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Stocks Slide for Second Day as Rates Climb to 2-Year High

Jeff Macke
Breakout

Stocks dropped hard in early trading on Wednesday after Cisco (CSCO) and Walmart (WMT) reported soft numbers and dim outlooks. It's the worst 2-day move in the markets since June. The S&P 500 (^GSPC) is still up 15% for the year, which is perhaps one reason why dip-buyers are staying on the sidelines

"The one thing that will make you feel better is that there's not a lot of volume out there," says David Lutz of Stifel Nicolaus in the attached video. "Here in the U.S. a lot of traders are taking their last weeks off before the kids head back to school." Large moves on low volume days are taken with a grain of salt by professional traders.

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Lutz points to interest rate on the 10-year climbing to a 2-year high, as another hurdle for investors. "That's going to weigh on a tremendous amount of the dividend names out there," says Lutz, ticking off REITS, consumer staples, the home builders and pharmaceuticals. Throw Walmart's miss into the mix and that's more than ample reason to justify what is now the worst 2-day run for stocks since late June.

Investors weren't expecting any great shakes from Walmart but interest rates could prove to be a longer-term issue for stocks. It's now conventional wisdom that the FOMC is going to begin tapering its bond repurchasing program in September. Without the Fed tamping down interest rates, investors who have been sitting in stocks for the dividend yield will start migrating back into the relative safety of bonds. Whether or not bonds truly are a safe haven is a subject for a different day.

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"When rates were extremely low we had a lot of the bond funds out buying U.S. equities in order to generate any kind of yield," Lutz explains. "Now that rates are moving up they are selling their equity holdings and starting to move into bonds as yields get more attractive."

Lutz points out the once scorching hot homebuilder sector as a particularly hard hit group. The iShares US Construction ETF (ITB) is now down on the year and more than 20% off its highs, the official definition of a bear market.

It's not time to panic, yet. Lutz is watching 1,655 as the first line in the sand for support on the S&P 500. As of mid-day stocks have managed to hold above that mark. If it should break, things might get serious. Unless or until that happens today's price action should best be considered an overdue pullback.

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