September got off to an inauspicious start on Tuesday, with stocks reversing the gains earned in recent days in a return to the volatile selling seen early last week. Concerns continue to build about the situation in China and the odds of a Federal Reserve interest rate hike on September 17 — with all eyes on the August payroll report due Friday.
Confusion reigns as the latest Bloomberg survey shows that 48% of 54 economists expect a September rate hike, down from 77% in early August but still nearly double the number expecting a delay until December.
In the end, the Dow Jones Industrial Average lost 2.8%, the S&P 500 lost 3%, the Nasdaq Composite lost 3%, and the Russell 2000 lost 2.7%.
Oil dropped hard, losing 9.9% on a slide that continued after-hours as API inventories surged the most in five months on the first build in six weeks. West Texas Intermediate is now testing the $44-per-barrel handle as sellers come back in after a 27.5% bounce over the three preceding sessions — which was the best rally since Iraq invaded Kuwait in 1990.
Not surprisingly, energy stocks led the way down with a 3.7% loss at the sector level. Big tech was under pressure, too, with Netflix (NFLX) down 8% on reports that Apple (AAPL) — which lost 4.5% on the day — was considering original video programing. Google (GOOGL) dropped 2.8% despite changing its logo. (Before you laugh, shares jumped when the company reorganized into “Alphabet” a few weeks ago).
In China, the Shanghai Composite lost 1.2% after the official manufacturing PMI fell to a three-year low. Contagion seems to be spreading in Asia — raising fears of competitive currency devaluations — as South Korean exports dropped 17.4% in August for the worst result in six years. Taiwan’s manufacturing PMI came in at three-year lows and has been in contractionary territory for five straight months.
Here at home, the ISM manufacturing index fell to a reading of 51.1 in August from 52.7 in July, marking the worst result since May 2013. Auto sales remain a bright spot, coming in at a 17.7 million seasonally-adjusted annualized rate, which was the best in 10 years and ahead of the consensus estimate. Ford (F) reported its best August in six years.
Technically, the situation looks ugly. The Dow fell back to the 16,000 level today. The S&P 500 has suffered its first “Death Cross” — a downward cross of the 50-day moving average below the 200-day moving average, a sign of lost medium-term momentum — in four years. The long-term trend is at risk as the index has closed below its 12-month moving average, a strong predictor of bear markets.
Unless the bulls mount a historic charge higher here — ending September 7% higher — it could be game over. Market history isn’t on their side.
August ended with more than a 5% loss on the S&P 500 — the worst performance for the month in 17 years — and the index is down 7.5% from its July high. According to Jason Goepfert at SentimenTrader, after August losses of this magnitude, September sported a positive return only 4 out of 13 times for an average loss of 5.4%. At the best point, stocks only rallied above August’s close by an average of 1.4%. At the worst, they fell an average of 8.3%.
In his words, that’s the data reveals a “terrible risk/reward ratio” in stocks right now. I couldn’t agree more, and have recommended the ProShares UltraShort QQQ (QID) to Edge subscribers, a position that is already up 3.6% since recommended on Monday. Clients enjoyed a 82% monthly return in August thanks to active defensive bets.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
