Stocks stumbled across the finish line on Wednesday, faltering on the final trading day of 2014. This isn’t all that surprising given the hollowness of the rally seen heading into the Christmas holiday break last week; a rally tainted by low volume and narrow breadth. And with the pullback, the Dow Jones Industrial Average fell further from the 18,000 level that it recently crossed for the first time.
By Wednesday’s close, the S&P 500 declined more than 1%, while the Dow Jones, Russell 2000 and Nasdaq all fell fractionally.
The economic calendar was light and included a mixed November pending homes sales report. The month-over-month result was better than anticipated, returning to positive territory after the contraction seen in October. But the year-over-year measure fell to 1.7%, missing expectations.
Crude oil was in focus as West Texas Intermediate dropped as low as $52.60 during European trading before rebounding. Traders continue to chew on reports that Saudi Arabia’s King Abdullah has been admitted to the hospital for tests. The United States Oil Fund LP (ETF) (USO) tested into positive territory in afternoon trading.
While the feebleness of the 90-year old monarch normally wouldn’t be a big deal, his death would call into question the Kingdom’s ongoing gambit to crush U.S. shale oil producers. The current administration has been happy to flood the world with oil at a time of shrinking demand as economic growth slows in Europe and Asia; Abdullah’s successor may be less inclined to do this.
Largely, the selloff was driven by a rise in the CBOE Volatility Index, or the VIX — something that seasonal trends suggested was to be expected this time of year, in the period between Christmas and New Year’s Day. In response, the leveraged VelocityShares 2x VIX (TVIX) positions recommended to Edge subscribers were up more than 15% at their peak today.
In response to this, as well as the market’s short-term overbought condition and the list of negative catalysts that await traders as the calendar flips into 2015, I recommended a number of new put option positions to my Edge Pro subscribers including the Jan $95 contracts against Nike (NKE).
Shares of NKE look ready to roll down out of a month-long topping pattern and could be ripe for a test of the 200-day moving average. That would take shares all the way down to $82, a near 15% drop from current levels.
As for the overall market, 2015 could very well start off on the wrong foot given narrowing buying interest with just 60% of New York Stock Exchange issues above their 50-day moving average, as shown in the chart above. In January alone, we have the start of the new GOP-dominated Congress, snap elections in Greece, and the fourth-quarter earnings season (featuring the response by energy companies to the drop in oil prices), which will kick off with Aloca (AA) on Jan. 12.
A possible low will be found when the next Federal Reserve policy statement is released on Jan. 28.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.
