Dow Loses Support for First Time Since Election Day

U.S. equities finished lower in relatively quiet trading on Wednesday. Big picture: Stocks continue in their listless, ultra-tight, two-month consolidation range. But on a purely technical basis, something major did occur: The Dow Jones Industrial Average closed below its 50-day moving average, a key technical support level for the first time since November.

The catalyst for the decline were lingering concerns about the geopolitical outlook (amid hotpots in Syria and North Korea concerning both Russia and China) as well as ongoing reports pooh-poohing the likelihood of action on tax reform before the end of the year.

In the end, the Dow lost 0.3%, the S&P 500 lost 0.4%, the Nasdaq Composite gave back 0.5% and the Russell 2000 was 1.3% lower. Treasury bonds were stronger, the dollar was weaker, gold gained 0.3% and oil broke a string of gains to decline 0.5%.

Defensive utility and telecom stocks led the way with gains of 0.6% while industrial were the laggards, down 1.3%. Breadth was heavily negative, with decliners outpacing advancers on the NYSE by a ratio of 2.2 to 1. NYSE volume was 86% of the 30-day average.

Blackberry Ltd (NASDAQ:BBRY) gained 16% after being awarded some $814 million in an arbitration settlement with Qualcomm, Inc. (NASDAQ:QCOM) concerning royalty payments. HP Inc (NYSE:HPQ) gained 2.7% on an upgrade to buy from analysts at Citigroup noting PC shipments data are better than expected as the company gains market share. Also helping is a mix shift toward higher margin gaming PCs. On the downside, Tractor Supply Company (NASDAQ:TSCO) fell 8.3% on a negative first-quarter earnings preannouncement.

On the geopolitical front, U.S. Secretary of State Tillerson met with Russian officials who agreed a U.N. probe into a recent chemical weapons attack in Syria was necessary. Regarding North Korea, Chinese President Xi reportedly told President Trump in a phone call that there should be a peaceful solution to the problem as Chinese officials warn Pyongyang against conducting another nuclear weapons test.

As a reminder, Trump has been lobbying Beijing hard for support in the matter, threatening trade sanctions. North Korea is expected to conduct another long-range missile test on Thursday.

Here at home, Trump in an interview said he would prefer to act on healthcare reform legislation first before tackling taxes — despite the fact a big push on the matter failed in the House of Representatives after pushback from conservative Republicans. Trump told Fox Business that healthcare reform could potentially free up hundreds of millions of dollars that could be used to offset the cost of tax cuts.

In a separate interview with the Wall Street Journal, Trump said the U.S. dollar was “too strong,” said he preferred interest rates staying low, and said he might reappoint Federal Reserve chairman Janet Yellen — despite his criticisms of her on the campaign trail — after sitting down and talking with her in the Oval Office. Oh, to be a fly on the wall during that conversation.

The so-called “reflation” trade looks vulnerable here on a lack of legislative progress by Trump with bank stocks in particular looking vulnerable. That’s boosted the ProShares UltraShort Financials (ETF) (NYSEARCA:SKF) to a gain of 2.2% so far this month for Edge subscribers.

Anthony Mirhaydari is founder of the Edge (ETFs) and Edge Pro (Options) investment advisory newsletters. A two-week and four-week free trial offer has been extended to Investorplace readers. Redeem by clicking the links above.

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