Major averages cratered once again on higher volume with oil and junk bonds continuing their respective downtrends. A late afternoon oversold rally ensued putting the majors near the midpoint of the fall. As we stated in a prior report, when a distribution day occurs the day after a follow through day, the odds drop to 3% of the follow through day working. This one clearly has failed.
One area of the market that continues to flash strong warning signals are the banking stocks. Names like Bank America (BAC) and Citigroup (C) are selling at just over half of their book value. This likely indicates that there are bad assets on the books of these banks, such that the currently cited book values are in question. This has shades of 2008, and one of the first warning signs of that precipitous bear market was the persistent downside movement in the banking sector.
The Japanese Nikkei plunged more than 5% overnight as worries about global growth continue and its 10-year benchmark bond slipped into negative yield territory. While negative yields are unnerving to investors, should the U.S. Federal Reserve follow suit at some point later this year as opposed to hiking rates which is becoming increasingly unlikely, it could put a floor under equities as capital would have little choice but to flow into stocks and various hard assets such as commodities and real estate. However, empirically speaking, negative interest rates have done little to bolster European markets, so it is surprising that Japan is now trying it too. Negative rates could also usher in a whole host of other issues in the U.S. with pension funds and the like, so the Fed may be limited in terms of pushes rates down that far.
Futures are currently down more than 1% at the time of this writing.