Stocks checked into Heartbreak Hotel for a second consecutive Monday as big gains on the back of China's move to relax the Yuan's peg to the U.S. Dollar evaporated to turn into another day of small losses. The Dow Jones was up as much as 144 points early in the session, but closed down eight points at 10,442. The S&P 500 slid four points to settle at 1113, barely above the 200-day moving average while the Nasdaq tumbled almost 21 points for a close of 2289. Small-caps were no better with the Russell 2000 shedding seven points to close at 660.
Overnight, China said it would relax a nearly two-year old Yuan/Dollar peg that was implemented in July 2008 during the nascent stages of the financial crisis in a bid by Beijing to support China's exporters. The relaxed peg sent the Yuan up 0.4% against the Dollar on Monday to 6.7976, but the reaction in equity markets may have been knee-jerk to say the least and that is probably why stocks could not hold their gains into the close.
The Chinese government, for all that can be said about it, is not known for doing business in hasty fashion and if it thought relaxing Yuan/Dollar peg would lead to dramatic near-term appreciation for the Yuan, the peg would not have been relaxed in the first place. On Friday, Yuan forwards were pricing in a 1.8% for the currency against the greenback over the next year. On Monday, that jumped to 2.7% over the same time frame.
In other words, this is by no means a dramatic move and Chinese policy makers said as much in their weekend statement, saying the action will result in only gradual changes while ruling out significant appreciation against the Dollar.
It should be noted that a stronger Yuan may not be good news for certain U.S. stocks. Retailers were the biggest losers among the 24 groups tracked by the S&P 500, tumbling almost 2% as a a group due to concerns that a stronger Chinese currency will increase the cost of importing Chinese products. Pick a marquee retail name and it is likely that the shares were down today.
Dow components Wal-Mart (WMT), the world's largest retailer, and Home Depot (HD), the largest home improvement reatailer, were both down more than 1% as was Target (TGT). Best Buy (BBY) tumbled almost 2% on the Yuan news, not surprising considering that so many of the retailer's items are produced in China. None of this was good news for the SPDR S&P Retail ETF (XRT), which slid 2.13% on the day.
Industrials and materials names caught a bid on the Yuan news as speculation swirled China's demand for energy products and industrial metals would remain robust. Copper soared the most in a week on rumors Chinese demand will grow. September copper futures jumped 5.8 cents, or 2%, to $2.9595. That helped buoy gains in materials and mining stocks such as Freeport McMoRan (FCX), which gained 3.31% on the day.
Coal stocks also got a big boost on the currency news. China is the world's largest coal consumer and plenty of U.S. coal producers have already upped their production of metallurgical coal, a key ingredient in the steel-making process. This is the coal that Chinese steelmakers crave. Shares of Alpha Natural Resources (ANR), Cliffs Natural Resources, Massey Energy (MEE), Patriot Coal (PCX) and Walter Energy (WLT) all jumped between 3% and 4%. Good news for the Market Vectors Coal ETF (KOL), which is nearing a critical point on its chart. The ETF's 50- and 200-day moving averages are separated by just a few pennies and a move beyond those lines could be very bullish for KOL.
Among financials, Visa (V) and MasterCard (MA) were solid performers, gaining 4% each as Congress mulled a compromise that would protect the transaction fees the companies charge to banks, according to Bloomberg News. The House may keep in place the Senate's proposal to limit fees charged to consumers for each swipe of their debit cards.
Essentially, the compromise is intended to protect consumers while not significantly altering the way Visa and MasterCard do business. One analyst said that if the proposal becomes law, the companies will see small changes to their business models, but nothing as extreme as was originally feared.
What would a day in the market be without some news related to the Gulf of Mexico oil spill? BP (BP) shares tumbled 4.5% after the company said it has spent $2 billion on spill cleanup and containment efforts. That compares with the $1.6 billion the embattled oil company said it had spent on cleanup costs through June 14. Do the math and you'll find that BP's daily costs have jumped 10% to an average of $33 million per day.
To add to BP's pain, the U.S. Chemical Safety Board said it is starting an investigation into what caused the largest oil spill in U.S. history. The agency said the investigation will be handled by the same investigators that worked the two-year probe of BP's 2005 fatal blast at its Texas City refinery. The Chemical Safety Board does not have enforcement authority, but it can recommend new safety protocols.
BP is also locked in a schoolyard brawl with Anadarko (APC), the independent oil and gas producer that owned a 25% non-operating in the Macondo well project. BP is considering suing Anadarko over the latter's potential refusal to pay its share of the spill cleanup tab. Texas-based Anadarko said last week BP should absorb all of the costs because of the reckless way in which it operated the Deepwater Horizon rig.
Anadarko is considering arbitration rather than litigation to resolve the dispute and that would keep the proceedings private. Analysts have speculated the company could be facing up to $6 billion in spill-related costs, so if the company is able to reduce that amount, the news would likely be bullish for the stock. Speaking of Anadarko shares, Barron's reported that J.P. Morgan is recommending selling the August 45 calls against an existing position in the stock.
Looking at the charts, not a lot has changed since I visited with you on Saturday, though the sell-off that ensued after enthusiasm for the Yuan news dissipated really hit the S&P 500 in a bad way. The index was looking quite strong early in the session, flirting with 1130 only to tumble all the way to 1110, where the index bounced off the 200-day moving average.
Certainly, it is a positive sign that the index found support at that critical line, but a close in the neighborhood of 1130 would have been decidedly more bullish as that would have given the index a chance to break the 50-day moving average at 1137 over the next day or two. I am still of the mind that if 1100 does not hold as support, the bears will gain control again.
S&P 500 Chart
I mentioned over the weekend that a move toward 10,550 for the Dow would be bullish. The Dow was actually trading close to 10,600 before the heartbreaking sell-off started. The 200-day moving average did not come into play, but investors are still left with the feeling of what could have been for the Dow on Monday. I reiterate a ''bullish above 10,550, bearish below 10,185'' feeling on the Dow.
Earlier, I mentioned the effects a stronger Yuan would have on retailers and some of that same selling pressure was seen in technology issues, leading to a decline of almost 1% for the Nasdaq. Again, this was another gut-wrenching scenario because the Nasdaq traded as high as 2341, representing a flirtation with the 50-day moving average at 2350.
The flirtation was short-lived as the index collapsed below 2300 by the end of the session. This will not be a problem if the Nasdaq can starting making some gains soon, but a close at 2289 is not all that far away from support at 2250. Cautious is the word of the day with the Nasdaq.
The Russell 2000 was the biggest loser on a percentage basis. I noted over the weekend that from Friday's close at 667, the small-cap index could go anywhere and anywhere was down on Monday. The action here has been less than impressive over the past several days and I would be wary as the Russell 2000 approaches 650. We will need to see 675 to encourage some fresh buying here.
Russell 2000 Chart
I admit I liked the action in commodities and materials names today and if Chinese demand is legitimate, that is perhaps one catalyst that could boost these leadership groups, and in turn the broader market, over the summer. One day does not beget a trend, so I am not jumping for joy, especially due to the lack of catalysts out there until earnings season starts in earnest. Even with that, there are no guarantees. I think it is time to take cues from the technicals and use the numbers highlighted here to make bullish or bearish bets.