S&P 500 Strikes Out, Tests Key Sell Signal

Those of us who love baseball use an expression called “The Mendoza Line,” a reference to when a player’s batting average falls below .200. If a hitter’s performance sinks beneath this threshold, he’s considered unworthy of the Major Leagues. The term is named for former shortstop Mario Mendoza, who hit .198 in the 1979 season.

The S&P 500 index on Thursday rattled investors when it briefly dropped below its own version of The Mendoza Line, otherwise known as the 200-day moving average (dma). By the end of trading today, the index lost 5.94 points to close at 2,629.73, with the 200-dma at 2,615.

The 200-dma is a closely watched technical threshold that’s often used to gauge the long-term momentum in an asset’s price. Investors view a dip below this level as a market timing signal to bail out before the start of a big downturn.

Dampening stocks today were concerns about tariffs, interest rates, inflation, and political turmoil. The Dow Jones Industrial Average was down more than 390 points at its session low. A late-afternoon comeback pushed the Dow slightly into the green, whereas the Nasdaq closed lower.

Volatility today was heavy, with the CBOE Volatility Index (VIX) spiking by 2.76%. Investors sought the safe haven of gold, driving up the yellow metal by $6.40 per ounce to a closing price of $1,311.10/oz.

Sell in May and go away?

Trade tensions continue to weigh on markets. A U.S. delegation arrived in Beijing on Thursday for talks on tariffs, but Wall Street doesn’t anticipate much progress. Chinese state media today vowed to stand up to what it characterized as U.S. bullying. Led by U.S. Treasury Secretary Steven Mnuchin, the delegation’s trip to China is not assuaging the anxieties of investors who fear a trade war.

At issue is the White House’s plan to impose tariffs on about $50 billion worth of Chinese exports. The discussions involve a variety of U.S. complaints about China’s trade practices, particularly mandatory technology transfers. The talks end on Friday. The likely result: lots of photo ops of the high-living Mnuchin in exotic settings, at taxpayer expense. Expect little else.

Underscoring investor worries are signs that Europe’s economic growth is slowing. The European Commission issued a forecast on Thursday that said growth in the euro zone will sputter this year and next.

The Commission’s report startled investors, especially since it comes in the wake of Europe’s strong expansion in 2017. The notion that “synchronized” global growth would continue to lift stocks has now been called into question.

The Commission predicted that economic growth in the 19 countries sharing the euro would slow down to 2% next year from 2.3% this year. Growth peaked at 2.4% in 2017.  “Overall, the risks to the forecast have risen and are now tilted to the downside,” the Commission stated today.

The Commission cited a familiar litany of current risks: stock market volatility, fiscal stimulus in the U.S. that could stoke overheating, rising interest rates, stirring inflation, and a brewing trade war.

These concerns are superseding strong first-quarter earnings. Analysts estimate that so far, the year-over-year blended earnings growth rate for S&P 500 companies has come in at more than 25%. Before the earnings season got underway, the consensus expected growth of 18.3%.

The upward trajectory of earnings suggests there’s more room to run in stocks. But risks abound, among them rising interest rates. The Federal Reserve’s policy-making Federal Open Market Committee meets again June 12-13, at which time it’s expected to raise rates.

Elon Musk sees red…

In an unexpected twist to earnings season, Tesla (NSDQ: TSLA) held a conference call with analysts last night that can only be described as, well, wacky.

The electric car maker reported first-quarter operating results after the closing bell on Wednesday that left investors shaken and confused.

In the raucous conference call, Tesla CEO Elon Musk railed against journalists for writing critical stories about vehicle accidents, patronized attendees for their lack of engineering knowledge, repeatedly interrupted and undercut his own executives, giggled childishly throughout, and allowed a Tesla fanboy on YouTube to dominate the Q&A session.

Maybe it was all a ploy to distract from Tesla’s dismal numbers.

Tesla reported first-quarter adjusted losses of $3.35 per share on revenue of $3.4 billion. The firm’s net losses hit a record $784.6 million.

Tesla also ended the quarter with more than $10 billion in debt and only $2.7 billion in cash, down from $3.4 billion in cash at the beginning of the year.

In September 2017, Tesla stock hit a record high of $389.61 per share. TSLA shares fell 5.55% today, to close at $284.45.

Beware of companies like Tesla that continually over-promise and under-deliver. They inevitably get punished by the market.

Thursday Market Wrap

  • DJIA: +0.02% or +5.17 points to close at 23,930.15
  • S&P 500: -0.23% or -5.94 points to close at 2,629.73
  • Nasdaq: -0.18% or -12.75 points to close at 7,088.15

Thursday’s Big Gainers

  • Inspire Medical Systems (NYSE: INSP) +56.25%

Medical equipment maker upsizes IPO.

  • Rudolph Technologies (NYSE: RTEC) +16.98%

Maker of inspection equipment reports solid earnings.

  • Engility Holdings (NYSE: EGL) +10.77%

Engineering firm issues strong operating results.

Thursday’s Big Decliners

  • InVivo Therapeutics Holdings (NSDQ: NVIV) -38.77%

Biotech’s equity offering looms; analysts skeptical.

  • Achaogen (NSDQ: AKAO) -24.76%

Wall Street pessimistic over biotech’s drug development.

  • Anika Therapeutics (NSDQ: ANIK) -24.68%

Drug maker posts earnings loss.

Letters to the Editor

“Isn’t wage growth a good thing? Why do investors fear it?” — Mike C.

Average hourly earnings for private-sector employees are climbing, a trend that provides sufficient inflationary conditions to prompt more aggressive tightening by the Federal Reserve. Rising rates tend to kill bull markets. Wage growth bodes well for American consumers but not necessarily for stocks because it pressures corporate earnings.

Questions about rising interest rates? Drop me a line:

John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits. He’s also an avid fan of the Boston Red Sox, which as of this writing boasted a batting average of .272.


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