Wall Street was hit hard on Tuesday as U.S. large-cap stocks threatened to break down and out of a two-month consolidation pattern.
In the end, the Dow Jones Industrial Average lost 1.1%, the S&P 500 Index lost 1.2%, the Nasdaq Composite lost 1.5% and the Russell 2000 lost 1.9%. Treasury bonds were weaker, the dollar surged alongside December Federal Reserve rate hike odds, gold lost 0.4% and crude oil lost 1.1%.
Healthcare led the decliners with a 2.5% drop.
The weakness coincided with the start of the Q3 earning reporting season, as aluminum maker Alcoa Inc (NYSE:AA) released disappointing results before the bell. The letdown from this bellwether set a negative tone for is likely to be a tough few weeks as investors — who have been distracted by the U.S. presidential election and the shifting odds of an interest rate hike from the Federal Reserve — contend once more with the fact that we’re in the midst of an ongoing corporate profits recession.
AA shares lost 11.4% in response.
In fact, with S&P 500 earnings expected to decline 2.1 percent from the same period last year, the earnings recession will likely stretch into its sixth consecutive quarter. That’s a run of falling profits not seen since the recession.
Given this, and the fact that stocks are trading near levels first reached in late 2014, valuations are growing increasingly stretched and stocks increasingly vulnerable to a downside correction. Also, keep an eye on the back up in long-term yields, which have put intense pressure on dividend stocks in areas like telecom, REITs and utilities in recent weeks.
For now, I’m recommending a cautious stance — at least through Election Day — with positions like the VelocityShares 2x VIX (NASDAQ:TVIX) which gained 10.8% for Edge subscribers today.
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.
