Stocks opened sharply lower Tuesday following a sell-off on European bourses and overnight in the U.S. bond market. Although much of the decline was recovered during the day, the Dow closed 0.2% lower, the S&P 500 lost 0.3%, and the Nasdaq fell 0.4%.
However, those declines were small in comparison to Germany’s DAX, off 1.7%, and France’s CAC, down 1.1%. Their losses were much greater during intraday, but Greece repaid $836.7 million to the International Monetary Fund, which sparked a rally in European stocks.
The only S&P sector to finish higher was energy, with the Energy Select Sector SPDR (ETF) (NYSEARCA:XLE) up 0.5%. Crude oil spot futures closed 2.5% higher at $60.75 a barrel.
Transportation was the worst-performing sector, with the Dow Jones Transportation Average off 1.2% and all 20 of its stocks in the red.
Gold for June delivery rose 0.8% to $1,192.40 an ounce. Precious metals have shown strength recently due to weakness in global bond markets.
The U.S. dollar fell 0.5% against the euro, and it was down 0.5% against a basket of currencies as well. The euro closed at 1.1219 versus the dollar.
At Tuesday’s close, the Dow Jones Industrial Average fell 37 points to 18,068, the S&P 500 was off 6 points at 2,099, the Nasdaq dropped 17 points at 4,976, and the Russell 2000 lost 3 points at 1,233.
The NYSE’s primary market traded 710 million shares with total volume of 3.1 billion. The Nasdaq crossed 1.7 billion shares. On the Big Board, decliners outpaced advancers by 1.2-to-1, and on the Nasdaq, decliners led by 1.4-to-1.
The chart of the benchmark CBOE Interest Rate 10 Year T Note (INDEXCBOE:TNX), which moves inversely to bond prices, shows yields have been rising since their low at the end of last year. In late April, they penetrated both their major bearish resistance line and 200-day moving average for the first time since the bond rally was confirmed in April 2014.
Ever since the top in the Dow Jones Transportation Average in November, the index has been confined to a broad-based channel down pattern. That is until the past month. Now trading is confined to a narrow range between a lower support line and the 50-day moving average at about 8,810.
Even more disturbing is that at the midpoint of this range sits the important 200-day moving average at 8,725. Because of the inability to stay above the 200-day, a close under the support line would signal a clear breakdown.
Unfortunately, there is nothing clear about this formation, so we will be forced to await the outcome of the bull/bear struggle taking place here.
The Federal Reserve’s jawboning about an overpriced stock market and the inevitability of higher interest rates appear to be having an impact on both equity and debt markets. Back when I first entered this profession, debt markets outpaced equities by over 10-to-1 in size. I don’t know what the ratio is today (perhaps a reader does), but the significance of a change in trend in international bond markets is huge.
Sellers of U.S. Treasuries, indicated by the jump in yields, will most likely not put their proceeds back into U.S. stocks. Why should they when the Fed Chief Janet Yellen warned that “equity-market valuations at this point generally are quite high”? Or when San Francisco Fed President John Williams wonders “what would happen if long-term yields went up rapidly… what would it mean for the economy and thinking through risk scenarios for that”?
Thanks, Mr. Williams, for a brilliant insight, which is close to throwing gasoline on a smoldering match.
I’m headed across the Pond and will be back after Memorial Day. But you will be in good hands with my colleague, Serge Berger. His valuable insights are always appreciated.
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.