U.S. equities fell on Tuesday to close near their worst levels after a surprising 25.4% year-over-year drop in Chinese exports rattled investors. This followed an 11.4% decline in January and was much worse than the 14.5% contraction that was expected.
Several headwinds were pointed to, including a higher exchange rate, calendar issues from the Lunar New Year holiday, and soft external demand. Exports to the United States fell 21.1%. Exports to Europe dropped 19.8%. Ugly.
In the end, the Dow Jones Industrial Average lost 0.6%, the S&P 500 gave back 1.1%, the Nasdaq Composite fell 1.3% and the Russell 2000 finished the day 2.4% lower. Elsewhere, both Treasury bonds and the U.S. Dollar strengthened, while gold fell from early highs to close with a slight loss and crude oil fell 4.3% to close at $36.27 a barrel.
Energy was hit not only by the China export data, but by cautious comments from Kuwaiti officials concerning a possible Russia-OPEC supply freeze deal. The Kuwaiti Oil Minister said they would only join the freeze if “all major producers” signed on and threatened to sell “every barrel Kuwait produces” if there isn’t a deal.
Also weighing was a cut to the Department of Energy’s oil demand outlook with a price forecast now at $34 per barrel in 2016 and $40 per barrel in 2017 — down $3 and $10 respectively from last month’s numbers. After the close, API crude inventories came in at a higher-than-expected 4.4 million barrels vs. the 1.75 million expected.
As a result, energy and materials stocks were the laggards down 4.2% and 2% respectively. Vivint Solar Inc (NYSE:VSLR) dropped 20% after terminating a $2.2 billion deal wot be acquired by SunEdison Inc (NYSE:SUNE). Burger maker Shake Shack Inc (NYSE:SHAK) dropped 11.8% after reporting better-than-expected earnings and comp-store sales on valuation and labor deleveraging concerns.
Defensive utility stocks were the highlights, rising 0.8%.
Stocks were ripe for a pullback after an impressive rally off of the February 11 lows, with a number of short-term technical measures now firmly in oversold territory. Moreover, investors are worried about two big central bank policy decisions over the next two weeks: The European Central Bank on March 10 and the Federal Reserve on March 16.
As a result, I recommended clients book profits in their most sensitive positions — such as the 116% gain in the March $26 puts against the iPath Short-Term VIX (NYSEARCA:VXX) recommended to Edge Pro subscribers on Feb. 18.
While some higher volatility is likely over the next two weeks, I don’t think it’s time for short-side plays. Instead, the best advice is to trim profits where appropriate, raise some cash, and prepare for the next upswing as new stocks like Home Depot (NYSE:HD) prepare to take the mantle of market leadership from energy and material stocks the led the way out of the lows last month.
The Dow also hit resistance near the 17,000 level back in October when rising out of the August-September unpleasantness. So it’s natural to expect a little bump in the road here again.
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.
