Here’s Why Market Bearishness Is Growing

Stocks slid further on Wednesday as the budget deadline approached, with no light at the end of the tunnel.

Stocks extended their losing streak to a fifth day as the budget battle on Capitol Hill continued. Beyond that, Treasury Secretary Jacob Lew reminded Congress that we will hit the debt ceiling on October 17. The bearishness inspired by the dysfunction in Washington combined with bad news from Wal-Mart (NYSE:WMT) to put investors in a risk-averse mood, sending stock prices lower. After Wal-Mart notified its suppliers that an ever-increasing pile of inventory was exceeding its warehouse capacity, the company’s stock price sank 1.45 percent. The news raised concerns among investors about the outlook for consumer spending as well as the upcoming Christmas shopping season.

The report on New Home Sales during August from the Commerce Department’s Census Bureau turned out to be another disappointment. Although the report indicated that the sale of new homes increased to a seasonally-adjusted annual rate of 421,000 from July’s SAAR of 390,000 the result fell short of economists’ expectations for a SAAR of 425,000.

Despite the disappointment, the SPDR S&P Homebuilders ETF (NYSEARCA:XHB) finished the day with a 0.13 percent advance. The Dow Jones Industrial Average (NYSEARCA:DIA) lost 61 points to finish Wednesday’s trading session at 15,273 for a 0.40 percent decline. The S&P 500 (NYSEARCA:SPY) fell 0.27 percent to close at 1,692. The Nasdaq 100 (NASDAQ:QQQ) declined 0.31 percent to finish at 3,208. The Russell 2000 (NYSEARCA:IWM) dipped 0.11 percent to end the day at 1,073 despite reaching a new, record intraday high of 1,082.00.

In other major markets, oil (NYSEARCA:USO) sank 0.91 percent to close at $36.88. On London’s ICE Futures Europe Exchange, November futures for Brent crude oil declined 77 cents (0.71 percent) to $107.00/bbl. (NYSEARCA:BNO). December gold futures rose $17.10 (1.30 percent) to $1,333.40 per ounce (NYSEARCA:GLD). Transports got stuck in traffic again on Wednesday, with the Dow Jones Transportation Average (NYSEARCA:IYT) declining 0.61 percent.

 

Nevertheless, the maritime subsector is doing extraordinarily well. Some of the stocks which we mentioned yesterday had another great session on Wednesday: DryShips (NASDAQ:DRYS) up 9.17 percent; Eagle Bulk Shipping (NASDAQ:EGLE) up 6.79 percent, and Baltic Trading (NASDAQ:BALT) up 5.58 percent.

In Japan, stocks sank during the final minutes of trading when the exchange rate for the yen increased as the dollar weakened on fears of a government shutdown. The yen strengthened to 98.60 per dollar before the closing bell in Tokyo. A stronger yen causes Japanese exports to be less competitively priced in foreign markets (NYSEARCA:FXY). The Nikkei 225 Stock Average dropped 0.76 percent to 14,620 (NYSEARCA:EWJ).

Stocks retreated in mainland China after China Beige Book International joined ranks with Namura Holdings and Jim Chanos to raise doubts about the strength of the nation’s economic recovery. The Shanghai Composite Index declined 0.41 percent to 2,198 (NYSEARCA:FXI). Hong Kong’s Hang Seng Index advanced 0.13 percent to end the session at 23,209 (NYSEARCA:EWH).

European stocks made a modest advance on Wednesday, after the National Institute of Statistics and Economic Studies (INSEE) reported that its French Business Climate Index rose 3 points to 94 in September (NYSEARCA:EWQ). The index remains slightly below its long-term average of 100. Airbus had a big day after three Chinese airlines ordered a total of 68 A320 planes. In Germany, GfK reported that while its Consumer Climate Indicator for September remained unchanged at 7.0, its Economic Expectations Indicator jumped to 10.7 from August’s 1.8 (NYSEARCA:EWG).

The Euro STOXX 50 Index finished Wednesday’s session with a 0.15 percent advance to 2,927 – climbing further above its 50-day moving average of 2,809. Its Relative Strength Index is 66.49 (NYSEARCA:FEZ).

Technical indicators revealed that the S&P 500 remained above its 50-day moving average of 1,679 despite finishing Wednesday’s session with a 0.27 percent decline to 1,692. Its Relative Strength Index dropped from 56.60 to 54.28. Although the MACD remains above the zero line, it has assumed a declining trajectory, suggesting the likelihood of a further retreat.

For Wednesday, only two sectors managed to finish in positive territory and seven sectors finished in the red. The two sectors which managed to avoid falling were the materials sector and the financial sector.

Consumer Discretionary (NYSEARCA:XLY): -0.61 percent
Technology: (NYSEARCA:XLK): -0.15 percent
Industrials (NYSEARCA:XLI): -0.45 percent
Materials: (NYSEARCA:XLB): +0.26 percent
Energy (NYSEARCA:XLE): -0.02 percent
Financials: (NYSEARCA:XLF): +0.55 percent
Utilities (NYSEARCA:XLU): -0.68 percent
Health Care: (NYSEARCA:XLV): -0.78 percent
Consumer Staples (NYSEARCA:XLP): -0.84 percent

Bottom line: The stock market extended its losing streak to a fifth day as bad news from Wal-Mart combined with the ongoing frustration over Washington’s fiscal policy to discourage investors. While many analysts, maybe most, think a government shutdown is unlikely, I think it’s a growing possibility since the deadline is Monday, nothing is really happening and the downside isn’t huge as estimated impact of a two-week shutdown is a 0.3 percent decline in GDP.

Of course, this isn’t about funding the government as much as it is about ideology and each side wanting to tie its agenda to the funding bill. The more serious debate with much more serious ramifications is yet to follow with the government default now forecast for mid-October. Unlike the shutdown, a default would have real and serious outcomes for the global economy and financial markets. A default is highly unlikely, but what we can expect is a white knuckle trip to the brink of disaster and intense volatility in U.S. financial markets over the next three weeks.

John Nyaradi is the author of The ETF Investing Premium Newsletter.

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