dries up and computer-trading algorithms run amok. If it continues, we could see dramatic, stair-step like moves in prices similar to what happened during the 2010 “flash crash” event. Something to keep an eye on, for sure.

Crude oil continued its slide, suffering its largest one-day drop in two years as futures moved down another $3.82 to $81.92 a barrel — a level not seen since the summer of 2012. Gold moved higher along with Treasury bonds, pushing the 10-year yield down to 2.2%. High-yield bonds remained under pressure with spreads to Treasury yields at their widest in 13 months — a sign of increasing nervousness by bond traders.

Investors had a lot on their plate today as the Q3 earnings season ramps up. The bulk of the reporting will happen over the next three weeks, providing insight to a multitude of factors, from the robustness of U.S. demand and the impact of economic slowdowns overseas, to the impact of the recent strengthening of the U.S. dollar on repatriated foreign earnings.

Bank stocks were in focus after Wells Fargo (WFC) dropped 2.7% as it fell below its 200-day moving average for the first time since 2012 on concerns about the health of the housing market, net interest margins, and mortgage originations. I’ve recommended the Nov $17 puts in Bank of America (BAC) to my Edge Pro subscribers on the belief the financials are the next major sector to move lower. The options are already up more than 30% since early October.

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Johnson & Johnson (JNJ) lost 2.1% despite beating earnings estimates and raising forward guidance, pushing shares below the 200-day moving average for the first time since February.

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There was also more poor economic data out of the eurozone, where industrial production dropped at a 1.9% annual rate for the worst performance since 2012. This, along with a drop in Greece sovereign bond prices (and an increase in yields) as well as a drop in Greek stock prices could be the early signs that another round of the eurozone debt crisis is coming amid doubts the European Central Bank will be able to save the situation with fresh cheap money stimulus after recently cutting interest rates into negative territory.

Keep an eye on the long-term government bond yields of countries like Spain and Portugal. If they also start increasing, it will be a big, flashing warning signal.

With stocks extremely oversold on a short-term basis, a rebound is in order. Analysts at Credit Suisse also highlight the fact that on a number of technical measures, such as the ratio of cyclical vs. defensive stocks, the situation is as bad as it has been since the 2009 bear market low.

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Stocks are discounting a big decline in the U.S. economy. Whether or not stocks hit my downside target of 1650, shown above, depends on whether slowdowns across Europe and Asia, along with the negatives of the stronger dollar (weaker exports, weaker corporate profits) does in fact pull down U.S. GDP growth.

We’ll know more on Wednesday morning, when the September retail sales report is released ahead of the industrial production report on Thursday.

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Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.


Article printed from InvestorPlace Media, https://investorplace.com/2014/10/bulls-wfc-bac-jnj/.

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