Wall Street went for a ride on Tuesday, with the Dow Jones Industrial Average oscillating in a 425-point range from high to low before closing with a 26-point decline or 0.2%. If you just checked the closing numbers on the nightly news, you’d miss what was an epic, volatile session.
The S&P 500 lost 0.3%, the Nasdaq lost 0.1%, and the Russell 2000 gained 0.1%.
Crude oil was again in focus, with West Texas Intermediate dipping below $44.50 a barrel after the UAE’s energy minister said OPEC had no intention of changing its strategy (which is tantamount to a price war against U.S. shale producers) and warned that it could take up to three years for oil prices to stabilize.
But it was able to end the day higher, with a small 0.4% gain, as divisions appear to be forming within OPEC. Iranian President Rouhani said that countries behind the fall in oil prices (he’s talking about Saudi Arabia and Kuwait, mainly) would regret their decision and suffer from lower prices.
For stocks, things started on a high note thanks to a surge in the futures market overnight as investors responded to better-than-expected headline results from Alcoa Inc (AA), a rise in the NFIB Small Business Optimism Index to its highest level since October 2006, and a strong November job openings report.
But as the day wore on, things took a turn to the downside as volatility boomed.
Homebuilder stocks are being fingered as a possible cause for the mid-day meltdown, with KB Home (KBH) dropping 16.3% after being up more than 4% early in the day. This was earnings driven, with the stock rising initially on a top-line beat; but then plunging after management said during a post-earnings call that the company will miss its margin goal for the year. The iShares U.S. Home Construction ETF (ITB) lost 2.6%.
Some post earnings disappointment hit Alcoa as well, which ended the day down 2.3% (reversing an overnight rise) and cast a pall over the entire materials sector, which dropped 1.2%.
Investors are catching on to the company’s strategy of parking expenses as “one-time, non-recurring” charges which it can then add back into its non-GAAP measure of earnings. These add backs totaled $388 million last quarter, the second highest amount in the last four years and something the company has been using more and more over the last two years.
With the add backs, the company reported earnings of 33 cents per share vs. the 27 cents analysts were expecting. Removing the accounting trickery, GAAP earnings totaled just 11 cents.
Expect more disappointment as the 4Q14 earnings season rolls on, with the energy sector about to get hit from the near 60% drop in oil prices since last summer.
Expect more fireworks on Wednesday as global markets react to a European court decision on the legality of the European Central Bank’s sovereign bond buying proposal.
Technically, breadth continues to narrow as fewer and fewer stocks hold the major averages aloft. The NYSE Composite Index, my preferred measure of the total stock market, was turned away at its 200-day moving average today, setting up a test of the mid-December lows.
I continue to recommend investors look at the nascent rebounds underway in gold and silver and the precious metals stocks, with the iShares Silver Trust (ETF) (SLV) recommended to Edge subscribers up more than 5% since added last week. I recently discussed five gold and silver stocks ready to push higher in a gallery post here.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.
