Stocks dropped hard on Wednesday, deepening the drop off of Tuesday’s morning highs, as a weaker-than-expected U.S. retail sales report let some of the air out of the optimists.
In the end, the Dow Jones Industrial Average lost 187 points or 1.1%, taking it down nearly 700 points from the highs set earlier in the week as the index falls to test the lows set earlier this month. The S&P 500 lost 0.6%, the Nasdaq Composite lost 0.5%, and the Russell 2000 lost 0.3%.
The big story was that the narrative about the United States shrugging off foreign economic weakness in Europe and Asia, or how lower oil prices were unambiguously good news, was handed a body blow by a 0.9% drop in monthly retail sales in December — the largest drop in nearly a year. Removing the impact of auto and gasoline sales, sales still dropped 0.3% versus the 0.6% rise that was expected.
This was all a bit of a head-scratcher for investors. Real income is up thanks to the drop in gasoline prices. Consumer confidence is up. Job creation is up. But middle-class Americans are, in many ways, still recovering from the recession as wages have stagnated the last few years and balance sheets are still being rebuilt.
The idea that the U.S. consumer could carry the world’s burden amid slowdowns in Europe and Japan, deflationary pressures, China’s debt problems, and a possible Greek exit from the Eurozone was too much. That’s being revealed now for all to see.
Adding to the pressure was disappointing earnings results from JPMorgan Chase & Co. (JPM) — the first big bank to report in the 4Q 2014 season — missing on both the top and bottom lines. Results were hit by a 14% drop in revenue from fixed-income trading. Shares dropped 3.5%.
The Financials Sector SPDR Fund (XLF) lost 1.4% to take it down to levels not seen since October.
Other negative catalysts included a downgrade in the global growth outlook by the World Bank, which cut its 2015 estimate from 3.4% to 3%. This was fingered as the cause of a big 5.2% wipeout in copper overnight.
Stocks were down much lower in mid-day trading, with the Dow off nearly 350 points at the depths before an odd 7% surge in crude oil futures into the options expiration close ramped everything higher. There was no news or catalyst for the move.
And on a positive note, BlackBerry Ltd (BBRY) soared nearly 30% after Reuters reported Samsung Electronics LTD had approached the company with a takeover offer for as much as $15.49 a share.
Overall, the market churn looks set to continue as we head into the Greek elections, the European Central Bank policy decision, and the Fed’s January policy announcement later this month. Already, the CBOE Volatility Index (VIX) — known as Wall Street’s “fear gauge” — is in the midst of its most persistent period of strength since the chaos surrounding the 2011 downgrade of the U.S. credit rating.
In response, the leveraged VelocityShares 2x VIX (TVIX) position recommended to Edge subscribers on Dec. 1 is up nearly 41%. For the more aggressive, the downdraft has created put option opportunities in stocks like Citigroup Inc (C), in which Edge Pro subscribers recently closed their Jan $55 puts for a gain of nearly 240%.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.
