Tuesday stocks turn tail and run. Higher U.S. interest rates loom

Tuesday morning’s stock market rally turns into a rout by mid-afternoon as retail and consumer staples stocks tank. Apple takes a hit as well.

This illustration, taken from an 1843 edition of Dickens' "Christmas Carol" is out of season today. But we do wish that Marley's ghost would visit a few more Wall Street and DC Scrooges on awful market days like this one. (Image now in the public domain)

WASHINGTON, May 31, 2016 – The merry, merry month of May is limping to a month-end close in Tuesday Wall Street trading action. As of 2:30 p.m. EDT, all three widely followed stock averages—the Dow Jones Industrials, the S&P 500 and the NASDAQ—are off sharply, with the Dow taking the worst hit, currently sitting at 17,745.87, off 121.05 points (0.68 percent).

Traders are back to smacking Apple (symbol: AAPL) around again after last week’s impressive run. But consumer discretionary and consumer staples stocks are also getting a beating, which doesn’t help any of the averages very much either.

Reasons given for today’s sharp drop from last week’s optimistic trading are word that various Fed officials are once again cheerleading for an interest rate increase and that those consumer stocks are lending a pall to the entire market.

That’s all poppycock, however, at least in the Maven’s opinion. Stocks are off today probably because they should be. Last week’s impressive but fundamentally weak rally was likely a mirage, even though we traded it a bit. The reason was the extraordinarily weak trading volume late last week, clearly due to the entire east coast taking off for the beaches en masse to celebrate Memorial Day and the unofficial start of summer vacation season.

Trading last week was so light it seemed as if even the HFTs and their supercomputers were taking a maintenance break. If so, however, they’re back with a vengeance this morning, probably shorting the dickens out of Tuesday morning’s brief lift in prices. Volume is heavy today, as it often seems to be these days when it’s time to sell.

We entered what may have been ill-advised (but small) positions in ETFs that made sense, at least according to the charts. But last week’s optimistic closing numbers may have driven both the Maven and the averages to draw an offsides penalty. Those usually reliable charts have been getting less and less reliable lately, leading to miscalculations like these.

The Bad News Bears seem to be back in action on Apple once again, perhaps attempting to beat it back down to previous lows. Given the stock’s history, we think longer term holders will be okay by this fall. But right now, prior to the expected iPhone 7 release, it’s all gloom and doom in the otherwise magical land of Apple products. Things will change.

For its part, oil is at least holding steady today, and small caps may be at the beginning of at least a minor comeback. Meanwhile, though, we’re watching our stops and may end up bailing on those ETFs we entered so optimistically this morning.

Trading diary

Not much to say here. Expecting to see averages follow through this morning from Friday’s optimistic close, we seemed quite correct when we picked up several ETFs not long after the opening bell, as each of those purchases continued to go up. Until they didn’t. They’re mostly off right now, although tomorrow is another day.

We entered this morning small positions in EPI (the India ETF), FAS (Direxion’s double-bullish ETF for the financials), RSP (Guggenheim’s equal weight S&P 500 ETF), and a pair of (for us) commission-free Schwab ETFs, FNDA (Schwab’s “fundamental” small cap ETF), and SCHV (Schwab’s value-priced stock ETF which generally has a heavy weighting in financials.) All are slightly down from where we bought them.

When the market took off decisively this morning, we also pared back our position in the double-short S&P 500 ETF, SDS, which we had been holding for quite some time as a hedge. Wrong answer! We should have held on to them, even though the position was down. We still have a small position here and will hang onto it for now as a continuing hedge, although it’s not very effective at the moment.

Pretty much everything else we hold is getting hit this morning as well, indicating that last week’s apparently nonchalant response to Fed interest rate threats was a false positive, and was simply due to the bulk of traders taking time off in the Hamptons or on Maryland’s Eastern shore. Like the “TV people” in the original “Poltergeist” film, “They’re ba-a-a-ack!” And our minor overindulgence in optimism looks to have been misplaced.

However, the way things are going these days, Wednesday trading may reverse today’s mess once again, meaning that fast trades may still not be for us little guys. We simply can’t out-race those damned machines. It all makes you want to say, “There oughta be a law.” Problem is, there is a law. But rich guys, hedge funds, HFTs, algos, and, above all, federal regulators who are supposed to protect us couldn’t be bothered to enforce the law.

That leaves small investors continually smarting, as they will never be part of the exclusive club.

We’ll keep you posted, but we’re likely done for today, having already nicked our portfolios around the edges. But we’ll be back tomorrow.

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