U.S. equities continued their downward slide on Wednesday after reversing early gains. What’s different is that a long simmering decline in market breadth measures, as more and more stocks weakened, has finally hit the Big Tech momentum favorites that have been leading the charge out of the October low.
I’m talking about stocks like Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN) and Netflix, Inc. (NASDAQ:NFLX). The catalyst? Turbulence in currencies and commodities.
In the end, the Dow Jones Industrial Average lost 0.4%, the S&P 500 Index wafted down 0.8%, the Nasdaq Composite shed 1.5% and the Russell 2000 ended the day 1.2% lower. Treasuries were mixed, the dollar was down hard, gold lost 0.3% and crude oil fell another 0.7% to close at $37.24 a barrel. The weakness in energy came despite data showing a draw in crude inventories, ending a 10-week string of increases.
Materials and energy stocks led the way, enjoying a bounce back after a pasting on Tuesday. Technology and consumer discretionary stocks were the laggards. Dow Chemical Co (NYSE:DOW) and E I Du Pont De Nemours And Co (NYSE:DD) gained 11.9% each on multiple reports they are in advanced talks to merge.
Yoga pants maker Lululemon Athletica inc. (NASDAQ:LULU) lost 13.1% after third quarter earnings missed expectations and Q4 earnings guidance was cut. Costco Wholesale Corporation (NASDAQ:COST) lost 5.4% after quarterly earnings missed expectations by 7% on weaker-than-expected membership fee revenue growth of 1.9%.
Yahoo! Inc. (NASDAQ:YHOO) fell 1.3% after confirming it will not spin off its stake in Alibaba Group Holdings (NYSE:BABA) and will instead look at spinning off its core business into a new company. Yahoo! 2.0?
The day’s big news was the drop in the dollar and the rise in the euro, with volatility starting overnight in the Asian session after China devalued its currency to four-year lows. This seems to have accelerated a move away from the dollar across all the major currencies in a reversal of “long dollar” carry trades. The greenback, as a result, fell to six-week lows.
The last bout of weakness for the dollar, which started back in August, was also associated with a Chinese currency devaluation and resulted in the “Black Monday” wipeout in stocks.
Technically, the result pushed the S&P 500 below both its 50- and 200-day moving averages, ending a multi-month uptrend and setting stocks up to retest their September/October lows.
I continue to recommend a defensive outlook, with a focus on hedging assets and precious metals. Edge subscribers are enjoying an 8.2% gain in the shares of First Majestic Silver Corp (NYSE:AG) and a 12.3% gain in the VelocityShares 2x VIX (NASDAQ:TVIX).
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.
