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A Breaking Point Is Looming for the Markets

Anthony Mirhaydari

U.S. equities moved higher on Wednesday in a relatively quiet session masking some increasing volatility in the fixed-income market with junk bonds coming under intense selling pressure.

In the end, the Dow Jones Industrial Average gained a fraction, the S&P 500 gained 0.1%, the Nasdaq Composite gained 0.3%, and the Russell 2000 gained 0.2%. Treasury bonds were weaker, the dollar was little changed, gold gained 0.6% and oil lost 0.7%.


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Breadth was mixed and NYSE activity was 110% of the 30-day average. Consumer staples led the way with a 1.1% gain while financials were the laggards, down 0.6%, as strength in long-term Treasury bonds weighed on net interest margin hopes.

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Synaptics, Incorporated (NASDAQ:SYNA) gained 18.6% after reporting better-than-expected quarterly results and 2018 guidance, helping catch a value bid after a big year-to-date slide in the stock price.

Take-Two Interactive (NASDAQ:TTWO) gained 10.6% amid ongoing success in the “Grand Theft Auto” video game series. MGM Resorts (NYSE:MGM) gained 5.1% on a quarterly earnings beat and word that bookings have rebounded to roughly normal levels after the October 1 mass shooting incident.

On the downside, watchmaker Fossil Group, Inc (NASDAQ:FOSL) lost 17.2% despite reporting better earnings amid a focus on weak Q4 guidance and weakness in wearables. LendingClub Corp (NYSE:LC) fell 15.9% after reporting mixed quarterly results on weak revenues and tightened underwriting standards.

Snap Inc (NYSE:SNAP) fell 14.6% after reporting weak numbers and lower-than-expected user growth amid a writeoff in Spectacles inventory and an announced app rebuild.

Time-Warner Inc (NYSE:TWX) lost 6.5% as the proposed merger with AT&T Inc. (NYSE:T) comes under increasing scrutiny from government regulators including a reported request to divest CNN.

On the economic front, all eyes are on the upcoming release of the Senate GOP’s tax reform bill. Reports are that the plan would be less aggressive, including a phase-in of the 20% corporate tax rate and a full repeal of the state and local tax deduction. President Trump is pushing for legislators to combine the bill with a repeal of Obamacare’s individual mandate, which would net $416 billion in budget offsets.

Conclusion

With the Dow Jones posting its seventh-straight daily gain, the big story is the divergence between equities and high-yield bonds as shown in the chart above. The iShares High Yield (NYSEARCA:HYG) has suffered capital outflows for eight of the last 10 days.

We continue to see a flattening in the Treasury bond yield curve as well, with short-term rates pushing higher while long-term rates stagnate. The gap between five-year and 30-year bonds has fallen for 10 days in a row, the longest flattening streak since March 2011 and December 2005. If it goes another day, it would be a record.

And finally, market breadth continues to deteriorate. On Tuesday, the Dow hit a new high on the worst breadth in 50 years. On Monday, the S&P 500 hit a new high yet more than 4% of its components hit a new 52-week low. For the Nasdaq 100, it hit a new high with an Up Issues Ratio at less than 30%, the worst ever reading in 50 years of data.

It feels like something’s about to break. Possibly on an inability to pass tax cut legislation.

Check out Serge Berger’s Trade of the Day for Nov. 9.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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Anthony Mirhaydari is the founder of the Edge (ETFs) and Edge Pro (Options) investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.

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