The Dow dropped into negative territory for the year-to-date on Thursday, down more than 400 points from the high set on Monday. The index is back below its 200-day moving average, a key measure of technical strength.
With the euphoria over the Greek debt deal two weeks ago fully faded — replaced by a nervous acknowledgement a resolution for Athens hasn’t been achieved, just further delayed — investors have grown preoccupied with a steady flow of disappointing Q2 earnings results from some of the largest and best-known publicly traded companies.
Also weighing on sentiment has been the ongoing rout in industrial commodities and high-yield or “junk” bonds. The result has been a collapse in breadth as fewer and fewer stocks remain above their 50-day moving averages.
In the end, the Dow Jones Industrial Average lost 0.7%, the S&P 500 lost 0.6%, the Nasdaq Composite lost 0.5%, and the Russell 2000 lost 1.1%.
Crude oil lost another 0.9% today to close at $48.77 as the impact of growing inventories and the Iranian nuclear deal keep reverberating. That move lifted the ProShares UltraShort Crude Oil (SCO) by 2.2% to bring its month-to-date gain to nearly 46% for Edge subscribers.
Earnings disappointments included Caterpillar (CAT), which dropped 3.6% after lowering revenue guidance and reporting a sales backlog decline of 11% quarter-over-quarter. Dow Chemical (DOW) dropped 4.5% after reporting a 13.5% decline in sales to a weaker-than-expected $12.91 billion.
The pressure on industrial stocks weighed on General Electric (GE), which dropped 1.4%. That move lifted the GE August $27 puts recommended to my Edge Pro subscribers on Tuesday to a gain of nearly 114% with room for more.
There were a few positive spots as well, with SanDisk (SNDK) rising 17.6% following a big earnings-per-share beat on better margins. After the close, Amazon (AMZN) surged 18% on a big positive earnings surprise of 19 cents per share (vs. the 11 cent loss analysts were expecting) on a 20% jump in sales over last year. Starbucks (SBUX) also beat bottom-line expectations.
On the economic front, initial jobless claims fell to the lowest level since 1973 to 255,000, further supporting the idea of a rapidly tightening labor market.
But it’s the wipeout underway in junk bonds that I want to highlight today. I’ve already recently discussed the drop in commodities and the deterioration of market breadth measures — some of which are flashing warning signals not seen since just days before the bursting of the dot-com bubble.
The chart of the iShares High Yield Corporate Bond Fund (HYG) reveals the turmoil underway in the riskier parts of the fixed income market as the HYG drops to levels not seen since January. Stocks just can’t be bothered: The S&P 500 is less than 2% from its record high.
According to SentimenTrader, the only time over the last 30 years that stocks have shrugged off a selloff in high-yield bonds to this scale was in 1999-2000. Back then, the S&P 500 dropped 13% over the next several months, but the dot-com bubble didn’t actually end for another year.
This is just another sign that the market is looking toppy here.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.
