Large-cap U.S. stocks finished with marginal losses on Wednesday on light volume, as the rally out of the October 15 low paused for a breather. Amid low volume and narrow breadth, the bulls weren’t about to post another late session rise — which we’ve seen in the last 14 sessions heading into today.
Headlines were light, with reports of Russian armor moving back into Ukraine largely ignored in favor of the ESA comet landing and President Obama’s net neutrality comments. News of another market rigging settlement with the big banks, this time surrounding foreign exchange trading, was also largely brushed off as par for the course these days (following similar settlements for bad behavior in mortgage securities, interest rates, and precious metals).
In the end, the Dow Jones Industrial Average lost a fraction, the S&P 500 lost 0.1%, the Nasdaq gained 0.3%, and the Russell 2000 gained 0.5%.
Oil Under Pressure, Traders Ready for Pullback
Crude oil was under pressure again as Brent crude dropped below $80 a barrel for the first time since four years while West Texas Intermediate lost 1% to close at $77.18 a barrel — its weakest finish since October 2011. The slide came despite comments from Saudi Arabia’s oil minister downplaying speculation of a price war to crush U.S. shale oil producers.
In corporate news, retailers American Eagle (AEO) and Macy’s (M) rose 10% and 5%, respectively, on better earnings and forward guidance.
For the first time since late October, stocks lost altitude in the final 30 minutes of trading. There was no apparent reason for this. It’s just something’s that’s been happening and, as it became more consistent, because a self-fulfilling dynamic on Wall Street.
Under the surface, insiders seem to be preparing for a possible pullback here as the market gets very overbought on a short-term basis. The S&P 500 hasn’t closed below its five-day moving average since October 15, an 18-day run. That’s extremely rare: Coming off of a six-month low, this has only happened five other times since 1928 according to SentimenTrader, with mixed results going forward. In 1948 and 1977, the short-term gains gave way to fresh lows in the months that followed.
As a result, it’s not surprising to see some hedging activity in the futures market with the CBOE Volatility Index (VIX) rising over the last two days. This is a sign traders are bidding up put option protection against lower prices.
In response, I’ve recommended my Edge subscribers get in on the action with a position in the VelocityShares 2x VIX (TVIX), which gained more than 2.9% today. Back in October, subscribers traded the TVIX for a gain of more than 45% between October 7 and October 17.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.
