The holiday spirit that lifted stocks into the Christmas holiday, with the Dow Jones Industrial Average rising for seven days straight for a gain of more than 1,000 points, faded a little on Monday with the index closing down 0.1%.
That doesn’t seem like much. But it does represent the first decline for large-cap stocks since December 16. The S&P 500 gained 0.1%, the Nasdaq Composite was unchanged, and the Russell 2000 gained 0.5%.
The two big factors in play was the reappearance of political risk in Greece and the renewed decline in energy prices. There were a definite risk-off feel to the day, with the iShares Barclays 20+ Year Treasury Bond (TLT) breaking out of its two-week downtrend pattern, resulting in a gain of 4.6% for my Edge subscribers since they initiated a position on November 21.
The CBOE Volatility Index (VIX) — known as Wall Street’s “fear gauge” — gained 5.1% to close back above its 50-day moving average, a precondition for periods of market weakness.
In Europe, fears of a Greek exit from the eurozone, something that hasn’t really been felt since 2012, made a comeback after the government’s preferred presidential candidate failed to secure the necessary votes in parliament. That sets the stage for a snap election in late January.
Polls are showing the anti-bailout Syriza party with a clear lead, fueling worries that new leadership could ditch the euro, default on their debts, and restore the drachma as a way to end the country’s long, debt-fueled malaise. The risk is that such a move would empower anti-bailout candidates in countries like Spain, increasing the odds of a dangerous contagion effect.
European stocks were under pressure, with the Europe iShares 350 (IEV) down 0.8% to drop back below its 50-day moving average and continue a six-month pattern of lower highs and lower lows.
Separately, West Texas Intermediate tested below $53 per barrel for the first time since the recession ended despite possible supply disruptions out of Libya and the release of data showing a drop in U.S. oil rig counts.
Crude oil has formed what chartists call a classic support break — falling out of the trading range that had held it for two weeks as prices drop back to levels not seen since the recession.
A disappointing Dallas Fed manufacturing activity report added to the concern that the drop in energy prices will have an adverse effect on corporate profits and capital expenditures.
Oil prices look like they have further to fall here, despite some optimism that fighting near Libyan oil infrastructure could reverse the trend. The chart above shows how energy stocks have separated from oil prices (red) during the Santa Claus rally we’ve seen over the last couple of weeks. If oil suffers additional weakness here, stocks will be under pressure to realign to the downside.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.
