On Wednesday, the Dow Jones Industrial Average fell for the fourth day in the past five, dropping 1.5% to a five-month low. The broad-based decline took the S&P 500 down 1.7%.
U.S. stocks broke lower at the opening bell, influenced by a sell-off in China and a new deadline for Greece to come to terms with European lenders. The next ultimatum for the ailing nation is Sunday, but the “new proposal” from the government appears to be little changed from one already submitted and rejected, according to those who have seen it.
However, as serious as Greece is to the Europeans, it was China’s move to stabilize its markets that resulted in a broad sell-off in both equities and debt as investors scrambled to raise cash. The Shanghai Composite fell 5.9% in overnight trading. The index is down 32% in less than a month.
And a New York Stock Exchange “glitch” added to investors’ frustration. The major world securities exchange was forced to halt trading for almost four hours while NYSE officials and technicians tried to fix the problem.
Trading was resumed prior to the close, but as computer problems shut down flights at United Continental Holdings Inc (UAL) and The Wall Street Journal’s homepage stopped working around the same time, rumors spread that computer hacking was responsible for the outages. This was strongly denied by officials at all three organizations.
All 10 sectors of the S&P 500 registered losses. Materials were off 2.2%, technology fell 1.6%, and financials lost 1.8%. The biggest loss, however, was taken by the biotechnology group as the iShares NASDAQ Biotechnology Index (ETF) (IBB) closed 2.9% lower.
Oil prices fell for the fifth straight day due to an increase in inventories. Crude oil for May delivery dropped 1.3% to $51.65 a barrel. The U.S. dollar was down 1.6% versus the Japanese yen but gained against the Chinese yuan, which fell to a four-month low.
U.S. Treasury bonds rallied on Wednesday after the Federal Reserve indicated that a path to higher interest rates could be delayed due to global economic conditions. The yield on the 10-year Treasury note fell to 2.21% from 2.23% on Tuesday.
At Wednesday’s close, the Dow Jones Industrial Average fell 261 points to 17,515, the S&P 500 lost 35 points at 2,047, the Nasdaq dropped 88 points to 4,910, and the Russell 2000 was down 19 points at 1,229.
The NYSE’s primary market traded just over 6 million shares with total volume of 3.6 billion. The Nasdaq crossed 1.9 billion shares. On the Big Board, decliners outpaced advancers by 4.6-to-1, and on the Nasdaq, decliners led by 5-to-1.
The daily chart of iShares FTSE/Xinhua China 25 Index (ETF) (FXI) shows a major breakdown in China’s equity markets. Five successive gaps down through the 200-day moving average, accompanied by very high daily volume, tell us that the decline is not yet over. However, a bounce from the current sell-off is likely since open gaps beneath a 200-day moving average are often closed by bargain hunters.
All of the gains made in China’s top big-cap stocks in the past 12 months have vanished since late April. But overall monthly negative volume is still not as high as the volume accumulated on the buy side.
FXI is due for a bounce, but so much damage has been done that only the most aggressive trader would dare try and trade this wild dragon.
Conclusion
There is some concern among investors that the bear market in Chinese stocks may spread to a worldwide contagion. But China’s government is to blame for encouraging even low-income buyers into an already inflated market.
After telling members of “an elite group of Communist Party officials that the market still had room to climb” (The Wall Street Journal) just days before the top, China’s top securities regulator, Xiao Gang, is now trying to unwind the dragon’s tail. Unlike the head of our SEC, he is held responsible for China’s bear market.
After encouraging wild speculation in large- and small-cap stocks, China’s regulators are now cutting interest rates, have state-run agencies buying stocks and have extended a line of credit amounting to $42 billion to securities firms charged with halting the decline.
But even communists find it difficult to regulate an essential free world market. So far they’ve done an astonishingly poor job as both bulls and bears.
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.
