Stocks suffered their worst one-day decline since January on Wednesday, triggering a downtrend signal on the major averages for the first time in three months. The selling is materializing naturally has headlines are relatively quiet this morning.
In the end, the Dow Jones Industrial Average lost 0.6%, the S&P 500 lost 0.4%, the Nasdaq lost 0.3% and the Russell 2000 lost 0.3%.
Crude oil was hit early on by another big inventory build, but has since recovered in what looked like a short-covering buying panic.
Retail stocks were in focus after American Eagle Outfitters (NYSE:AEO) gained 9.6% on better-than-expected Q4 earnings of 36 cents per share vs. the 34 cents analysts were expecting while raising forward guidance. Abercorombie & Fitch Co. (NYSE:ANF) was in the penalty box, however, falling 11% on weaker-than-expected revenues and comp-store sales.
At the sector level, healthcare led the way with a 0.4% gain, while telecom led the decliners falling 1.2%.
All in all, a fairly quiet session.
Technically, however, something exciting is about to start as the Dow and other major averages fall below their parabolic stop-and-reverse levels — a precondition for a period of weakness.
This is a big deal since stocks have melted higher over the last few weeks into a severe overbought condition — ignoring the weakening of fundamental earnings and economic data — powered by a surge of bullishness among “dumb money” traders to a level, by one measure, not seen in more than a decade, according to SentimenTrader.
At the same time, smart money traders ramping up their bearish bets in a way that hasn’t been seen since June 2014 (ahead of the top hit just before the Independence Day holiday) and November 2013 before that (ahead of the January 2014 swoon).
The catalyst for all this, it seems, is the slow realization that the Federal Reserve is about to return to the forefront after a lack of action in February (there was no policy meeting) amid an ongoing strengthening in the job market (keeping the pressure on for rate hikes later this year).
But that’s set to change starting Friday, when the February payroll release provides a final update on the job market ahead of the March 18 Fed policy statement. This will feature both an update to the Summary of Economic Projections (SEP) and a post-announcement press conference by Yellen.
The SEP, also known as the “dot plot,” was last released in December and will provide in in cold, hard numbers an updated look at where Fed policymakers believe interest rates, the unemployment rate, inflation, and GDP growth are all going.
Fed Chairwoman Janet Yellen has been playing it cagey, desperately trying to avoid making any firm commitments for fear of spooking a market that’s grown ridiculously dependent on Fed policy moves. I mean, look at the way key words such as “patient” and “considerable time” have been the focus of so much attention in recent months — and how Yellen and other officials have frequently changed their definition of what these words mean for the pace and timing of rate hikes.
As the calendar rolls on, that’ll have to change and the Fed will be forced to make clear, definitive declarations on its intentions.
The big reveal will start on Friday, with Societe Generale’s Brian Jones looking for the run of solid payroll gains to continue in February’s jobs report. He’s looking for another 280,000 positions for the month, building on the 336,000 monthly pace set over the last three months. His confidence is based in part on the drop in initial weekly jobless claims during the month to the lowest level since April 2000.
If so, it’ll be increasingly hard for the Fed to justify holding off on its first interest-rate hike since 2006; something investors are simply not prepared for.
In response, today I ramped up my short exposure by adding a number of new put option positions including a March position against Goldman Sachs Group Inc (NYSE:GS).
Edge Pro subscribers are already enjoying a 140%+ gain in their March Alcoa Inc (NYSE:AA) puts recommended last Tuesday.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.
