Stocks End Mixed as Junk Bonds Get Smashed

U.S. equities oscillated around the unchanged line on Tuesday in what was a relatively quiet session

In the end, the Dow Jones Industrial Average gained 0.3%, the S&P 500 gained 0.1%, the Nasdaq Composite lost 0.6% and the Russell 2000 lost 0.6%.

The most notable aspect of the trading action was the inability of the bulls to spur a rebound following the deep losses on Tuesday; which were caused by concerns over the odds of a Federal Reserve rate hike this year, China/emerging market fears, commodity price weakness and weakness in areas of speculative excess like biotech and Big Tech stocks.


Healthcare stocks led the way with a 0.9% gain while technology dropped 0.6%. Yahoo (NASDAQ:YHOO) gained 2.4% after it announced it will proceed with its original plan to monetize its Alibaba (NYSE:BABA) stake via a spinoff.

Apple (NASDAQ:AAPL) dropped 3% on no specific catalyst, but an ongoing feeling that the company’s product innovation cycle has slowed. Indeed, some of the magic has seemed to dissipate. As a result, as shown above, shares have sliced below a two-month uptrend support line to return to early September levels.

The move was good news for Edge Pro subscribers, however, who’ve seen their October $113 puts jump to a gain of more than 80% since they were recommended last Thursday.

Not bad for three day’s work.


On the economic front, consumer confidence increased to 103 in September from 101.5 in August, well ahead of the 96 expected by analysts based on recent stock market volatility. But instead, consumers seem to be responding positively to the drop in gasoline prices and ongoing labor market strength.

Wholesale gasoline prices, as shown above, dropped from a high of $1.77 per gallon in August to a low of $1.30 earlier this month — a 27% drop in a matter of weeks.


A new dynamic in play is the concern over the health of the commodities trading house Glencore, as its balance sheet comes under pressure amid the protracted decline in energy and metals prices. Glencore’s bonds have been hit lately, focusing attention on the nausea-inducing drop in high-yield corporate bonds — driven mainly by rising default risk in the bonds of shale oil companies — with the High Yield Bond SPDR (NYSEARCA:JNK) falling to two-year lows.

In fact, the JNK is down more than 8.2% from its springtime high — enough to wipe away more than a year-and-a-half of the funds dividend payouts.

With stocks very weak technically, as the Russell 2000 small-cap index tests below its late August lows, amid headwinds from the Fed, corporate earnings and China, I continue to recommend a defensive positioning. The VelocityShares 2x VIX (NASDAQ:TVIX) recommended to Edge subscribers is up more than 21% since recommended on September 21.

For most investors, simply increasing your cash allocation is a smart move here.

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.

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