Don't get too excited about the Dow's last-second jump

Investors were gifted another new record high for the Dow Jones industrials index on Friday. It marked the 11th record in a row, a run matching January 1987 for the best-ever streak in the index’s more than 100-year history. 

Yet for most of the day, keeping the streak alive looked like a long shot as stocks traded heavily, with a loss of around 60 points. But then, as if powered by divine providence, a “meltup” in the last hour of trading pushed the average into the green and up to another new all-time high. In fact, the Dow turned positive only in the final minute of trading (chart below).

In the end, the Dow gained just a fraction of a percent, up 11 points, thanks in large part to gains by “defensive” issues like Johnson & Johnson (JNJ) and Verizon (VZ), while cyclical names like Caterpillar (CAT) lagged. Small-cap stocks in the Russell 2000 declined slightly. Treasury bonds were stronger across the curve -- a safe haven bid that bests characterizes the tone of the day’s trade. That pushed the 30-year Treasury yield below 3 percent.

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Wall Street continues to focus on the growing realization that President Trump’s desire for tax reform, infrastructure spending and Obamacare replacement will likely be longer in coming than originally envisioned. Issues like a border tax remain in flux. 

And with the debt ceiling approaching fast, fresh attention is being paid to the fiscal implications of these policies at a time when the budget deficit -- given a national debt swelling toward $20 trillion -- will increasingly have to bear rising interest service costs.

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And this is all happening within the context of analysts marking down 2017 S&P 500 earnings growth expectations, rising inflation pressure and an increasingly hawkish Federal Reserve that could well raise interest rates again next month. The “hard” economic data remains weak as well, from gasoline demand to housing activity (chart above).

While the Dow overall looked like it shrugged off these concerns on Friday, under the surface rising stress is clearly evident.

After 15 straight days higher, technology stocks suffered their worst day of the year. Financials suffered their worst session in five weeks. Gold rose above the $1,250 level for the first time since the election and is up eight of the last nine weeks. Silver is up nine weeks in a row for its best run since May 2006. And bitcoin just hit a new record high.

Breadth remains moribund as well, with buyers focusing on a very narrow group of momentum-driven stocks. On Friday, more than 60 percent of total volume on the New York Stock Exchange went into declining issues.

To be clear, none of this precludes stocks from persisting in their historic uptrend. But the risks of a sudden reversal are clearly rising in unison. 

  • Anthony Mirhaydari

    Anthony Mirhaydari is founder of the Edge , an investment advisory newsletter, and Edge Pro, options newsletter. Previously, he was a markets columnist for MSN Money; a senior research analyst with Markman Capital Insight, a money management firm; and an analyst with Moss Adams focusing on the financial services industry.