The S&P 500 Pulls Back Hard on White House Fears

Investors are worrying about promised tax reforms and other expected legislation

   

On Wednesday, stocks fell in a broad decline fueled by a New York Times article claiming that the White House put pressure on the FBI to shut down an investigation into former National Security Advisor Michael Flynn. The Washington-based story replaced what has been a calm and steady rise with a jolt to the broad market.

The Dow Jones Industrial Average and the S&P 500 fell 1.8% each, and the Nasdaq and the Russell 2000 were hit with losses of 2.6% and 2.8%, respectively. The fear that the swift passage of the president’s pro-growth policies is in jeopardy appeared to be the cause of the sell-off. Three of the president’s prime initiatives are tax reform, deregulation and infrastructure spending, all of which could have a positive impact on the nation’s growth.

The CBOE Volatility Index (VIX), which measures investors’ expectations, leaped 46% yesterday (see chart, below).

Defensive sectors rose: Gold gained 1.8%, closing at $1,257.50 per ounce, the benchmark 10-year U.S. Treasury note’s yield fell to 2.2% from 2.3%, and bank stocks were under pressure. The Financial sector of the S&P 500 fell 3%, with some bank stocks falling almost 6%.

Of the S&P 500’s eleven sectors, only Utilities had a gain (+0.17%). The worst performers were Information Technology (-2.6%) and Financials (-2.5%).

At the close, the Dow Jones Industrial Average fell 373 points to 20,607, the S&P 500 lost 44 points, closing at 2,357, the Nasdaq closed at 6,011, down 159, and the Russell 2000 fell 39 points at 1,356. The NYSE’s primary exchange traded 990 million shares with total volume of 4 billion shares, and the Nasdaq crossed 2.3 billion shares. On the Big Board, decliners outpaced advancers by 3.7-to-1, and on the Nasdaq, decliners led by 5.6-to-1. More important: Declining volume on the NYSE exceeded advancing volume by just 4.8-to-1. Big, meaningful sell-offs traditionally reach 10 (plus)-to-1. Blocks on the NYSE increased to 8,069 from 6,795 on Tuesday.


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The S&P 500 Pulls Back Hard on White House Fears

Yesterday’s sell-off, based on fear that the White House’s growth plans would halt, is reflected in the VIX (Fear Index). The VIX had its biggest advance since last September, which only lasted for two days. This jump may go for several more but appears limited to bargain-hunting.


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Yesterday’s sell-off was accompanied by above-average volume and closed below the first level of support — its 50-day moving average at 2,369 — finally resting on the support line at 2,367. The next support line is at the double bottom of March/April at April’s closing low at 2,329.

Conclusion: This “sell-off” may take the higher P/E stocks lower along with the financials, since those sectors had the biggest percent advances. But I’m not expecting a broad sell-off unless downside volume picks up (over 10 to 1, as noted) and blocks on the NYSE increase to over 10,000 on down days.

Meanwhile, take some profits (if you must) but use some cash to jump onto bargains like our Trade of the Day, Home Depot Inc (NYSE:HD).

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.

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