U.S. blue chips fell for the fifth consecutive day on Monday, pushing the Dow Jones Industrial Average to its deepest pullback below its 200-day moving average since October.
Back then, it was all about fears of Ebola spreading. Now, it’s about a scary selloff in Chinese equities after the Shanghai Composite lost 8.5% overnight — the worst one-day selloff in eight years. China’s markets had been stabilized in recent weeks thanks to aggressive efforts by Beijing to stem the slide including state funding for brokerages and threats to jail short sellers.
But reports the International Monetary Fund has called for authorities to unwind their overt support of stock prices spooked traders, pushing shares down nearly 30% from the highs hit in June. The selling was concentrated on brokerages as overnight interest rates tighten and put a squeeze on margin accounts.
In the end, the Dow Jones Industrial Average lost 0.7%, the S&P 500 lost 0.6%, the Nasdaq Composite lost 1%, and the Russell 2000 lost 0.9%.
Defensive utility stocks gained thanks to the rise in U.S. Treasury bonds, which pushed down yields. The dividend-sensitive group gained 1.3%.
Gold finished higher for the third straight day. Crude oil lost 2.2% to close at $47.07 a barrel, pushing up the ProShares UltraShort Crude Oil (NYSEARCA:SCO) recommended to Edge subscribers to a month-to-date gain of 55% as the carnage in commodities continues. That weighed on energy stocks, which fell 1.4%.
Pharmaceuticals were in focus with Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) rising 16.4% after announcing the acquisition of the generic drug business from Allergan PLC (NYSE:AGN) in a $40.5 billion deal that is expected to be significantly accretive to 2016 earnings. Mylan NV (NASDAQ:MYL) fell 14.5% after TEVA withdrew its unsolicited offer for the company.
In earnings news, Baidu Inc (ADR) (NASDAQ:BIDU) fell 8.2% in after-hours trading after reporting weaker-than-expected adjusted earnings, building on the 4.2% loss during the regular session.
Technically, the selloff looks like it has further to run as the percentage of S&P 500 stocks in uptrends is still well off of the lows hit last October. The fundamentals are stacking against the market as well, from weak Chinese economic data to a realization that the situation in Greece hasn’t been fixed but merely postponed (with another deadline in August) to the ongoing commodities crunch, high-yield bond selloff, and underwhelming Q2 earnings growth.
So far, according to FactSet data, the S&P 500’s blended earnings are set to decline 2.2% for Q2 over last year — on track for the first drop in profitability since 2012. Energy sector earnings have been the drag (S&P 500 blended earning would be set to grow 4% without them) and will be in focus this week as Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX) report results.
Looking ahead, analysts expect year-over-year earnings declines to continue through the third quarter while year-over-year revenue declines are expected through the end of the year.
Also on deck is the outcome from the Federal Reserve’s latest two-day policy meeting on Wednesday — the last before a potential rate hike in September — as well as the release of the advance estimate of Q2 GDP growth on Thursday. Deutsche Bank economists are looking for GDP growth of 2.5% last quarter on a 3.0% rise in real consumption vs. the -0.2% contraction logged in Q1.
The BEA will also release its annual revision to the GDP time series with possible seasonal adjustments to persistently weak Q1 results expected.
With so much in play, and the fact investors remain overconfident without having suffered a 10%-plus correction since 2012, I continue to recommend subscribers prepare for a deepening selloff in the days to come. Trades include the Aug $16 calls on the iPath S&P 500 VIX Short-Term (NYSEARCA:VXX) that are up 94% for Edge Pro subscribers since July 20.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. Two- and four-week free trial offers have been extended to InvestorPlace readers.
