U.S. equities mostly finished lower on Wednesday as a breakdown in crude oil weighed on equities — resulting in the longest selloff since the election.
In the end, the Dow Jones Industrial Average lost 0.3%, the S&P 500 lost 0.2%, the Nasdaq Composite gained a fraction and the Russell 2000 lost 0.6%. Treasury bonds were weaker again, the dollar was stronger, gold lost 0.6% and oil was hit hard on a large U.S. inventory build pushing West Texas Intermediate down 5.4% to fresh lows for the year.
The crude carnage boosted the ProShares Ultra Short Crude (NYSEARCA:SCO) 10.4% for Edge subscribers as the United States Oil Fund LP (ETF) (NYSEARCA:USO) fell below its 200-day moving average for the first time since late November to end a four-month trading range. This also represents another failed breakout attempt for energy prices near the $55-a-barrel level.
The catalyst for the weakness — amid ongoing hopes from the bulls over the implementation of that OPEC supply freeze deal — is a combination of record high inventories and growing evidence of a rebound in U.S. shale oil activity. The market is growing more and more oversupplied. Bloomberg reports that U.S. oil inventories are 39% above their five-year average at a time when U.S. rig counts are 51% higher than last year.
The EIA reported a crude oil build of 8.2 million barrels, above the 6.6 million expected and representing the ninth straight week of inventory growth.
The oil price decline will be accelerated by the fact that, according to futures market data, net long commitment is “well over-extended” according to Scotia’s energy commodity strategist Michael Loewen. Panicked selling of positions by hedge fund types threatens to dramatically deepen the pullback and end the relative calm energy markets have enjoyed for the past year.
No surprise then that energy stocks led the decliners, down 2.5% as a group followed by utilities, REITs and telecoms, as yield-sensitive stocks continue to get hit by the backup in yields on strong expectations of a March rate hike from the Federal Reserve.
Children’s Place Inc (NASDAQ:PLCE) gained 18.3% on a big quarterly earnings beat driven by profitability. Express, Inc. (NYSE:EXPR) fell 10.9% on on-line earnings but a slight miss to comp-store sales and weaker-than-expected forward guidance. Rite Aid Corporation (NYSE:RAD) fell 7.2% on nervousness over the M&A tie up with Walgreens Boots Alliance Inc (NASDAQ:WBA). And Caterpillar Inc. (NYSE:CAT) fell 2.8% after the NY Times cited a report commissioned by the government accusing it of carrying out tax and accounting fraud. No charges have been filed yet.
On the economic front, ADP payroll data came in at a stronger-than-expected 298,000 in February, well ahead of the 189,000 expected. That was the strongest since March 2006 and the largest beat relative to expectations since December 2011. This sets the stage for a strong non-farm payrolls report on Friday, which will likely further boost expectations of a Fed rate hike next Wednesday.
With the partisan rancor in Washington at full tilt — as even Republicans tear into the Obamacare replacement plan put forward by GOP leadership and supported by President Trump — another rate hike just three months after the last, when there have only been two hikes in the last ten years, will be a major headwind for stocks going forward.
With breadth narrowing, sentiment at extremes and technical measures massively overbought, the bull market is looking vulnerable as tomorrow, March 9, marks its 10-year anniversary.
Anthony Mirhaydari is founder of the Edge (ETFs) and Edge Pro (option) investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers by clicking the links above.