Investors returned from the weekend to more of the same on Monday. Crude oil dropping hard. Stocks falling. And yields compressing as Treasury bonds get a bid on safe haven inflows.
The weakness was enough to drop the Dow Jones Industrial Average by 94 points or 0.5%, taking the index back below its 50-day moving average — a level it has been flirting with since the middle of December. Separately, the S&P 500 dropped 0.8%, the Nasdaq Composite lost 0.8%, and the Russell 2000 lost 0.5%.
Oil prices dropped another $2.44 a barrel to close at $45.92, breaking to fresh seven-year lows. The catalyst was comments by Saudi Prince Al-Waleed Bin Talal that $100-a-barrel oil was a thing of the past given the drop off in demand and the surge of new global supply.
As a result, oil stocks were hit hard. The Market Vectors Oil Services ETF (OIH) dropped 3.8% to violate the lows set three weeks ago — off of which the broad market put together that pre-Christmas rally to great fanfare. It didn’t help that Goldman Sachs cut industry heavyweight Schlumberger Limited (SLB) to “neutral” from “buy,” sending shares down 3.9%.
In Fed news, stocks have now erased the gains earned from comments last week by dovish Chicago Fed President Charles Evans that raising rates now would be a “catastrophe”; offset by comments today by San Francisco Fed President John Williams that a June rate hike would be “reasonable” given recent job gains and “strong momentum” in the labor market.
The 10-year yield dropped to just 1.9%, a level not seen since early 2013 and fully erasing the “taper tantrum” rate rise that followed former Fed chairman Ben Bernanke’s testimony to Congress that his institution was preparing to roll back the now ended “QE3” bond purchase program.
The drop in yields is reflective of ongoing fears about the health of the stock market, the robustness of the global economy amid softness across Asia and Europe, concern that oil’s drop is more about soft demand then an excess of supply, and whether or not markets can handle the start of the Fed’s first rate hike campaign in nine years later this year.
It’s been good news for my Edge subscribers, who have seen their position in the iShares 20+ Year Treasury Bond ETF (TLT) rise more than 10% since first recommended back on Nov. 21.
New opportunities are appearing in precious metals as gold and silver get a lift on rising fears that we could be looking at disorderly currency and bond market moves in the near future — especially with big hurdles looming in Europe later this month with elections in Greece, a legal decision on the legality of bond buying stimulus by the European Central Bank, and an ECB policy meeting.
Gold gained 0.8% to close at levels not seen since October, pushing up the related mining stocks in a big way. Newmont Mining Corp (NEM) climbed 2.3%, pushing up the Jan $20 calls recommended to Edge Pro subscribers on Wednesday to a gain of 115% already.
I recently discussed five gold and silver stocks that are looking ready for big moves higher, including Anglogold Ashanti Limited (ADR) (AU), up nearly 12% for Edge subscribers since Jan. 6.
Anthony Mirhaydari is the founder of the Edge and Edge Pro investment advisory newsletters.
