US STOCKS-Energy and materials drag Wall St lower after a 3-day rally

23 Dec 2015 | Author: | No comments yet »

A Stock Market Breather Before A Big-Time Bullish Breakout? Not Bloody Likely.

U.S. stocks dropped Thursday on persistent concern over faltering global economic growth, led by declines in energy and materials shares, a day after shares had rallied on the Federal Reserve’s decision to raise interest rates. “I think what we’re going to see through the end of the year is a refocus on oil and commodities,” said Karen Hiatt, senior portfolio manager at Allianz Global Investors in San Francisco. “The market is still continuing to want to migrate towards more defensive, more visible earnings-type companies or sectors.” At 2:58 p.m. the Dow Jones industrial average .DJI fell 171.54 points, or 0.97 percent, to 17,577.55, the S&P 500 .SPX lost 20.58 points, or 0.99 percent, to 2,052.49, and the Nasdaq Composite .IXIC dropped 41.60 points, or 0.82 percent, to 5,029.53.

Oil prices LCOc1 CLc1 extended recent declines on persistent oversupply worries and as the dollar .DXY hit a two-week high. [O/R] [FRX/] Dow components Exxon (XOM.N) and Chevron (CVX.N) were down, by 1.5 and 3.1 percent, respectively. The previous three days of gains included Wednesday’s rally after the Federal Reserve raised its benchmark rate by 25 basis points to between 0.25 percent and 0.50 percent, signalling confidence in the strength of the world’s largest economy. After a more than 1% post Fed rate-hike rally on Wednesday, Wall Street gave back gains on Thursday as renewed pressure from the energy sector forced U.S. equity markets substantially lower. “With the U.S. dollar strengthening, the subsequent sell off in commodities was inevitable as further pressure has been brought to bear on energy prices along with both base and precious metals,” Alastair McCaig, IG market analyst wrote in note. However, investors remain concerned about weak global economic conditions as the slide in commodity markets continues unabated and demand slows. “Investors continue to struggle with the notion of the strength in the U.S. economy, in the context of this performance within global conditions that are mixed at best,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia.

For example, in spite of the exceptionally poor rap that trend-following techniques receive from the mainstream financial media, a decision to “stand down” when the 50-day crossed below the 200-day in the previous stock bear provided a remarkably desirable return OF capital. Declining issues outnumbered advancing ones on the NYSE by 1,849 to 1,200, for a 1.54-to-1 ratio on the downside; on the Nasdaq, 1,706 issues fell and 1,100 advanced for a 1.55-to-1 ratio favouring decliners. Economists at Goldman Sachs, in a note, said the Fed’s policy changes held very few surprises for Wall Street, and that’s partially why a blockbuster rally is unexpected in the days following the announcement. “The market reaction was limited, suggesting the policy and statement together were reasonably close to investor expectations.

For instance, popular shows regularly trot out analysts who insist that that market is “grinding higher.” First of all, which market is grinding higher? Post-meeting rates in the overnight indexed swap market suggest investors expect the effective funds rate to settle at around 0.34% after liftoff, up from 0.15% in recent days,” the note said.

Friday’s “quadruple-witching,” when options on stocks and indexes and futures on indexes and single stocks all expire on the same day, could exacerbate volatility. Even there, progress is less impressive when one weights the components of the NASDAQ equally, rather than rely on the super-sized weightings of Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Alphabet (NASDAQ:GOOG). This is evident in the deterioration of the First Trust NASDAQ-100 Equal Weight Index ETF (NASDAQ:QQEW):the PowerShares QQQ Trust ETF (NASDAQ:QQQ) price ratio. About 8.0 billion shares changed hands on U.S. exchanges, compared with the 7.2 billion daily average for the past 20 trading days, according to Thomson Reuters data. Why is the lack of meaningful progress in so many U.S. stock barometers – the Dow Industrials, Dow Transports, S&P 500, S&P 400, Russell 2000, NYSE Composite – being overlooked?

On Thursday, the Philadelphia Federal Reserve’s gauge of manufacturing activity for the mid-Atlantic region dropped solidly back into contraction territory as it tumbled to -5.9 from 1.9 the month prior. For one thing, where consolidation has occurred during previous “pauses,” the number of advancing stocks on the exchanges relative to the the number of declining issues usually move higher. Expectations were for 275,000. “In light of the firming of job growth since the October meeting, the [policy] statement significantly upgraded its assessment of labor market developments.

It now notes ‘ongoing job gains’ and ‘declining unemployment,’ and says that underutilization of labor resources has diminished ‘appreciably,’” Goldman’s note continued. If one is inclined to believe that the current stock bull is merely catching its breath for a second wind, shouldn’t we see the same kind of improving breadth here in 2015? The statement, however, struck a different tone when it came to inflation pressures as measures closely monitored by the central bank have yet to reach the set 2% target, and that the committee “continues to monitor inflation developments closely.” Goldman’s economists said that’s a clear signal central bankers need to see more inflation in order to continue on the path to lifting rates in 2016 and beyond. Combine the strong dollar, low commodity prices, higher borrowing costs, and we’re about to see our third consecutive quarterly decline in S&P 500 earnings.

What’s more, the profitability concerns are wreaking havoc on traditional valuations; that is, you cannot see a 14% decline in year-over-year earnings, as well as a third consecutive quarter of earnings deterioration, and anticipate anything other than expensive stocks becoming even pricier. The iShares MSCI United Kingdom ETF (NYSEARCA:EWU) is far beneath its 200-day moving average and hardly shows any indication that it is ready to rally back to new 52-week highs. Yet history and probability do not favor the idea that stock markets will magically grind higher. (They haven’t for the last year.) History and probability do not favor a bullish breakout to new records when manufacturing is contracting, earnings and sales are declining, and global economic hardships are increasing. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above.

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