The drama continues to build on Wall Street as the smooth, easy gains investors enjoyed out of the Oct. 15 low — which by some measures was the most consistent rally in market history — are replaced by turbulence and fear.
Impressive mid-day gains and excitement surrounding the big 56%-plus IPO gains by Lending Club (LC) gave way to a surge of selling as crude oil dropped below $60 a barrel for the first time since July 2009. In the end, the Dow Jones Industrial Average gained 0.4%, the S&P 500 gained 0.5%, the Nasdaq Composite gained 0.5% and the Russell 2000 gained 0.5%. At its highs, the Dow was up 1.3%.
The NYSE Composite Index was unable to retake its 200-day moving average, forming a big “inverted hammer” pattern that suggests the sellers remain in control.
This was backed up by the formation of another “Hindenburg Omen” pattern formed by the ongoing breakdown in market breadth, or the number of stocks participating to the upside. It’s the sixth signal seen since the beginning of the month, a cluster that far outweighs the two Omens seen back in late September as the market was rolling over.
The translation here is that a narrowing group of stocks is preventing the market decline from getting much worse.
Volatility, as represented by the CBOE Volatility Index, or the VIX, gained 8.4% to close above 20 for the first time since October 17 as Wall Street’s “fear gauge” kicks into action. Crude oil lost 2.1% to close at $59.95. And Treasury bonds jumped, pushing the 10-year yield down to 2.17%, returning to the mid-October lows.
The ongoing meltdown in crude oil continues to weigh on sentiment as investors realize that while this will boost non-fuel retail spending — indeed, lifting November retail sales to a monthly gain of 0.7% vs. the 0.4% expected — it will have negative implications for U.S. shale oil producers. And as a result, everything from S&P 500 profits, capital expenditures (of which energy represents about a third of the total), and overall job gains are all at risk.
High-yield corporate bonds continues to be pressured by the blowout in credit-default swap spreads against indebted, high-cost basis energy companies hit by the drop in crude below their breakeven price — which Barclays Capital estimates is around $70-$80 a barrel. The chart of the Barclays High-Yield Bond ETF (JNK) shows the extent of the damage, falling another 0.6% to test levels not seen since November 2013.
The other big catalyst of the day was an apparent breakdown in Congressional machinations to pass a $1.1 trillion “CROmnibus” spending bill to keep a majority of the federal government running through late next year. Deadline for action is midnight tonight, raising the risk of a short-term shutdown or the reliance on very short-term spending bills.
The Wall Street Journal reported that the White House was making preparations for a shutdown by holding a call with federal agency heads.
The bill barely scraped by a rules vote required to set it up for debate, passing by a razor thin 214-212 margin after looking set for failure. Not a single Democrat voted for it as they demand changes to the bill to tighten regulations on derivative trading on Wall Street and keep limits on campaign giving.
House Minority leader Nancy Pelosi sent a letter to colleagues this afternoon saying it’s “clear” Republicans in the House don’t have the votes needed to pass the $1.1 trillion bill as conservatives balk at passing the measure since it gives up leverage to use against President Obama’s recent executive action on immigration.
As I write this, the House is in recess subject to the call of the chair with no clarity on when it’s coming back.
All indications suggest that the selling pressure is going to continue as we head into next week’s Federal Reserve policy meeting. The chatter this week is that given GDP growth and job gains, policymakers are eager to prepare the market for short-term rate hikes in the first half of 2015 — something that hasn’t happened since 2006.
This, combined with the ongoing pressure from lower crude oil, should keep junk bonds moving lower and thus weigh on stocks. It’s worth noting that all of this is coming at a time of extended investor sentiment as everyone got bulled up by the rally out of the October lows. According to SentimenTrader’s index of “dumb money” sentiment, heading into this decline investor confidence was at levels not seen since last December.
In response, I’ve recommended my Edge subscribers move into the leveraged Credit Suisse AG – VelocityShares Daily 2x VIX Short Term ETN (TVIX), which is up 30% for them so far this month. For options traders, the Dec $70 GoPro Inc (GPRO) puts recommended to Edge Pro subscribers are up more than 142% since Monday as popular new-tech stocks break to the downside.
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