Monday’s gains were erased by Tuesday’s broad market decline. The Dow Jones Industrial Average and S&P 500 fell 1%, while the Nasdaq lost 1.3% and the Russell 2000 plunged 1.7%.
Investors seemed stunned by economic reports for the month of April that showed a jump in U.S. inflation, strong homebuilding numbers and an increase in industrial output. More accurately, it was what these reports mean for long-term interest rates and comments by Federal Reserve members that sparked the sell-off.
With two Fed bank presidents implying there may be enough evidence to support a rate hike at the next FOMC meeting, the odds of an increase in June jumped 4% on Tuesday to 15%, according to CME Group.
Further selling pressure resulted from a report that famed investor George Soros has dramatically increased his bearish market positions, doubling the number of put options he holds on the SPDR S&P 500 ETF Trust (SPY) and increasing his holdings in gold.
All sectors of the S&P 500 fell expect energy. Consumer staples (-2%), utilities (-1.7%), real estate (-1.7%) and consumer discretionary (-1.1%) led the way down.
Crude oil continued to make new year-to-date highs, up 1.2% to $48.31 a barrel, due mostly to supply concerns stemming from forest fires in Canada. The recent recovery in oil and gasoline prices contributed to the 0.4% rise in the consumer price index in April. The Fed watches CPI as an inflation barometer.
Gold gained 0.2% to close at $1,276.90 an ounce on Tuesday, and the yield on the 10-year Treasury note rose to 1.76% from 1.75% on Monday.
At Tuesday’s close, the Dow Jones Industrial Average fell 181 points to 17,530, the S&P 500 lost 19 points at 2,047, the Nasdaq was off 60 points at 4,716, and the Russell 2000 dropped 19 points to 1,098.
The NYSE Composite’s primary exchange traded over 1 billion shares with total volume of over 4 billion. The Nasdaq crossed 1.9 billion shares. On the Big Board, decliners outpaced advancers by 1.8-to-1, and on the Nasdaq decliners led by 2.7-to-1. Block trades on the NYSE increased to 5,577, up from 5,120 on Monday.
The S&P 500 broke its 50-day moving average at 2,057 by 10 points but held above the support line at 2,040. Slightly higher-than-normal volume accompanied the break, and MACD remains negative, as it has been for all of May.
Some technicians are comparing buyers’ failure to follow through on Tuesday with the breakdown in late December. But there are several differences: The December break was preceded by three tops — one of which came with a Collins-Bollinger Reversal (CBR) — and higher-than-average volume accompanied the breakdown.
Like its big cousin, the S&P 500, the SPDR S&P MidCap 400 ETF (MDY) broke its 50-day moving average, but by an even smaller amount. It did, however, confirm a failure to successfully attack the resistance line at $265.
The next support is at the 200-day moving average at $256, and then the support line at $250. Volume was lower than average on Tuesday, and the MACD indicator is negative.
Conclusion
ChangeWave Investing Editor Josh Levine reiterated his call for a range-bound market on Tuesday, saying, “One industry and sector after another has tap-danced into a bear market, before coming back in line with the rest of the market.”
Many prior tap dances were directed by members of the Federal Reserve. On Tuesday, there were two Fed governors waving a baton.
In my opinion, the market pays far too much attention to comments like these. By now, most investors should recognize that their purpose is simply to test the temperature of the markets and gauge investors’ reaction.
Yes, the market is range-bound, and after the fourth-longest expansion in more than 150 years, it is due for a rest. However, a full 20% correction does not appear to be imminent. Nevertheless, raising cash is probably a prudent step in an uncertain economy.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
