Global markets were slammed Monday as Chinese stocks melted lower overnight after traders reacted badly to December’s Manufacturing PMI data and currency volatility, as well as the approaching end of a ban on insider selling. China equities closed the day early with a 7% loss after hitting new circuit breaker rules.
Adding to the worries are new tensions between Iran and Saudi Arabia after Riyadh executed a well-known Shia cleric resulted in the burning of the Saudi embassy in Tehran. Riyadh responded by cutting diplomatic ties and halting flights.
In the end, the Dow Jones Industrial Average lost 1.6%, the S&P 500 Index shifted down 1.5%, the Nasdaq Composite felt a 2.1% haircut and the Russell 2000 finished 2.4% lower.
The Dow was off more than 400 points at its worst point, testing the 17,000 level for the first time since October. Treasury bonds were stronger, the dollar strengthened, gold gained 1.4%, and oil finished with a 0.8% loss.
Bank stocks led the decline with a 2.1% drop on financial stability concerns. That boosted the Jan $17 Bank of America Corporation (NYSE:BAC) puts recommended to Edge Pro subscribers, which were trimmed for a gain of 133% early in the session. Other notable decliners included Yahoo! Inc.(NASDAQ:YHOO), which dropped 5.6% on management concerns, and Tesla Motors Inc (NASDAQ:TSLA), which lost 6.9% on lower than expected vehicle deliveries.
By all indications, more market turmoil is ahead. That’s bad news for the bulls since history proves that start-of-the-year performance is indicative of what we should expect for the rest of the year.
Jeffrey Hirsch of the Almanac Trader notes January provides an important signaling effect on what to expect for the rest of the year. Hirsch’s “Early Warning System” looks at what stocks do during the first five days of the year and extrapolates that out into the rest of the year. In the last 16 presidential election years, 14 followed the direction of the first five days.
The full-month January performance has had a presidential election-year predictive record of 12 of the last 16 full years.
Hirsch’s father created the “January Barometer” measure back in 1972, which simply extrapolates January’s performance on the full year whether or not a presidential election is happening. Since 1934, it has carried an 88% accuracy rate with only eight major errors in the past 65 years.
Weak fundamentals complicate the situation.
Consider that the U.S. ISM Manufacturing Activity Index collapsed in December to its weakest condition since July 2009. At 48.2, it was much lower than the 49.2 consensus estimate and is only the third time so far this cycle that activity contracted outright on a month-over-month basis (indicated by a sub-50 reading).
We also have the specter of additional Federal Reserve interest rate hikes in the New Year. We’ll know more when the December payroll report is released on Friday ahead of the next Fed policy announcement on Jan. 27.
Another hurdle is the approach of the Q4 earnings season. Things will heat up starting Jan. 11 when Alcoa Inc (NYSE:AA) reports. Things aren’t looking good: According to FactSet data, the S&P 500 is on track for its third consecutive quarterly earnings decline, something that hasn’t happened since the recession ended.
On a technical basis, things are looking ugly as well. Market breadth is weakening as fewer and fewer stocks stand against the tide: Just 52% of the stocks in the S&P 500 are in uptrends down from a high of 72% in November and a high of nearly 85% back in the summer of 2014 before the crude oil wipeout slammed the energy sector.
As a result, I continue to recommend investors maintaining a defensive positioning focused on positions such as the Short-Term VIX (NYSEARCA:VXX) which is up nearly 12% for Edge subscribers.
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.
