Stocks Pummeled: Dow Dives 300 Points, S&P Down 2.5%

29 Sep 2015 | Author: | No comments yet »

Biotech fund posts worst single-day drop in 4 years.

Wall Street’s consensus view remains that the market will close higher in 2015, expected to bounce after testing the year lows, but some strategists say the odds are growing that the market will end the year with losses.A Monday slide by biotech shares pushed the iShares Nasdaq Biotechnology exchange-traded fund IBB, -6.33% to its worst single-session performance in more than four years. On Monday, selling accelerated after Democratic lawmakers distributed a letter calling for a subpoena to force Valeant Pharmaceuticals (VRX) to fork over more documents related to price increases for two heart drugs. The S&P is taking aim at 1,867, the low set Aug. 24, and some strategists see it continuing to move lower in an environment of uncertainty about China, the global economy, rising interest rates and the commodities meltdown.

The downdraft in biotech stocks comes fresh on the heels of the sector’s worst weekly performance in seven years and places the biotech fund, which hit its peak in mid July, squarely in bear-market territory, which is a decline of at least 20% from a recent peak. Add to that the steep decline in market leader biotech, which took another hit Monday after congressional Democrats pushed for a hearing on Valeant’s pricing practices. Biotechnology shares tumbled on Friday, offsetting gains fueled by Fed Chair Janet Yellen’s reassurances that turbulence in emerging markets won’t harm U.S. growth. Valeant lost 16 percent and the IBB iShares Nasdaq Biotech ETF fell 6.3 percent Monday, giving it a 14 percent decline in the past week. “If we break that August low, what I think you do is everybody brings down their (S&P 500) targets, and that will bring capitulation,” said James Paulsen, chief investment strategist at Wells Capital Management. “And that kind of thing will bring a bottom.

Last week the biotech sector’s IBB suffered a more than 13% drop as presidential hopeful Hillary Clinton criticized drug prices and laid out a plan to curb costs. Dudley said Monday the central bank will “probably” raise interest rates later this year despite uncertainties over global growth. “I think that the economy is doing pretty well,” Dudley said at an event in New York.

The biotech industry has been one of the highest-flying sectors during the stock market’s bull run, and as a result has been the target of bubble calls by industry watchers and analysts. A report Monday showed household spending climbed more than forecast in August and incomes also rose as the biggest part of the U.S. economy continued to power past a global slowdown. The S&P 500 was down 8.6 percent year to date as of Monday’s close. “October is the favorite month for corrections and bear markets to end,” said Stovall. One trader said that the selling “feels heavily index driven,” meaning that investors are bailing on index-tracking exchange-traded funds — and fast. Since World War II, the fourth quarter has averaged a gain of 3.8 percent as stocks benefit from seasonal gains. “We’re going to need a very strong recovery to even get anywhere close to the surface, to peek our heads above water,” he said.

Andrew Burkly, head of institutional portfolio strategy at Oppenheimer, said he does expect the market to be more similar to its performance in 2011, with the market bouncing after it finds a new floor, but ending the year slightly higher instead of flat. We’re losing what little leadership we had left.” The Nasdaq Biotech Index slid into a bear market on Friday amid its worst weekly decline in four years.

August 24 was climactic and the bounce into old resistance really didn’t last,” said Burkly. “The idea is we don’t want it to be as climactic as it was in August. That would be a better sign.” FundStrat Global Advisors founder Thomas Lee said he’s been speaking with active fundamental managers, and they are very wary of the market. “I don’t think anybody is really doing anything in the markets right now. Stocks fell after the Fed’s decision to hold off raising rates on Sept. 17 raised questions about the impact of a global growth slowdown on the U.S. I think the list of worries is so great that people decided instead of having a belief of how it resolves, they’d rather wait for it to resolve before they decide what to do,” he said. “Everybody is letting everybody else give them conviction about what to do. In a world where the stock market is at the intersection of reality and expectations, it’s good to know expectations are very low right now,” he said.

Ablin said the market volatility could be greater ahead of the end of the quarter. “The sell in May go away doesn’t go away until Nov. 1,” he said, referring to the old market adage that the summer is the worst time for stocks and the best is November through April. Paulsen said he sees the market continuing to seek a floor. “My feeling has been that we’re probably going to break those lows and break 18,800 and find a bottom there somewhere. I don’t know if that’s now or later,” he said. “To me, this is more about the market finding a better valuation and sentiment being checked and people getting over the initial shock of rates going up.” For Tuesday, traders will continue to watch the biotechs, which have been a point of pain for some investors. He said there could be some negative credit events in the industry that would mark a capitulation though he was not specifically commenting on Glencore.

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