It’s getting real.
Stocks were pummeled Tuesday as investors begin to realize the main dynamics supporting equities over the last few years — ultra-cheap dollars from the Fed, unstoppable corporate profits and nonexistent volatility — are suddenly all at risk.
In the end, the Dow Jones Industrial Average lost 1.8%, the S&P 500 lost 1.7%, the Nasdaq lost 1.7% and the Russell 2000 lost 1.2%.
The catalyst was another strong reading on the U.S. jobs market — this time, from the JOLTS report that showed the number of job openings surged to the highest level since January 2001. This greatly increases the chances the Federal Reserve prepares for a June hike in interest rates, the first since 2006.
As a result, the U.S. dollar is surging, pushing down commodities and crude oil, hammering the euro and destabilizing emerging market economies. Things have depended on the smooth flow of cheap dollars from the Fed and a lack of cross asset volatility. That’s changing now as the Fed prepares to hike and currencies moves undermines the calm the bulls have enjoyed since late 2012.
Moreover, a stronger dollar, weaker commodity prices (especially oil) and turbulence overseas all threaten to undermine the value of foreign profits earned by U.S. corporations — threatening earnings growth, which is already rolling over at a pace that’s associated with recessions. In fact, the last times the dollar strengthened to this extent were in the midst of the last two recessions, as shown above.
Let’s also not forget that a big driver of corporate earnings growth in the last few years has been the loose labor market and a lack of wage inflation. With the JOLTS data corroborating the solid February payroll report — featuring a drop in the unemployment rate to 5.5% — that’s changing as well.
If all this wasn’t enough, the negotiations between Greece and the European establishment seem to have hit an impasse. The U.S. debt ceiling is back in play. And oil dropped 2.6% to close at $48.69 a barrel on word from Kuwait’s OPEC governor that he expects the cartel to continue with its current policy stance at its next regular meeting in June.
In other words, the market oversupply will continue.
Technically, given how overextended investor sentiment and positioning was headed into this decline, I’m looking for the S&P 500 to drop to support near its 200-day moving average at 2,000. That would be worth an additional 2.2% decline from here. Should any of the wild cards, such as Greece or the debt ceiling, take a turn for the worse, we could see a potential move back to the October lows — another 8.3% down from here.
In response, I’m recommending leveraged inverse ETFs to my Edge subscribers including the ProShares UltraShort Europe (NYSEARCA:EPV) — which is up 9.6% this month. For the more aggressive, my Edge Prosubscribers booked nice profits on a number of put option positions today.
Many of these were highlighted in a recent post — including a 193% gain in the March $33 contracts against Intel Corporation (NASDAQ:INTC) that were purchased on Friday as well as a 166% gain on the March $190 contracts against Goldman Sachs Group Inc (NYSE:GS) purchased on March 4.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.
