Stocks dropped for the seventh consecutive session on Friday as investors suffered their longest losing streak in four years.
Large-cap stocks are on the verge of a death cross as the 50-day moving average prepares to close below the 200-day moving average — something that last happened in August 2011.
Aside from disappointing Q2 earnings, traders are growing increasingly nervous about the specter of higher interest rates as ongoing job growth gives the Federal Reserve fewer and fewer reasons to keep interest rates near 0%.
In the end, the Dow Jones Industrial Average lost 0.3%, the S&P 500 Index shaved 0.3%, the Nasdaq Composite went down 0.3% and the Russell 2000 closed the day down 0.8%.
Crude oil lost 1.9% to close at $43.81 a barrel after another increase in U.S. shale oil output amid OPEC’s ongoing effort to recapture market share by pushing prices lower. That is the first time since March that crude fell below the $44 mark, and it is crude’s sixth consecutive weekly decline. The U.S. rig count has risen in five of the last six weeks, even as prices have fallen into a new bear market with a 20%+ decline over this time.
The result helped push the ProShares UltraShort Crude Oil (NYSEARCA:SCO) — recommended to Edge subscribers on May 26 — to a gain of nearly 70%.
Friday’s non-farm payroll report came in as expected, with 215,000 jobs created and the unemployment rate holding steady at 5.3%, but driven more by job gains rather than labor force drop-outs.
Given all the evidence of continued tightening in the labor market, this further raises expectations that the Federal Reserve will raise interest rates for the first time since 2006 at its Sept. 17 policy announcement. The futures market has been downplaying the chances of a September rate liftoff, but the flow of economic data and comments from Fed officials has forced a reevaluation.
And that’s why markets have been under increasing pressure. Stocks are finally succumbing to the selling impetus already seen in areas like high-yield bonds, commodities and foreign stocks. Actually, a growing share of the stock market has been rolling over since April, as shown by the chart of the percentage of S&P 500 stocks in uptrends above.
It’s just that highfliers like Walt Disney Co (NYSE:DIS) and Apple Inc (NASDAQ:AAPL) have masked the weakness by keeping the major averages afloat. That is changing, however, and Dow is heading toward the death cross.
Concerning a September hike, Eric Green at TD Securities believes the result “has raised the odds;” while Brian Jones at Societe Generale told clients it leaves the Fed “on track” for liftoff. IHS’ Nariman Behravesh believes the gain “strengthens the case” for action next month.
Michelle Meyer at Bank of America Merill Lynch notes that the job gains probably satisfy the Fed’s own criteria of “some” further improvement in the labor market being needed before raising rates for the first time since 2004. In her opinion, “the burden is on the data to weaken to prevent the Fed from hiking rather than to accelerate in order to prompt hikes.”
And while wages remain tepid, with average hourly earnings increasing only 0.2% month-over-month and 2.1% annually, Meyer reminds us that Yellen herself has admitted wage inflation is not a precondition for inflation or rate hikes.
The bulls believed that the end of the eight-year experiment with zero interest rate policy would be benign since it was a sign the economy had returned to health.
Yet skeptics like me have been warning for years that higher rates would reveal just how large and unsustainable the credit bubble had become, creating negative consequences for stocks via less debt-fueled corporate buybacks, less “reach for yield” support of risky bonds and a marked increase in volatility.
It looks like we’re finally about to see who’s right.
Friday, in response, I recommended Edge Pro subscribers initiate a new put option position against Goldman Sachs (NYSE:GS) as shares prepare to break down out of a multi-month consolidation pattern. The specter of Fed rate hikes will usher in a more difficult environment for the Wall Street banks as it will hurt fixed income trading and IPO volumes, among other things.
Edge Pro subscribers are already enjoying a gain of 20% on newly initiated puts against Hewlett-Packard Company (NYSE:HPQ) and a 260% gain on puts against General Electric Company (NYSE:GE) recommended on July 21.
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.
