STOCKS ARE UNDER HEAVY PRESSURE AS CRUDE OIL HITS NEW LOW -- S&P 500 THREATENS SUPPORT -- SMALL CAPS HAVE ALREADY BROKEN NOVEMBER LOW -- TREASURIES JUMP WHILE JUNK BONDS TUMBLE TO TWO-YEAR LOW -- EMERGING MARKETS LEAD GLOBAL DECLINE
SMALL CAPS LEAD MARKET LOWER ... The drop in crude oil to another six-year low has undercut the recent bounce in energy shares, which are leading today's stock selloff. With all ten sectors in the red, energy stocks are down -3%. Commodity-related material stocks are right behind. The three groups holding up a bit better are defensive groups like utilities, staples, and gold. Support levels are being threatened. Chart 1 shows the S&P 500 threateningn its mid-Novmber low (and mid-September high) near 2020. A close below that level would seriously jeopardize the four-month rally. Small caps look even worse. Chart 2 shows the S&P 600 Small Cap Index already trading below its November low. That's a negative sign for it and the rest of the market.
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Chart 1
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Chart 2
TREASURIES SURGE, WHILE HIGH YIELD TUMBLES... The deflationary aspect of falling oil prices, and heavy global stock selling, are pushing investors into the safe haven of long-dated Treasuries. Chart 4 shows the 20+Year Treasury Bond iShares (TLT) surging to a six-week high, and breaking a falling trendline starting in August. Junk bonds, however, are falling sharply. Chart 5 shows the iBoxx High Yield Corporate Bond iShares (HYG) plunging below last December's low to a new two-year low. A lot of that is due to falling energy bonds. But it's also a negative warning for the economy and stock market.
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Chart 3
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Chart 4
FOREIGN STOCK ARE LEADING THE DECLINE... Foreign stocks are faring a lot worse than the U.S. Chart 5 shows the Vanguard FTSE All-World ex-US ETF (VEU) falling to the lowest level since October. A retest of the summer low appears likely. Europe is leading the decline in developed markets with losses of -2%. Developed countries tied to commodities, like Australia and Canada, are being sold. Emerging markets are being led lower by China and stocks tied to crude oil like Mexico and Russia. Emerging currencies are also falling. The Chinese yuan has fallen to a four-year low. That's helping export deflation to the rest of the world which partially explains weakness in commodity markets and stocks tied to them.
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Chart 5
VIX BREAKS THROUGH 20 RESISTANCE LEVEL... My Wednesday market recap showed the CBOE Volatility (VIX) Index moving dangerously close to its November high near 20. Chart 6 shows the VIX breaking through that chart and psychological barrier today. Moves above 20 are associated with a market correction. The week is ending badly for stocks, but good for Treasuries.
