The bulls just couldn’t hold it as U.S. equities declined Monday to finish February in the red. After a mid-day push into positive territory — much like an army advancing past its supply lines — the rally simply couldn’t hold.
In the end, the Dow Jones Industrial Average lost 0.7%, the S&P 500 drifted 80 basis points, the Nasdaq Composite fell 0.7% and the Russell 2000 ended with a 0.3% loss.
Elsewhere in the economy, treasury bonds showed strength while the dollar was mixed; gold gained 1.7% and crude oil wafted 3.2% higher to close at $33.83 a barrel. Oil benefited from reports Saudi Arabia was working with other producers to limit price volatility.
For the month, the S&P 500 lost 0.4% and remains down 5.5% for the quarter and year-to-date.
Defensive utility stocks led the way with a 0.2% gain. Consol Energy Inc. (NYSE:CNX) gained 10.1% after announcing the sale of coal assets for around $420 million — continuing a pattern of material/energy stock moves on asset sale announcements.
Healthcare stocks were the laggards, losing 1.6% as a group. Valeant Pharmaceuticals Intl Inc (NYSE:VRX) lost 18.4% after withdrawing prior financial guidance and scheduling, then cancelling, an analyst call followed by the disclosure of several SEC investigations.
There was some disappointment in Asian markets overnight after a weekend meeting of G20 leaders ended without any commitment to coordinate new stimulus efforts. The post-meeting statement did acknowledge slower growth and downside risks but dismissed recent market volatility as not indicative of underlying weakness in global economic fundamentals.
Leaders added the boilerplate statement about the need to refrain from competitive currency devaluations (even though Japan and Europe, as well as China, have pretty much been doing this for years).
That resulted in a rough opening for China’s markets before the People’s Bank of China swooped in with a surprise 0.5% reserve ratio cut aimed at increasing banking system liquidity. It was the first such move since October and marks the eighth cut since November 2011.
Despite the weak performance, the groundwork is being laid for a continuation of recent strength. Materials stocks were lifted by news the Chinese government would lay off 1.8 million workers in the coal and steel industries to help alleviate chronic oversupply conditions (about 15% of the workforce).
The S&P Metals & Mining ETF (NYSEARCA:XME), recommended to Edge subscribers, gained 4.3% in response.
Various technical indicators are flashing green. Junk or high-yield bonds have been perking up nicely, with the iShares iBoxx $ High Yid Corp Bond (ETF) (NYSEARCA:HYG) returning to levels not seen since December. Breadth, or the number of stocks participating to the upside, keeps improving. And recent fear and pessimism has a long way to go before normalizing.
SentimenTrader notes that small traders are holding a record short position against the S&P 500, Nasdaq 100 and Dow Jones Industrial Average worth about $8 billion.
In response, I continue to recommend risk-on, long positions such as the March $5 calls on Mexican cement maker Cemex SAB de CV (ADR) (NYSE:CX) that are up 43% for Edge Pro subscribers.
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