The Dow Jones Industrial Average on Tuesday suffered its first “death cross” — a downward cross of the 50-day moving average below the 200-day moving average, a sign of a medium-term trend breakdown — since 2011.
Elsewhere, crude oil fell to test a $42 a barrel handle for the first time since March. Gold and silver are perking up. And Treasury bonds are soaring as investors scatter to safety.
The catalyst was a surprise move overnight by the People’s Bank of China to devalue the yuan by 1.9% in response to weak trade and inflation data over the weekend. This is the largest one-day drop on record since China ended its dual-currency system in January 1994. And it returns the currency value to where it was in April 2013.
By the looks of things, the turbulence is just getting started.
Tuesday’s final results: The Dow Jones lost 1.2%, the S&P 500 lost 1%, the Nasdaq lost 1.3% and the Russell 2000 lost 0.9%.
Technology stocks were under pressure, dropping 1.7% as a group. They were led by Apple Inc. (NASDAQ:AAPL), which fell 5.2% in its largest one-day loss since January 2014 on concerns over its business in China in the wake of the currency devaluation (more on this below). Materials stocks, especially base metal names, were also hit, with United States Steel Corporation (NYSE:X) down 8.9% and Alcoa Inc (NYSE:AA) down 6%.
Technically, stocks are on the precipice with the S&P 500 poised to break below its 50-week moving average — a level that has sustained the stock market’s melt-up since 2011. Remember that we haven’t seen a 10%-plus correction since 2012.
Gold gained 0.3% while crude oil fell 3.7% to close at $43.31 a barrel. It looks like the March lows in crude are about to be taken out, putting 2009 levels back into play.
As a result, the ProShares UltraShort Crude Oil (NYSEARCA:SCO) recommended to Edge subscribers are now up nearly 70% since added on May 26 as the black stuff craters on a combination of concerns over supply (increasing U.S. production, end-of-summer driving season and high inventory levels) and demand (slowdowns in China and elsewhere).
The rise in gold and silver is also benefiting the mining stocks I recommended to subscribers last week, including Kinross Gold Corporation (USA) (NYSE:KGC), which is up 22% since added on Aug. 3. In options, the August $27 puts against General Electric Company (NYSE:GE) are now up 262% for Edge Pro subscribers since July 21 as the industrial giant threatens to break down below its 200-day moving average.
Back to China, where authorities felt compelled to devalue for good reason.
Exports fell below expectations, dropping 8.3% in July over last year vs. the 1.5% decline forecast. Producer price inflation dropped to its lowest level since October 2009, down 5.4% year-over-year vs. the 5% drop expected and the 4.8% drop posted in June. Corporate profitability in China has been under pressure. And the Shanghai Composite, ahead of the move, had fallen nearly 30% from its June high.
In their statement, the PBoC explained that a strong currency was adding to the pressure on the country’s exports. Since the yuan is loosely pegged to the dollar, the recent strength in the greenback has pushed the currency into overvalued territory according to an analysis earlier this year by Barclays.
While the move could help exports the immediate aftereffects such as capital outflows, reactionary devaluations from trade partners, and possible credit market disruptions will happen first.
From the perspective of the United States, this threatens to further boost the dollar, weigh on exports and keep the pressure on corporate earnings as the strong dollar/weak foreign currency dynamic pushes down the value of overseas profits. These potential near-term negatives have spooked U.S. investors and pushed stocks lower.
Indeed, Moody’s Gerry Granovsky said today that the yuan devaluation “is credit negative for technology companies with significant operations in China, such as Apple, which already have to cope with a strong U.S. dollar.” The move “further increases the cost of iPhones and iPads in the local market.”
Whether the market turbulence continues depends, in large part, on whether the PBoC moves to shore up its currency or allows the decline to precipitate.
For now, I continue to recommend investors maintain a defensive positioning as U.S. stocks look ready for their first serious wipeout in years — joining the downside already seen in areas such as emerging market stocks, high-yield bonds, and commodities.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.
