U.S. equities moved lower in relatively quiet trading on Wednesday as bank and energy stocks weakened. Bank stocks were hit by worries over trading revenues and the net interest margin pressure for a flattening yield curve. Energy names were pushed lower as crude oil weakened on reports of weakening compliance by OPEC nations in their recently extended output freeze agreement.
Big names in both sectors are now at risk of significant downside support breaks, setting up further losses in the days to come.
In the end, the Dow Jones Industrial Average lost 0.1%, the S&P 500 lost 0.1%, the Nasdaq Composite gave back 0.1% and the Russell 2000 ended the day 0.1% lower. Treasury bonds climbed higher, the dollar was broadly weaker, gold gained 0.8% and oil fell 2.7%.
Breadth was mixed to slightly negative, with 1.1 decliners to every advancer on the Nasdaq. NYSE volume was extremely heavy — suggestive of distribution, a negative sign — with 1,433 million shares traded representing 168% of the 30-day average in the most active day of trading since March 17.
Defensive utility stocks led the way with a 0.5% gain while financials and energy were the laggards, down 0.8% and 0.4%, respectively. JPMorgan Chase & Co. (NYSE:JPM) fell 2.1% after its CFO said second-quarter market revenue was down about 15% from last year. Bank of America Corp (NYSE:BAC) fell 1.9% after its CEO said Q2 trading revenue will be down on an annual basis.
BAC, as shown above, is now testing critical “neckline” support of a massive six-month head-and-shoulders reversal pattern. The pattern is about as perfect as you’ll find in the wild. And it traces a downside target of $18.50, which would take the stock below its 200-day moving average to return it to levels not seen since early November — nearly completely reversing the post-election rally. Edge Pro subscribers are enjoying a 121% gain in their June $23 BAC puts recommended earlier this week.
Aside from the warnings on trading revenue, the financial sector is at risk as Treasury bonds move higher (and thus, long-term yields move lower) as the post-election “Trump-flation” trade fades.
This amid the worst disappointment in the economic data relative to expectations since 2015, underwhelming inflation data, and a sense the healthcare reform, tax cuts, and infrastructure spending plans Wall Street had eagerly priced in following President Trump’s surprise victory are going to be long in coming.
As a result, the iShares 20+ Yr Treas.Bond (NYSEARCA:TLT) has pushed above its 200-day moving average for the first time since last October. That’s boosted the ProShares Ultra 20+Year Tsury ETF (NYSEARCA:UBT) recommended to Edge subscribers to a 4.5% gain.
The area of the market to watch right now is energy.
Oil is under fresh pressure with West Texas Intermediate testing below the $47-a-barrel level. JBC Energy reported falling OPEC production cap compliance (down to 92% from 96% in April) as it’s clear the oil sheiks — despite agreeing to a nine-month extension of their output freeze deal — are increasingly desperate as U.S. shale producers lower their cost structures and boost rig counts.
Commerzbank analyst Carsten Fritsch wrote in a note to clients that there “continues to be considerable skepticism about the effectiveness of the production cuts” amid an ongoing global oversupply situation and swollen inventories.
This is terrible news for energy stocks which have been in a persistent six-month downtrend. The Energy Select Sector SPDR (ETF) (NYSEARCA:XLE) is already down nearly 16% from its December high. Today’s losses push the sector down to levels not seen since last July. Shares of oil majors like Chevron Corporation (NYSE:CVX) look extremely vulnerable here, readying a break out of multi-month consolidation ranges.
Where this starts to matter to all investors is the bleed. Both bank and energy stocks are on the slide, and as a result, the broad market’s quiet strength – bolstered by overheated sentiment and parabolic rallies in big-tech stocks like Amazon.com, Inc. (NASDAQ:AMZN) — is unlikely to continue.
Especially as we enter what is seasonally the most difficult part of the year for the market.
“Sell in May” and all that.
Check out Serge Berger’s Trade of the Day for June 1, 2017.
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Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
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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.