Wall Street Dips as Rate Hike Case Strengthens

Stocks drifted lower on Wednesday in a relatively quiet session as bond markets were closed for the Veterans Day holiday.

In the end, the Dow Jones Industrial Average lost 0.3%, the S&P 500 shed 0.3%, the Nasdaq Composite was off 0.3% and the Russell 2000 ended 0.8% lower. Further, the U.S. dollar lost some strength while gold declined and oil lost 40 basis points on surplus inventory reports from Tuesday night.

Defensive utility stocks led the way with a 0.9% gain while energy stocks lagged, falling 1.9%. Amazon.com. Inc. (NASDAQ:AMZN) gained 2.2% thanks to a price target increase by Morgan Stanley analysts citing success in its Amazon Web Services division.

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A big 14% decline for Macy’s, Inc. (NYSE:M) was the day’s focus after the company reported poor results and guidance featuring a 3.9% comp-store sales decline — well under expectations for a 0.7% drop. Fiscal 2015 earnings per share guidance was cut by 10.5%, with management citing headwinds from tepid demand for apparel and accessories as well as a drop in tourism activity.

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Heading into the critical holiday shopping season, this wasn’t the news optimists wanted to hear. And it further raises the stakes for Thursday’s economic release on the labor market courtesy of the Job Openings and Labor Turnover survey, as well as Friday’s retail sales and producer price inflation reports.

Another factor in Macy’s story was an increase in its corporate bond default risk as its aggressive stock buyback strategy — spending $900 million in the last quarter at an average price of $53.89 — blows up in its face. At current prices, the buybacks are carrying a loss of around $230 million. Not the kind of value creation shareholders were looking for.

JC Penney Company Inc (NYSE:JCP) dropped 1.8% despite announcing comp-store sales growth of 6.4%; ahead of the FactSet consensus estimate of a 5.7% increase. The retail focus will continue tomorrow with Kohl’s Corporation (NYSE:KSS) and Nordstrom, Inc. (NYSE:JWN) reporting results after the close.

In Federal Reserve news, San Francisco Fed President John Williams told USA Today that there was a very strong case for a December rates liftoff as the economy continues to strengthen and policymakers grow more confident in their expectation for inflation to return to their 2% target in the medium-term.

He added that concerns over market volatility and risks out of China cited in the Fed’s September policy statement have failed to materialize. And he dismissed the soft jobs and spending data of August and September as a “blip” — possibly related to the stock market volatility occurring at that time.

Another slate of Fed speakers, including chairman Janet Yellen, will fill headlines on Thursday.

Overseas, economic data out of China was a little soft but not disastrous: Industrial production growth fell to a 5.6% annual rate in October from 5.7% in September and below the 5.8% analysts were expecting. Fixed-asset investment and the property sector both slowed.

Retail sales growth was a bright spot, rising to an 11% annual rate in October from 10.9% in September. Alibaba Group Holding LTD (NYSE:BABA) reported a record $14.3 billion sales take for China’s Singles’ Day online shopping event (which, I suppose, is a lonelier version of America’s Cyber Monday.)

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With the Dow still constrained by the 18,000 level amid narrowing market breadth, weakness in bonds and commodities, and growing unease about the impact of the Fed’s December rate liftoff, I continue to recommend investors maintain a defensive posture.

The VelocityShares 2x VIX (NASDAQ:TVIX) position recommended to Edge subscribers is up 5.5% since it was added on Friday. For the more aggressive, the Short-Term VIX (NYSEARCA:VXX) November $19 calls recommended to Edge Pro subscribers look ready for big gains should stocks suffer, as I expect, their first significant pullback since the September lows.

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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