U.S. equities continue to be the epitome of cool, collected and calm. The CBOE Volatility Index (VIX) last closed above 11 on April 21 (14 days ago) as the Dow Jones Industrial Average steadfastly refuses to move from near the 21,000 level, losing just 0.1% on Thursday. The Nasdaq Composite lost 0.2%.
Breadth was negative — with 1.6 decliner for every advancing issue on the NYSE — with volume in line with recent trends. Consumer staples led the way with a 0.1% gain while consumer discretionary stocks were the laggards down 0.6% after Macy’s Inc (NYSE:M) was slammed with a 17% loss on an earnings miss.
Recent IPO sweetheart Snap Inc (NYSE:SNAP) — “But Spectacles are so cool!” — lost a nauseating 21.5% after actual quarterly results missed expectations in a classic case of hype smashing headlong into dismal reality. Daily average users and ad revenues missed estimates.
But the veneer is beginning to crack: On an intraday basis, the Dow Jones violated its 20-day moving average for the first time since late April. It has also nearly touched its 50-day average as well. Ripples in the pond.
Periods of market calm often presage market turmoil as easy conditions encourage excessive risk taking and speculation. And, indeed, these calm conditions are on a scale that hasn’t been seen since the market was last topping in 2007 if not longer.
And to be sure, many headwinds are accumulating that the bulls are ignoring. The economy is stalling (0.7% first-quarter GDP growth and estimates for Q2 are dropping fast). Wage growth is pressuring corporate margins yet isn’t translating into increased spending. Valuations are at extremes. And the Federal Reserve is poised for another rate hike in June amid rising inflation pressure.
Oh, and President Donald Trump’s agenda is in serious trouble amid the fallout from the ouster of FBI Director Comey — which is triggering outrage from Democrats, further fueled the “Russian influence” meme and has poisoned any chance of cooperation on tax reform, healthcare reform and stimulus spending.
The largest of which is the situation in China, where the Shanghai Composite is down more than 8% from its early April high — nearly in outright correction territory — as Beijing tightens policy and fuels another outburst from its long simmering bad debt bubble. Only this time, with President Trump in office, another currency devaluation won’t be a policy option as it was in 2016.
A similar drop in the Dow Jones — a pullback of a scale that would normally be considered a healthy part of a typical bull market — would drop the index to 19,320, a return to early December levels. That type of market volatility and chaos hasn’t been felt since early 2016, when crude oil prices were collapsing and China’s currency and credit woes were fueling global contagion fears.
Are we poised for a repeat?
Final Word: On a technical basis, Thursday’s intraday decline in U.S. large-caps could represent the beginning of the end of the market’s ultra-tight three-month consolidation and would mirror the breakdown in Chinese equities over the past two months.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
Anthony Mirhaydari is founder of the Edge (ETFs) and Edge Pro (Options) investment advisory newsletters. A two-week and four-week free trial offer has been extended to Investorplace readers. Redeem by clicking the links above.
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