Selling Pressure Rages Unabated as VIX Ties 2018's Longest Climb

(Bloomberg) -- Five straight dips without a buyer and suddenly you’re talking about serious money. Why won’t the selling let up?

Traders hoping for a midweek respite from what has become the worst five-day lurch in stocks since April were slapped awake in the first hour as the S&P 500 plumbed its biggest one-day drop in four months. Among other things, they saw momentum names swooning 3 percent, a rout in the NYSE advance-decline line and small caps slip below their 200-day moving average.

With the S&P 500 down 2 percent at 2:52 p.m. in New York and the Cboe Volatility Index up for a fifth day, the longest streak since January, here’s what people were pointing to:

Trade War - Shots Fired

Investors have been fretting about the impact of the trade war with China and they’re increasingly seeing signs the tit-for-tat tariffs will harm corporate profits. Luxury retail company LVMH was the latest to describe increased difficulties in the face of the trade tiff. The company confirmed harsher checks on travelers entering at the border, sending its shares down as much as 7.8 percent. American luxury stocks also sank.

There may be peace between the Trump administration and its North American trading partners, but stress is building in relations with China, with the threat of higher tariffs still looming.

“Markets appear well priced for the impact of a 10 percent tariff on Chinese goods, but I do not believe they are positioned for a rise in that and the moderate economic impact that will have on U.S. growth,” Frances Donald, head of macroeconomic strategy at Manulife Asset Management said. “As that tail risk grows, markets are likely to start paying more attention.”

Buyback Blackout

Another culprit may be companies themselves. As one of the biggest sources of demand for stocks in recent years, corporate America is now subject to a blackout on discretionary buybacks before the third-quarter earnings season starts on Friday.

Demand from firms fell to $14 billion last week from this year’s peak of about $40 billion, data compiled by UBS Group AG showed. The liquidity backdrop may not improve until later this month, according to Keith Parker, the firm’s head of equity strategy.

Valuation Squeeze

Technology stocks have led the market higher for most of the bull market and are among its most expensive. But as bond yields settle into a new trading range around 3.2 percent, it’s detracting from the sector’s allure by providing stiffer competition for the industry’s enviable cash flows. The Nasdaq 100 Index tumbled 2.3 percent Wednesday, most among major averages.

“We’re in one of these testing phases where the market is grappling with, ‘Are risk assets comfortable with higher yields?’ As a reflection of a stronger economy, that’s OK,” Dean Curnutt, chief executive officer of Macro Risk Advisors, said on Bloomberg Television. “Or are higher yields a sell signal because you have to discount earnings at higher prices?”

Guidance Gap

The evidence is mounting: U.S. companies are growing less confident they’ll be able to hit analyst profit targets. Looking at forecasts issued by S&P 500 members last month, Bank of America found that more than twice as many projections were below the Wall Street consensus than above. It’s the most shortfalls in two-and-a-half years.

"The No. 1 issue that’s allowed the stock market to fight through these headwinds is earnings,” said Matt Maley, equity strategist at Miller Tabak + Co. “If they’re not going to be as strong, it will be much tougher for the market to fight off those headwinds.”

Cyclical Bulldozing

Industries that are typically more sensitive to the business cycle have had a particularly tough week, a trend that sits poorly with macro investors. The materials sector was the worst of the 11 S&P 500 groups Tuesday, and extended declines for a sixth day Wednesday.

Industrials stocks also slid, and the sector was the second worst in the S&P 500 Wednesday. Large multi-national companies including Boeing Co., 3M Co., and Caterpillar Inc were among the biggest laggards, names also embroiled in the trade spat with China.

“When you’ve got these risk-off moments, especially when you’re later in the cycle, there is some concern on the part of investors where it’s like, ‘Is this the beginning of the end?”’ Sameer Samana, a global quantitative and technical strategist for Wells Fargo Investment Institute, said by phone.

Technical Breaches

Equity losses worsened after the S&P 500 undercut a range between 2,860 and 2,870, levels that some chart watchers had hoped would hold during this episode as they marked the highs in January and August. At current levels, the benchmark index is poised to close below its 50-day average for the first time since July.

“The averages had run up to levels where it probably was going to be difficult to see significant near-term upside, and once support levels started to fall, traders were given permission to hit the ‘sell’ button a little harder,” said Andrew Adams, a strategist at Raymond James & Associates Inc.

To contact the reporters on this story: Sarah Ponczek in New York at sponczek2@bloomberg.net;Lu Wang in New York at lwang8@bloomberg.net;Vildana Hajric in New York at vhajric1@bloomberg.net

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Chris Nagi

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