Stocks Finish Mixed as Bond Concerns Spread

U.S. equities mostly moved higher on Monday in what was a stomach-churning session, as investors remain on edge heading into the first potential rate hike from the Federal Reserve in nearly a decade later this week.

Bond market weakness remains center stage, as well as issues in the high-yield corporate bond market now spreading to other credit areas, such as investment-grade bonds.

In the end, the Dow Jones Industrial Average gained 0.6% after trading in a 200-plus point range, the S&P 500 Index gained 0.5%, the Nasdaq Composite gained 0.4% and the Russell 2000 lost 0.7%.

The end-of-day bounce in stocks was fueled by shaky looking panic buying in Big Tech momentum favorites like Facebook Inc (NASDAQ:FB) and, Inc. (NASDAQ:AMZN) — many of which are looking vulnerable to a resumption of downward process in the days to come.

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Treasury bonds were weaker, the dollar strengthened, gold lost 1.1% and crude oil moved 1.7% higher.

Defensive telecom stocks led the way with a 1.1% gain, followed by consumer staples up a modest 0.9%. Trina Solar Limited (ADR) (NYSE:TSL) gained 11.6% after being approached by its chairman with a private takeover offer representing a 21.5% premium to the prior close.

Toymaker Mattel, Inc. (NASDAQ:MAT) gained 3.1% after being upgraded by analysts at BMO noting success in key product lines this holiday shopping season as well as attractive valuations.

Materials and financial stocks were the laggards, with the former losing 1.4%. The beleaguered GoPro Inc (NASDAQ:GPRO) lost 9.6% after suffering a downgrade from analysts at Morgan Stanley, noting that retailers have reported year-over-year sales declines and waning interest in its products and a shift to lower-cost products

There were no specific headline catalysts for the big intraday ups and downs, as shown above, just a general feeling of nervousness. Economic data out of China came in better than expected with industrial production, retail sales and fixed-asset investment all beating estimates for November.

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High-yield bond ETFs moved lower again as the iShares High Yield Bond (NYSEARCA:HYG) lost another 0.9% to test its 2013 lows. Yet another high yield credit fund — the third in recent days — ran into problems as Lucidus Capital liquidated its $900 million portfolio to return capital to investors.

Wall Street did its best to calm the collective raw nerves of investors, noting that the high-yield bond market is a declining share of the overall bond market and that cash levels at high-yield mutual funds are at their highest level since 2012.

The rise in crude oil was odd considering the day’s big energy headlines were out of Iran, where Reuters reported oil exports would hit a six-month high in December and that Tehran had recently cut its light crude price for January loadings. Separately, Bloomberg reported that Iranian deputy oil minister for international and commerce affairs as saying there was “absolutely no chance” they would delay an increase in output despite falling prices.

All eyes are turning to Wednesday’s “hike/no hike” decision from the Federal Reserve. Expectations are for a 25 basis point increase in the short-term Federal Funds policy rate — up from nearly 0% now. Focus will be on the updated summary of economic projections, including the “dot plot” of interest rate expectations, for clues as to the pace of any subsequent rate hikes in 2016.

There is growing chatter that the Fed will soon have to start cutting rates again, with more than half of the 65 economists surveyed by the Wall Street Journal seeing rates back near 0% in the next five years. Ten expect rates in negative territory.

Their concern centers on the fact that no major central bank has been able to raise interest rates and keep them high since the financial crisis and that the Fed has never waited this long into the business cycle to start tightening policy. So the odds of a policy mistake are very high.

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With the stake so high, stocks are looking technically very vulnerable here amid poor breadth figures as demand wanes. In fact, as shown above, the percentage of S&P 500 stocks in uptrends actually fell 4% to 53.4% despite the day’s overall gain. This is down from a high of 72.2% back in early November.

As a result, I continue to recommend a defensive positioning to clients with Edge subscribers booking a 65% month-to-date gain in their VelocityShares 2x VIX (NASDAQ:TVIX) position today.

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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