U.S. stocks suffered their worst one-day decline on Thursday since the panic of Feb. 8. The Dow Jones Industrial Average dropping 724 points or 2.9% and the Nasdaq Composite fell 2.4%.
Because of the decline, the Dow Jones has returned to its early February lows, violating the psychologically critical 24,000 level for the second time since first crossing this level back in November. Further weakness from here will set up a test of the intra-day low of 23,360 set on Feb. 9. If this doesn’t hold, we’re looking at a move back to levels not seen since October.
What’s driving the sudden reappearance of fear?
The morning started rough with reports that John Dowd, President Trump’s lead attorney in the Mueller probe, had resigned. This was interpreted as a sign that Trump was looking to get more aggressive with Robert Mueller’s investigation into Russia’s election interference and possible ties to Trump associates and whether Trump himself has obstructed justice.
After announcing prior trade action against solar panels and washing machines as well as steel and aluminum imports, Trump unveiled plans to put a 25% tariff on $60 billion worth of Chinese goods in response to allegations of intellectual property thefts and a deepening trade deficit.
The selloff comes a day after the Federal Reserve, under new chairman Jerome Powell, raised interest rates by another 0.25%. While the move was expected, Fed officials also increased their interest rate projections for 2019 and beyond.
Finally, pressure from all these catalysts is manifesting as weakness in the corporate bond market, which is an important source of buying demand for stocks because of the popularity of debt-funded corporate share buybacks. Measures of investment-grade credit risk (that is, the risk of default or bankruptcy) have increased to six-month highs.
So, further weakness is likely.
Three Stocks to Watch
iPath S&P 500 VVIX Short-Term ETN (VXX)
The surge in market volatility marks reversal of the stabilization the bulls attempted since the early February panic. The iPath S&P 500 VVIX Short-Term ETN (NYSEARCA:VXX) gained more than 13% as a result, benefiting Edge subscribers who initiated a in late February.
I expect a deepening of the losses to push the VXX above its highs from last month as crowded big-cap tech trades, an environment of complacency and extended equity valuations force a reevaluation by traders.
American Express (AXP)
American Express Company (NYSE:AXP) has fallen back to its 200-day moving average, a level of support that held the stock back in February. That’s a decline of some 10% from its high last month and it marks a breakdown from a double-top resistance pattern. The drop resulted in a 105% gain in the April 20 $95 AXP puts recommended to Edge Pro subscribers on March 16.
The company will next report results on April 18. Analysts are looking for earnings of $1.70-per-share on revenues of $8.7 billion. When it last reported on Jan. 18 earnings of $1.58 beat estimates by 4 cents on a 10.2% rise in revenues.
Walt Disney Co (NYSE:DIS) shares have broken below support going back to November and they have fallen below its February/March lows, setting up a decline all the way back to its September-November range. That’s great news for Edge Pro subscribers, who have earned an 8% gain in their April 20 $101 DIS puts with more to come.
The company will next report results on May 8, after the close. Analysts are looking for earnings of $1.69-per-share on revenues of $14 billion. When the company last reported on Feb. 6, earnings of $1.89 beat estimates by 28 cents on a 3.8% rise in revenues.
Check out Serge Berger’s Trade of the Day for March 23.
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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