Wall Street Dips Into Bear Market as the 2016 Meltdown Continues

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The selling was persistent, unyielding and powerful Wednesday, as U.S. equities melted even lower. There was no specific catalyst for the decline, only a growing sense of fear that policymakers both here and overseas have lost control of the situation: energy prices are weakening, currency volatility is increasing and economic data continues to crumble.

Much stems from the concern the Federal Reserve made a policy mistake when it raised interest rates by 0.25% in December for the first time since 2006. Either the Fed waited too long, or it didn’t wait long enough. It’s not clear which just yet.

But the result is clear: Small-cap stocks are now down 22% from their June high, officially entering a bear market.

For the day, the Dow Jones Industrial Average bled out 2.2%, the S&P 500 took a 2.5% dive, the Nasdaq Composite plummeted 3.4% and the Russell 2000 finished 3.3% lower.

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Treasury bonds strengthened, the dollar was little changed, gold gained 0.8% and the United States Oil Fund LP ETF (NYSEARCA:USO) lost 0.9%. High-yield “junk” bonds were also under pressure with the SPDR Barclays Capital High Yield Bnd ETF (NYSEARCA:JNK) breaking down to fresh lows testing the $33-a-share level for the first time since June 2013, as concerns over the threat of energy-sector defaults keep rising as crude oil keeps falling.

The pangs of panic boosted volatility, with the iPath Short-Term VIX (NYSEARCA:VXX) rising to a 32% gain for Edge subscribers since recommended on Nov. 9.

Consumer discretionary stocks were the laggards, losing 3.4% as a group. Auto suppliers were hit hard on weak guidance/backlogs, with BorgWarner Inc. (NYSE:BWA) down 9.5% and American Axle & Manufact. Holdings, Inc. (NYSE:AXL) down 16.9%.

GoPro Inc (NYSE:GPRO) was slammed as much as 25% in afterhours trading after lowering its fourth-quarter guidance and announcing a 7% workforce cut. Revenues are now expected to total $435 million vs. $513 million previously. Meanwhile, Vision system supplier Ambarella Inc (NASDAQ:AMBA) lost 11% in sympathy.

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A number of popular Big Tech stocks rolled over badly, reversing the tepid bounce seen earlier this week. Apple Inc. (AAPL) lost 2.6% to drop back below $100, pushing up the Jan $110 puts recommended to Edge Pro subscribers to a 379% gain. The Jan $17 Bank of America Corp (NYSE:BAC) puts finished with a 515% gain since recommended on Dec. 31.

Crude oil weakened after the EIA petroleum report showed crude inventories were up 0.2 million barrels vs. yesterday’s 3.9 million draw reported by the API. But a big build in refined products garnered the most attention with gasoline inventories up 8.4 million barrels and distillates up by 6.1 million barrels, casting a pall over the demand side of the equation.

This represented the largest two-week gasoline inventory build on record.

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Chinese equities initially rallied on a smaller-than-expected 1.4% year-over-year drop in exports in December (vs. a 7.1% drop in November), thanks largely to recent weakness in the yuan. But the gains couldn’t hold, with the Shanghai Composite losing 2.4% to drop below $3,000 for the first time since August. A close below $2,900 would return the index to late 2014 levels.

On a technical basis, sentiment is reaching a critical juncture: Either we see a full-scale panic selling wipeout or brave bargain hunters squeeze the shorts and ignite a dead-cat rebound. Bullish sentiment in the latest Investors Intelligence survey fell to 28.7% from 34.7% last week, representing the lowest level since late summer when the percentage of bulls fell to 24.7%. Similar readings were seen in March 2009 (26.4%) and November 2008 (22.8%).

It’s worth noting the survey pointed out that pessimism is not yet excessive nor is the negative bull/bear spread (-7.1%) a strong buy signal.

More damage is likely as catalysts like the ongoing waterfall collapse in crude oil, the rollout of poor Q4 earnings, tensions in the Middle East, fresh weakness in junk bonds, the specter of more Fed rate hikes and turmoil in China’s markets and the fragility of the over-indebted Chinese economy keep the pressure on.

But first, I’m selling my January puts and booking long volatility profits in anticipation of a short-term relief rally. For investors looking for an exit, any rallies should be sold as 2016 is shaping up to be something nasty.

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.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/01/brent-oil-crude-stocks/.

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