#1 DJIA drops as fear factors set in
Sometimes, investors just get punched in the mouth. Blame rising interest rates, climbing crude prices, tariff tremors, high anxiety over valuations… or just more sellers than buyers. It's a market, after all, and these things happen.
Why it Matters: We can come up with many more reasons for today's selloff, but we think it more useful to look at a few underlying trends that get our attention when things like this happen.
We are big fans of @sentimenttrader, run by Sundial Capital Research. They point to a dramatic rise in the amount of short positions held by traders against the major US index futures like the S&P 500 and the DJIA. $65 billion worth of short positions, to be exact, which is tied for the largest dollar amount in history. Simply put, there is a historic amount of money betting that US markets will decline in the near term. This is happening as the DJIA is dancing around record highs, earnings growth is robust and the economy is strong. Perhaps it can be explained by the fact that because we are near record highs, some investors want to hedge against a massive sell-off or correction, which many people are predicting. As Warren Buffett likes to say, "Be greedy when others are fearful, and be fearful when others are greedy." It's good advice at all times, but hyper-topical right now.
What's Next: Earnings season is about to start for US listed companies, which should give us a good overall picture of how companies are feeling about their prospects and what they are hearing from their customers and suppliers. We've already heard more than a few companies urging caution - especially those that may be exposed or endangered by a tariff war. If that drumbeat gets louder, expect the Bears to start growling louder, more short bets against the major indexes and their constituents, and more days like this. Plan accordingly!
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What causes a bond's price to rise? #2 JPMorgan downgrades China
Speaking of tariff wars, JPMorgan thinks it's unavoidable. JPM's emerging markets research team included this sobering quote:
"A full-blown trade war becomes our new base case scenario for 2019," emerging market strategist Pedro Martins Junior said in a note to clients Wednesday.
Why it Matters: Chinese stocks have had a pretty rough year as the country deals with tempered growth, rising commodity prices and tough talk from President Trump on tariffs. He has already announced $200 billion worth of tariffs on 10 percent of goods against China, and Beijing has retaliated in kind. Neither side will back down and Trump has promised to raise the tariffs on 25 percent of Chinese goods by January 1. This will only get worse.
What's Next: If no compromise is reached, and the prospects get dimmer by the day, the pain will be felt by not just Chinese companies. U.S. manufacturers and producers are already feeling it as prices for everything from aluminum to soy have been grinding higher as trade sabres are rattling. An escalated trade war will crimp growth in China, the U.S. and all the major global trading countries, and it will absolutely find its way into the equity markets.
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What are the Top US Exports? #3 Tilray gets smokedTilray has been the poster-child for the cannabis stock craze since the Nanaimo, British Columbia-based company went public earlier this year. It's up more than 850 percent, giving it a market cap north of $14 billion. Keep in mind that the company is still losing a lot of money and its sales are paltry, albeit growing. It generated just $17.5 million in sales for the first 6 months of this year. Did I mention that it sports a $14 billion market cap??!! The recent sell-off looks like it was prompted by the company's announcement that it plans to float a $400 debt offering to raise cash to repay loans, expand its production and make future acquisitions.Read Tilray's Press Release about its debt offeringRead Tilray's most recent quarterly reportWhy it Matters: Manias like the one we are witnessing for marijuana stocks come crashing to the ground when investors get real about the health of these companies and their prospects for generating real cash flow in the future. The cannabis industry is very promising, no doubt about it. But, when companies like Tilray get bid up by investors who have unrealistic expectations about their future growth, or simply don't care because they are day trading these stocks, they have a tendency to fall, and fall hard. We saw it in internet stocks in the late 1990s, fracking stocks in 2010, cryptocurrencies last year, and now the marijuana patch.What's Next: New industries like cannabis that get a lot of media and investor attention go through cycles like this: Companies go public that probably shouldn't, traders bid up their stocks in a frenzy and cash out before the herd jumps in, they report lackluster sales and profit growth, and then get slammed when investors realize the reality of their prospects. This is not to say that Tilray won't one day become a great and profitable business. It might be one of the winners of the great cannabis stock shakeout in years to come. Then again, it might not. The fact that Tilray wants to tap the debt market to raise cash is not a bad thing, per se. But when it does, investors are forced to take a hard look at their books. In this case, they don't like what they see… at least not today. Read more:Top Marijuana Stocks to WatchAll About TilrayWhy Tilray's Stock is Tumbling Today Chart of the Day: Soaring 10-year Treasury yield sends markets reeling
It's no secret that the closely watched yield on the benchmark 10-year Treasury note broke out to hit a new seven-year high on Wednesday, coinciding with a new all-time high on the Dow.
By Thursday morning, though, as yields continued to rise to even higher levels – with the 10-year hitting an intraday peak at 3.232% – market jitters over rising interest rates began to intensify. This helped send the major indexes reeling, pulling both the Dow and S&P 500 down and splashing some cold water on the recent market rally.
Though the 10-year yield pulled back modestly as Thursday wore on, rate momentum remains to the upside in light of recent data showing an exceptionally strong U.S. economy. This week, private employment numbers, unemployment claims, and non-manufacturing data were all significantly better than expected, underscoring this consistent economic strengthening.
Friday morning brings the highly anticipated monthly jobs report from the U.S. Labor Department. If that also turns out better than expected, yields could rise even further, which could place even more strain on high-flying equity markets.  CONNECT WITH INVESTOPEDIA |
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