Markets hit a snag Wednesday as the European Central Bank remains in “wait and see” mode on stimulus amid a recent increase in pressure on Eurozone banks. The absence of fresh easing measures means the situation is likely to get worse before it gets better.
Also weighing was a weak ADP employment report here at home, as well as commodity and currency market weakness out of China. As a result, large-cap stocks have fallen to test support from the late March/early-April lows.
In the end, the Dow Jones Industrial Average lost 0.6%, the S&P 500 dropped 0.6%, the Nasdaq Composite wafted 0.8% lower and the Russell 2000 saw a 0.8% loss. Treasury bonds moved higher, the dollar strengthened, gold lost 0.8% and crude oil gained 0.6% to close at $43.89 a barrel.
Defensive utility stocks led the way with a 1.1% gain followed by consumer staples. Media stocks CBS Corporation (NYSE:CBS) and Time Warner Inc (NYSE:TWX) gained 1.6% each on better-than-expected first-quarter earnings and revenue. Energy stocks were the laggards down 1.3%.
Tesla Motors Inc (NASDAQ:TSLA) lost 4.2% after Bloomberg reported the company’s VP of manufacturing and VP of production were both leaving the company. After the close, the company gained 3.3%after reporting a narrower loss of 57 cents per share for Q1 (on a slight revenue beat) after moving a production target of 500,000 units ahead by two years to 2018. Model 3 production is expected to start in late 2017.
The kicker is the company’s ongoing cash burn rate, which totaled another $446 million last quarter for a $2.1 billion result over the past year. Further capital raising, either debt or equity, is likely.
A big driver for the day’s decline was another big drop in industrial metals with copper and iron ore both on the slide. China continues to rein in speculation in the metals, with open interest in active iron-ore contracts on the Shanghai Futures Exchange dropping to its lowest level since November.
Also overnight, China devalued the yuan by the most since August — an event that unleashed U.S. market volatility and weakness.
On a technical basis, weakness seems to be spreading with the percentage of S&P 500 stocks in uptrends falling below 75% today for the first time since the middle of March.
A drop by the Dow 30 below the 17,600 level would mark a clear breakdown out of a three-month topping pattern and confirm the first significant downtrend since December.
In response, I continue to recommend defensive, short-side positions such as the May $107 Apple Inc. (NASDAQ:AAPL) puts that are up more than 250% for Edge Pro 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.
