Friday’s gains, driven by a better-than-expected November jobs report, were washed away on Monday in the first serious bout of selling pressure seen since the October 15 market low.
The decline was driven by the ongoing slide in crude oil as well as weakness in high-yield corporate bonds. Junk bonds are being pulled down on concerns that weak energy prices will threaten higher default rates among indebted U.S. shale oil producers. As a result, the SPDR Barclays Capital High Yield Bond ETF (JNK) dropped to fresh lows, returning to levels not seen since February. Treasury bonds and precious metals were well bid, as investors sought safe havens.
In corporate news, McDonald’s Corporation (MCD) was crushed 3.8% on a drop in same-store sales both globally and in the United States as the company struggles for direction. At the sector level, energy led the decliners with a 3.8% loss followed by materials with a 1.6% decline. Utilities, financials, health care, and telecom stocks managed modest gains.
In the end, the Dow Jones Industrial Average lost 0.6%, the S&P 500 lost 0.7%, the Nasdaq Composite lost 0.8% as it flashed a downtrend signal, and the Russell 2000 lost 1.3%.
The NYSE Composite, my preferred market index, is rolling down out of a dangerous triple-top resistance pattern, breaking through a three-month consolidation range.
Crude oil lost 4.2% to move to a five-year low around $63 a barrel. This was driven in part by comments from the head of Kuwait’s state oil company that oil prices are likely to remain around $65 a barrel for the next six or seven months. Estimate cuts from brokerage analysts didn’t help either, with Morgan Stanley looking for oil to drop as low as $43 a barrel in the middle of 2015 as its worst-case scenario.
Emerging market stocks were also hit hard, with the iShares MSCI Emerging Markets Index (ETF) (EEM) dropping 1.5% to drop out of a trading range going back to late September on a weaker-than-expected Chinese trade report.
The Asian session was also brought down by a big unexpected downward revision to third quarter Japanese GDP growth, which calls into question the “cheap money solves all” meme that has been the central factor in this five-year-old bull market since the Bank of Japan has pushed the envelope of monetary policy stimulus, buying stocks and bonds with aplomb.
Technically, the selling pressure has pushed the ratio of NYSE new highs versus new lows into a downtrend pattern for the first time since September — something that will likely increase pressure on the stock market in the days and weeks to come.
In response, I’m recommending positions such as the December $40 puts against Twitter Inc (TWTR), which are up nearly 103% for Edge Pro subscribers since the first of the month.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.
