With stocks at support, hopes were high heading into Wednesday’s session that a bounce was in order.
Apple (NASDAQ:AAPL) reported better-than-expected results, including the largest quarterly profit in history. Crude oil posted a modest gain on Tuesday. And the Federal Reserve’s latest policy announcement was on deck, which was sure to reassure investors worried about the situation in Europe, a recent drop in U.S. economic data, the collapse of crude oil, weak overall earnings, and a litany of other problems.
But it all came undone as the Federal Reserve stuck to its hawkish stance — and the mid-2015 timing of its first rate hike since 2006 — and a big rise in crude inventories sent oil prices sliding to fresh lows.
In the end, the Dow Jones Industrial Average lost 1.1%, the S&P 500 lost 1.4%, the Nasdaq Composite lost 0.9%, and the Russell 2000 lost 1.6%. The 100-day moving average on the Dow, which supported the index all month, was lost as shown above.
Treasury bonds pushed higher as the 10-year yield fell to 1.7% while the 30-year yield hit a new record low of 2.3%. The dollar strengthened but not enough to save the yen carry trade, which looks ready for a waterfall collapse.
And crude oil dropped 2.9% to close at $ 44.35 a barrel is it moved below month-long support after the government reported that inventories had risen to the highest levels since tracking started in 1982.
Energy stocks, which had recently separated from crude oil to rally to the upside, fell back to earth with a 3.9% decline. Among the victims were Hess Corp. (NYSE:HES), down 7.8%, and Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR), down 12%.
Despite the 5.7% gain for Apple, tech stocks were caught in the whirlwind as well, falling into the red by the closing bell as Yahoo (NASDAQ:YHOO) dropped 3.2% to erase an after-hours surge related to news it would form a tax-free spinoff for its 15% stake in Alibaba Group Holding Ltd (NYSE:BABA). Microsoft (NASDAQ:MSFT) lost another 3.5%.
The initial reaction to the Fed statement was positive, with stocks pushing higher as policymakers noted that international developments would be a factor in their decisions going forward (a tip of the hat to issues in Europe and Asia).
But the overall impression was that the Fed sees plenty of signs of strength in the U.S. economy in what was the shortest policy announcement, in terms of word count, since 2012.
It noted that job gains were “strong” instead of “solid” in its last announcement and that the economy was proceeding at a “solid pace” versus “moderate pace” previously. This, along with the disappearance of the “considerable time” language spooked investors that rate hikes are indeed just a few months away and brought out the sellers.
Also weighing on sentiment has been the ongoing disappointment with the fourth-quarter earnings season. Drags include the impact of the stronger dollar on foreign profits, overseas weakness and the drop in energy prices.
Although these factors were known heading into the reporting season, the actual impact on results has been more severe than expected — shattering expectation formed by years of seemingly unstoppable corporate profitability that results would always and forever surprise to the upside.
According to FactSet, S&P 500 earnings per share growth expectations for 2015 stand at 4.9%, down from 8.6% earlier this month. Moreover, expected revenue growth has been cut in half to 1.5%.
In response, I continue to recommend clients maintain a defensive positioning focusing on precious metals and volatility as a retest of the Dow’s October lows looks likely.
The VelocityShares 2x VIX (NASDAQ:TVIX) recommended to Edge subscribers on Monday is up nearly 24% as the multi-week quiet Wall Street enjoyed comes to a violent end.
For the more aggressive, the comedown in sentiment is creating a multitude of put option opportunities. This includes the drop underway in the seemingly unstoppable Walt Disney Co (NYSE:DIS), which pushed up the Feb $ 94 puts I recommended to Edge Pro subscribers on Tuesday — and covered in a gallery of picks here — to an overnight gain of nearly 70%.
Separately, the Feb $ 37 puts against Intel Corporation (NASDAQ:INTC) recommended on Jan. 14 are carrying a gain of nearly 85%.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.
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