Wall Street Looks Vulnerable as a Pullback Looms

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The bulls managed to drag stocks mostly into positive territory on Tuesday to snap a four-day losing streak in large-caps.

Overall, the mood remains cautious.

High-yield corporate bonds continue to melt lower on Federal Reserve rate hike fears, threatening the flow of debt-funded stock buyback programs that have helped juice earnings numbers despite tepid revenue growth. Rate hike fears are also continuing to boost the U.S. dollar, threatening corporate profitability via a currency drag on foreign earnings and pressure on commodity prices.

In the end, the Dow Jones Industrial Average gained 0.2%, the S&P 500 gained 0.2%, the Nasdaq Composite lost 0.2% and the Russell 2000 gained 0.3%. Treasury bonds strengthened, the dollar gained 0.3% and December crude oil gained 0.8% to close at $44.21 a barrel.

Dow Jones

Headlines were fairly quiet, with attention focused on the sometimes real, sometimes faux outrage over Starbucks Corporation (SBUX) holiday cups and the upcoming GOP presidential debate on Fox Business tonight. And while banks will be closed for the Veterans Day holiday tomorrow, markets will remain open. (Capitalism trumps patriotism and honor, I guess.)

Consumer discretionary stocks led the way with a 0.8% gain while materials fell 0.8% to lead the laggards.

SunEdison Inc (SUNE) dropped 22% to slam the entire solar power group on concerns about the company’s decision to slow asset sales to spin off yieldcos. Apple Inc. (AAPL) fell 3.2% after a Credit Suisse report said checks indicated iPhone supply chain orders have slowed significantly — with some component orders down as much as 10% on tepid demand for the new iPhone 6s.

Gap Inc (GPS) fell 1.4% after reporting October comp-store sales dropped 3% vs. the consensus estimate for a 0.8% increase. All of its three major brands missed the mark. And forward guidance came in below consensus.

McDonald’s Corporation (MCD) gained 0.3% after management decided against spinning off its U.S. property holdings into a REIT structure as the upside wasn’t compelling enough, in their view, to justify the financial and operational risks.

And finally, on the economic front, the only significant news was out of China where consumer price inflation came in at a softer-than-expected 1.3% annual rate in October; down from a 1.6% increase in September and below the 1.5% consensus estimate. Producer price inflation fell 5.9%. Activity data, including retail sales and industrial production, will be released Wednesday.

If they aren’t solid, Chinese growth concerns are likely to resurface despite a rally in China’s Shanghai Composite Index in recent weeks. China fears helped drag copper lower to fresh six-year lows despite industry production cuts and constructive comments from Chile’s mining minister.

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I continue to recommend investors remain defensively focused as stocks (blue line above) have separated from growing weakness in high-yield corporate bonds (black line) and commodity prices (red line) as shown above. Technical measures are warning of trouble as well, with breadth narrowing (the percentage of New York Stock Exchange stocks above their 50-day moving average dropped below 60% on Monday after hitting a high of 75% last week).

This including booking profits in positions such as the 10.3% in Advanced Micro Devices, Inc. (AMD) enjoyed by Edge subscribers when the position was sold last week after being first recommended on October 16.

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/11/wall-street-looks-vulnerable-as-a-pullback-looms/.

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