Despite rallying overnight and into beginning of cash trading, U.S. stocks succumbed to the selling pressure once again heading into the closing bell — erasing what had been, at one point, the year’s best one-day rally.
Market bulls are no doubt shell-shocked that a stimulus-induced surge couldn’t hold after rate cuts by the People’s Bank of China both to its policy rate and to its reserve requirement ratio. This was the second rate cut by the PBoC in two months; but it was too little too late after global markets panicked on Monday on a lack of action by the central bank over the weekend.
We could very well be looking at the beginning of the end of the stimulus bubble as traders lose faith in the ability of cheap money easing to drive economic deliverance and continued market gains.
In the end, the Dow Jones Industrial Average lost 1.3% to fall further below the 16,000 level, the S&P 500 lost 1.3%, the Nasdaq Composite lost 0.4%, and the Russell 2000 lost 0.7%. In mid-morning trading, the S&P 500 was up nearly 3%. This is the first six-day losing streak since 2012.
Utilities led the decline with a 3.2% loss on a regulatory rejection of a pending M&A deal while some tech stocks managed to post feeble gains. Facebook Inc (NASDAQ:FB) rose 1.1% while Apple Inc. (NASDAQ:AAPL) gained 0.6%. Best Buy Co Inc (NYSE:BBY) jumped 12.6% thanks to a big earnings beat.
There was no specific catalyst for the late session selloff, just a slow accumulation of selling pressure. Hopes of a Turnaround Tuesday faded into realization that there is just no support for equities as the Dow settled at levels first reached in the summer of 2013. It was the worst intraday reversal since the fallout from the collapse of Lehman Brothers (Oct. 16, 2008 to be exact).
It shouldn’t have been surprising given the response from Chinese equities to the stimulus move: The Shanghai Composite lost another 7.6% — pushing the index down 43% from its June high — raising chatter the communists in Beijing are about to dump prime minister Li Keqiang as the sacrificial lamb.
Moreover, according to Societe Generale’s Wei Yao analysts, the PBoC’s move was meant to offset domestic liquidity tightening that’s happening in response to the recent devaluation of their currency, the yuan, and subsequent efforts to stabilize it at its new lower level. As a result, the move was not “net easing for sure” and may not even be enough to compensate for the loss of official foreign exchange reserves seen so far.
In other words, the rate cuts may not be what they seem on the surface.
The panic is palpable, and that’s helped push the Credit Suisse AG – VelocityShares Daily 2x VIX Short Term ETN (NASDAQ:TVIX) — a leveraged bet on volatility — to a 164% month-to-date gain for Edge subscribers, pushing their overall month-to-date gain to nearly 100% thanks to other bets against crude oil, small-cap stocks, and emerging markets.
With stocks so extended below their 50-day moving average, a short-term mean reversion bounce back is likely as traders prepare for the critical September 4 August payroll report, the last jobs report before the critical “hike/no hike” decision from the Federal Reserve on Sept. 17.
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.
