Stocks Melt Lower to Cap Terrible Start to 2016

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The bulls couldn’t reverse the tide on Friday despite an overnight intervention by Beijing into the Chinese stock market. Newly implemented circuit breakers, which halted trading early twice this week, were suspended. And there were reports that state-controlled funds were used to purchase stocks for at least the second time this week.

Instead, the bears were emboldened by a better-than-expected December payroll gain of 292,000 — well ahead of the 200,000 consensus estimate — which supports the Federal Reserve’s expectation of another four quarter point rate hikes in 2016.

While this is about half the pace of a typical tightening cycle, it’s twice as fast as the futures market has currently priced in.

Fears of faster rate hikes combined with the ongoing waterfall decline in crude oil, Middle East tensions, the approach of a sure-to-be-soft fourth-quarter earnings season and fresh weakness in the corporate bond market to push U.S. equities lower. There was also late-day chatter about over-the-weekend economic releases out of China.

In the end, the Dow Jones Industrial Average lost 1%, the S&P 500 dropped 1.1%, the Nasdaq Composite wafted down a percentage point and the Russell 2000 closed down 1.7%. Treasury bonds were stronger, the dollar gained, gold lost 0.4% and crude oil continued its rout, losing 1.1% to close at $32.90 a barrel.

The Dow is now down 6.2% for the year-to-date while the Russell 2000 small-cap index, which is on the verge of an outright bear market, is down 7.9%.

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Financial stocks — on fears over trading revenues — led the decliners with a 1.6% drop. Bank of America Corp (NYSE:BAC) lost 2.1% to collapse back to the lower end of its August-October trading range. The stock is now testing critical support going back to late 2013. But that was great news for the January $17 BAC puts held by Edge Pro subscribers that are now carrying a bigtime gain of 429% since recommended on December 31.

There were some high-profile decliners in the retail space as holiday shopping data is unveiled. Gap Inc (NYSE:GPS) lost 14.3% after reporting a 3.4% drop in December comp-store sales on continuing traffic challenges. Investors were particularly displeased with the 7% comp-store sales drop at Old Navy. American Eagle Outfitters (NYSE:AEO) dropped 16.6% on Q4 comps of 4% for the quarter-to-date vs. the 4.9% growth that was expected.

Technically, stocks continue to look vulnerable as the CBOE Volatility Index (INDEXCBOE:VIX) rises to levels not seen since late September as investors pile into put option protection against further losses. That’s boosted the iPath Short-Term VIX (NYSEARCA:VXX) to a gain of nearly 30% for Edge subscribers to help boost their month-to-date gain to 11% vs. the near 6% loss for the S&P 500.

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It’s no wonder as both the Russell 2000 and the NYSE Composite — broader measures of stock market health than the Dow or the Nasdaq — have fallen to fresh lows. In fact, the Russell 2000 has dropped all the way back to levels last seen in October 2013 as it falls below its 200-week moving average for the first time since 2011.

Unless the bulls can turn things around soon, benefited by the extreme selling seen this week, doubt will linger about whether the current bull market is in its death throes. We’re due for a short-term bounce. But that quality and strength of that bounce will determine, in large part thanks to the “January effect,” what the rest of 2016 will bring for investors.

According to Jason Goepfert at SentimenTrader, the down pressure reading on the Nasdaq 100 clocked in at 98% on Thursday — meaning that only 2% of the points gained or lost were gained and only 2% of the volume went into advancing shares.

Over the past decade, stocks were five times more likely to gain 2% in the week that followed than lose another 2%.

But fresh hurdles will soon appear with the start of the fourth-quarter earnings season on Monday with Alcoa Inc (NYSE:AA) reporting, since it’s set to be the third consecutive quarter of negative earnings growth for the S&P 500. That’s a run of falling profitability not seen since the financial crisis.

And we’ve got another Fed policy meeting on Jan. 26 and 27 that will likely bring a rate hike at the March 15 and 16 meeting into focus. Especially since December’s job gains capped the second-best year for job creation since 1999. Wage inflation is also relatively stable, with average hourly earnings up 2.5% vs. last year in December.

One thing’s for sure — the New Year sure hasn’t lacked excitement.

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/stocks-china-2016/.

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