U.S. equities moved higher on Wednesday despite losses in the European session amid ongoing chatter of a bond buying tapering by the European Central Bank.
In the end, the Dow Jones Industrial Average gained 0.6%, the S&P 500 gained 0.4%, the Nasdaq Composite gained 0.5% and the Russell 2000 gained 0.7%. Treasury bonds remained under pressure, which weighed on safe havens like gold, yield-focused stocks (real estate, utilities, and telecom) and corporate bonds. Gold lost 0.1%, building on Tuesday’s 3.3% decline. Edge subscribers enjoyed another 0.9% gain in their ProShares Ultra-Short Treasury (NYSEARCA:TBT) position.
Oil resumed its post-OPEC rise, gaining 2.3% on U.S. inventory draws. OPEC and non-OPEC producers (mainly, Russia) reportedly plan on meeting informally in Istanbul on October 8 through October 13 to review the implementation of the rough production cap target outlined at a meeting in Algiers last month (of 32.5 million barrels per day vs. the 33.2 million per day pumped in August).
Twitter Inc (NYSE:TWTR) gained 5.7% after the Wall Street Journal reported the company is expected to field takeover bids later this week. Apple Inc. (NYSE:AAPL) gained 0.4% in after-hours trading after supplier Dialog Semiconductor reported better-than-expected revenue of around $345 million (vs. the $290 million to $320 million expected), with 80% of its sales coming from Apple.
There was more hawkish commentary from the Federal Reserve, with Richmond Fed president Lacker out again today saying there is a strong case to raise rates more rapidly (building on comments from Tuesday night). That helped boost the dollar and push up long-term rates.
For now, investors are still treating all this as benign or even a positive, in the case of financial stocks. The thinking is that higher long-term rates will boost net interest margins and thus profitability. Never mind that higher rates will pinch demand for auto and home loans. Or that banks face mark-to-market losses on their bond holdings.
No surprise then that financial stocks led the way with a 1.5% gain. Yield sensitives were the laggards, with real estate investment trusts down 2%, telecoms down 1.8%, and utilities down 0.3%.
And finally, on the economic front, the September non-manufacturing ISM activity report came in at 57.1, well ahead of the 53.0 expected to hit the highest level since last October. This was a big bounce back from August, which featured the lowest reading since February 2010. And looking ahead to Friday’s non-farm payrolls report, ADP private payrolls were slightly weaker than expected.
Overall, while the bulls are putting on a brave face here as rates rise and a large swatch of the market weakens in response, under the surface market breadth is weakening — a classic sign of vulnerability.
Maybe this has something to do with rapidly declining Q3 GDP estimates or that we are just days away from the start of the Q3 earnings season, which is expected to feature the sixth quarterly decline in profitability (and will only get worse if the dollar keeps rising).
While the Dow remains resolutely above the 18,000 level, the percentage of NYSE stocks above their 50-day moving average stands at just 45% — down from nearly 65% a few weeks ago, 75% back in August, and nearly 85% back in July.
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.
