One day after failing to close in positive territory for 21 consecutive Tuesdays, the Dow Jones Industrial Average took a 216-point nosedive.
Wednesday’s 1.43-percent swoon by the Dow Jones Industrial Average (NYSEARCA:DIA) was the most significant drop among the major American stock indices. The Russell 2000 (NYSEARCA:IWM) was a close second with a 1.41-percent fall. The dismal May ADP National Employment Report scared investors into having nightmares about what could happen to stocks on Friday if the May non-farm payrolls report from the Bureau of Labor Statistics should turn out to be equally bleak. The ADP report indicated that only 135,000 private payroll jobs were added in May, falling 21 percent short of the 171,000 new jobs expected by economists.
The Dow took a 216-point nosedive to finish Wednesday’s trading session at 14,960 for a 1.43 percent decline. The S&P 500 (NYSEARCA:SPY) finished Wednesday’s session with 1.38 percent drop to close at 1,608. The Nasdaq 100 (NASDAQ:QQQ) fell 1.23 percent to close at 2,937. The Russell 2000 sank 1.41 percent to 968.
In other major markets, oil (NYSEARCA:USO) advanced 0.24 percent to close at $33.28. On London’s ICE Futures Europe Exchange, July futures for Brent crude oil declined by 35 cents (0.34 percent) to $102.54/bbl. (NYSEARCA:BNO). June gold futures advanced by $4.90 (0.35 percent) to $1,402.00 per ounce (NYSEARCA:GLD). Transports drove into a sinkhole on Wednesday, with the Dow Jones Transportation Index (NYSEARCA:IYT) declining by 1.83 percent.
The major European stock indices finished Wednesday’s session in the red after downbeat economic reports from Eurostat. News that euro zone GDP declined by 0.2 percent during the first quarter came as no surprise. The report from Eurostat indicated that for the greater, 27-nation European Union, first quarter GDP contracted by 0.1 percent. Eurostat also reported that retail sales declined by 0.5 percent in the Eurozone during April. For the greater, 27-nation European Union, April retail sales fell by 0.7 percent. On a year-over-year basis retail sales fell 1.1 percent in the Eurozone and 0.6 percent in the EU27.
The Euro STOXX 50 Index finished Wednesday’s session with a 1.68 percent swoon to 2,709 – finally falling below its 50-day moving average of 2,710. Its Relative Strength Index is 41.48 (NYSEARCA:FEZ).
The Japanese stock market sank after Prime Minister Shinzo Abe discussed the long-awaited specifics of his “third arrow of Abenomics” on Wednesday. The effort to achieve 2 percent economic growth per year over the next decade includes restarting nuclear power plants and cutting corporate taxes for research and development. Just before the close of the Japanese stock market, the yen strengthened to less than 99.5 per dollar. A stronger yen causes Japanese exports to be less competitively priced in foreign markets (NYSEARCA:FXY). The Nikkei 225 Stock Average took a 3.83 percent nosedive to 13,014 (NYSEARCA:EWJ).
In China, stocks struggled despite an advance by the nation’s wine companies (Chinese wine?) as the government retaliated against European measures taken to prevent “dumping” of cheap, Chinese solar panels onto European markets. The Chinese government countered with its own “anti-dumping” investigation into European wine imports. The Shanghai Composite Index dipped 0.03 percent to 2,270 (NYSEARCA:FXI). Hong Kong’s Hang Seng Index sank 0.99 percent to 22,069 (NYSEARCA:EWH).
Technical indicators reveal that the S&P 500 remains barely above its 50-day moving average of 1,604 after closing at 1,608. The formation of a head-and-shoulders pattern on the S&P chart is now complete, which would signal a further decline. This pattern often becomes a “self-fulfilling prophecy” – investors spot it and head for the exits. Its Relative Strength Index dropped from 50.02 to 42.32. The MACD crossed below the signal line and both are on downward trajectories, providing more support for the likelihood of a continued decline.
For the day, all sectors were solidly negative, with the utilities sector suffering the least damage and the materials sector taking the hardest hit, sinking 2.22 percent.
Consumer Discretionary (NYSEARCA:XLY): -1.66 percent
Technology (NYSEARCA:XLK): -0.98 percent
Industrials (NYSEARCA:XLI): -1.82 percent
Materials (NYSEARCA:XLB): -2.22 percent
Energy (NYSEARCA:XLE): -1.17 percent
Financials (NYSEARCA:XLF): -1.63 percent
Utilities (NYSEARCA:XLU): -0.88 percent
Health Care (NYSEARCA:XLV): -1.46 percent
Consumer Staples (NYSEARCA:XLP): -1.21 percent
Bottom line: The importance of ongoing job creation to stock prices was obvious on Wednesday after the May ADP National Employment Report revealed that the number of private payroll jobs added in May fell 21 percent short of economists’ expectations. As a result, the S&P 500 sank far enough to close just a whisker above its 50-day moving average.
John Nyaradi is the author of The ETF Investing Premium Newsletter.
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