The Markets Are Keeping Pullbacks to a Minimum

U.S. equities held near the unchanged line on Wednesday as both the bears and the bulls seemed uninterested in engaging. The bulls are likely winded after an impressively powerful rally out of the mid-August lows. The bears, if there are any left, are probably shell-shocked.

In the end, the Dow Jones Industrial Average gained 0.1%, the S&P 500 gained 0.1%, the Nasdaq Composite gained a fraction and the Russell 2000 lost 0.3%. Treasury bonds were unchanged, the dollar ended lower, gold gained 0.2% and crude oil fell 0.9% to close below the $50-a-barrel level for the first time in more than two weeks.

News flow was relatively light. The cost of President Trump’s tax reform plan continued to dominate the political sphere, along with possible gun control action in the wake of the mass shooting in Las Vegas. On the economic front, the ISM services report hit its highest level since August 2005; following on the heels of a very strong ISM manufacturing report on Monday. And the ADP employment report came in just below expectations, whetting the appetite for Friday’s non-farm payrolls report.

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Breadth was mixed and volume light, at 85.7% of the NYSE’s 30-day average. Mylan (NASDAQ:MYL) gained 16.2% on FDA approval of a generic equivalent of the Copaxone treatment made by Teva Pharmaceutical (NYSE:TEVA). Netflix (NASDAQ:NFLX) gained 2.9% after UBS increased their target to $225 from $190 citing tracking data evidence of strong growth momentum.

On the downside, Office Depot (NASDAQ:ODP) fell 17.7% after issuing worse-than-expected downside comp-store sales guidance. Shopify (NYSE:SHOP) fell 11.6% after Citron Research, an activist research outfit that originally attracted attention to Herbalife (NYSE:HLF), called the company “a business dirtier than HLF” and questioned the company’s merchants.


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This pretty much sums it all up: The Russell 2000’s 0.3% decline was the worst one-day pullback in more than a month. At a time when SentimenTrader’s fear and greed measure has risen to tie 1998 as the second-highest level on record.

And it’s not just stocks that are looking extended here: Bond credit spreads have collapsed back to post-recession lows at a time when corporate leverage has never been higher, as measured by debt vs. assets according to Credit Suisse. What could possibly go wrong?

Bank of America Merrill Lynch notes that the maximum sustained sell-off for the S&P 500 has been less than 2% so far this year. If it holds into 2018, that would represent the weakest experienced pullback sine the data started in 1928.

Check out Serge Berger’s Trade of the Day for Oct. 5.

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.

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Anthony Mirhaydari is the founder of the Edge (ETFs) and Edge Pro (Options) investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.

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