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Defensive Investments Go ‘Exponential’

On Wednesday, the major indices took another solid punch that was so hard that the best-performing index, the Nasdaq, was down 0.5%. The Dow Jones Industrial Average ended off 1.1%, and the S&P 500 lost 0.6%. It was the fourth consecutive loss for each index.

Stocks opened lower resulting from concern over a new World Bank growth outlook for 2015 and 2016. It reduced its growth estimates for this year from 3.4% to 3%, and from 3.5% next year to 3.3%. Worries mounted that the U.S. could maintain an expansion at an annual rate of 5% in the face of a global economic decline.

Financial stocks were hard hit, down 1.4%. Wells Fargo & Co (WFC) was off 1.2% despite a 1.8% rise in Q4 net income. JPMorgan Chase & Co. (JPM) fell 3.5% following a lower-than-expected revenue and earnings report.

Crude oil futures rallied 5.6% to $48.48 a barrel, pulling energy stocks to a gain of 0.3%. But materials stocks, which are considered growth sensitive, fell 1.2% and were among the hardest hit on the S&P 500.

Copper had its worst day in three years as heavy selling in Asia drove the industrial metal down 5.2% to $2.51 per pound. Copper has lost 11.3% this year, the second largest decline for a commodity after crude oil.

The yield of the 10-year Treasury note fell to 1.84% as investors rushed to buy protection. Gold futures ended the day flat at $1,234.40 an ounce.

At Wednesday’s close, the Dow Jones Industrial Average fell 187 points to 17,427, the S&P 500 lost 12 points at 2,011, the Nasdaq fell 22 points to 4,639, and the Russell 2000 lost 4 points at 1,177.

The NYSE’s primary market traded 928 million shares with total volume of 4.3 billion. The Nasdaq crossed 2 billion shares. On the Big Board, decliners outpaced advancers by 1.5-to-1, and on the Nasdaq, decliners were ahead by 1.8-to-1.

VIX Chart
Click to Enlarge

The VOLATILITY S&P 500 (VIX), often referred to as the “fear index,” added another bar to its chart as investors rushed for the exits. The index indicates that stocks will probably seek a lower plane before stabilizing. Compared to prior spikes, the VIX appears to have room to head higher.

TLT Chart
Click to Enlarge

DJU Chart
Click to Enlarge

The charts of the iShares Barclays 20+ Yr Treas.Bond ETF (TLT) and the Dow Jones Utility Average — both defensive investments — have broken above their respective bullish resistance lines. Both have gone “exponential,” meaning they have been driven to abnormally high prices that represent an increasingly sharp upward arch.

Conclusion

The charts of TLT and DJU, as well as the VIX, indicate that a measure of fear has entered the market. And the transportation index (not shown), a measure of expected economic activity, broke its December low, telling us to anticipate an economic decline.

On Wednesday morning, I reviewed the S&P 500, noting the “outside reversal” and its negative connotation. In Wednesday’s session, the S&P 500 broke its January low of 1,992, confirming the reversal and setting the index up for further lows and a test of the December low at 1,973, and possibly a test of its 200-day moving average at 1,965.

However, there is a glimmer of hope — most of our internal indicators are overbought, telling us that a brief recovery rally (dead cat bounce) is due. If we get it, use it to lighten up on long trading positions and seek new shorts (traders only).

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.


Article printed from InvestorPlace Media, https://investorplace.com/2015/01/daily-market-outlook-defensive-tlt-utilities-go-exponential/.

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