Tax Cut Concerns Weigh on the Dow Jones

U.S. equities were hit hard on Thursday, with the Dow Jones Industrial Average losing more than 200 points at the lows, in the worst bout of selling pressure in months.

The catalyst was the ongoing machinations of tax reform legislation, with the Senate GOP reportedly considering a phase-in of the 20% corporate tax rate, the elimination of the state and local tax exemption and other changes that the Street wasn’t so happy about.

Another catalyst was a surge of China inflation, which could push up inflation measures around the world via export prices. Remember: Inflation is the kryptonite of this central bank bubble. Once it’s unleashed, the façade will come crashing down.

In the end, the Dow Jones lost 0.4%, the S&P 500 gave back 0.4%, the Nasdaq lost 0.6% and the Russell 2000 finished lower by 0.5%. Treasury bonds were unchanged, the dollar was weaker, gold gained 0.3% and oil wafted up 0.8%.

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Breadth was negative, with 1.7 decliners for every advancing issue. NYSE volume was 108% of the 30-day average. Energy stocks led the way with a 0.3% gain while industrials were the laggards, down 1.3%.

Roku Inc (NASDAQ:ROKU) soared nearly 55% after reporting Q3 earnings and revenues ahead of consensus on improved user account metrics, streaming hours, and average revenue per user. Macy’s Corporation (NYSE:M) gained 11% on earnings and a smaller-than-expected comp-store sales decline, fueling hopes of a turnaround.

On the downside, Advanced Micro Devices, Inc. (NASDAQ:AMD) lost 5% on management share sales.

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After the close, Walt Disney Co (NYSE:DIS) was crushed 3.5% after reporting weaker-than-expected earnings and revenues, with media network sales down 3%. Edge Pro subscribers sold their November $100 DIS calls for a gain of more than 120% during the cash session, in anticipation of post-report volatility.

Nvidia Corporation (NASDAQ:NVDA) dropped 0.6% after hours despite reporting better-than-expected results and a higher dividend on a sell-the-news dynamic.

Today’s Trading Landscape

The big news remains the deepening selloff in the credit markets, with high-yield bonds falling back to levels not seen since August. The move has the potential to spill into equity markets as spreads widen and portfolio losses spread like a cancer.

Why are bond traders spooked? The threat of inflation and higher interest rates, combination with the “leverage” inherent to low yields (a concept known as duration), means the entire asset class is vulnerable to a re-rating. The Federal Reserve is quietly pulling back on its portfolio of bond holdings and is preparing another interest rate hike next month, which will amplify this dynamic.

All this, combined with very narrow equity market breadth, badly extended technical indicators and dimming tax reform hopes, is setting the stage for a bumpy period heading into the Thanksgiving break.

Check out Serge Berger’s Trade of the Day for Nov. 10.

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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