U.S. stocks sank, extending the Standard & Poor’s 500 Index’s worst two-day drop since June, amid disappointing results at JPMorgan Chase & Co. and signs hedge funds were dumping the bull market’s best performers.
The S&P 500 fell 0.9 percent to 1,815.78 at 4 p.m. in New York, closing at its lowest level in two months. The gauge has slipped 2.6 percent this week, the biggest weekly loss since 2012. The Nasdaq Composite Index dropped 1.3 percent, extending its biggest two-day retreat since 2011, and the Dow Jones Industrial Average slid 141.03 points, or 0.9 percent, to 16,029.19. Trading in S&P 500 shares was 26 percent above the 30-day average at this time of day.
“You need to shake out some of the speculative money and throw water on the irrational exuberance,” Randy Frederick, managing director of trading and derivatives at Charles Schwab Corp., which manages $2.2 trillion in client assets, said in a phone interview. “It’s a good reminder that markets don’t go straight up. While the long-term is positive, we need to have these steps back along the way. We need this kind of pullback.”
The S&P 500 declined 2.1 percent yesterday and the Nasdaq Composite slumped 3.1 percent, its biggest decline since November 2011. Technology shares slid yesterday as investors sold the biggest winners in the five-year market rally. A gauge of Internet stocks tumbled the most since 2011 yesterday, while biotechnology shares approached a bear market.
‘Measured’ Selling
The percentage of hedge-fund bets that stocks will rise has decreased to 46 percent, compared with 2014’s high of 58 percent, according to an April 9 research note from Credit Suisse Group AG. Net exposure in the U.S. declined to the lowest level since August 2012, the report said.
“So far, exposure reductions have been measured and at least for the time being, there has been no mass rush for the exits,” Credit Suisse’s Jon Kinderlerer wrote. “Unsurprisingly, we have seen exposure being trimmed the most in information technology where the popular longs have underperformed significantly over the last few weeks.”
Companies with high levels of hedge fund ownership have fallen about twice as much as the overall market. S&P 500 stocks that are most popular among the speculators have fallen 7.8 percent since April 2. The U.S. equity benchmark is down 3.9 percent since then.
Hedge Holdings
Hedge funds make up at least 30 percent of the shareholders in Allegion Public Limited Co., Dollar General Corp. and Constellation Brands Inc., the most among companies in the S&P 500. About 37 percent of Allegion shares are owned by hedge funds, the most among S&P 500 companies. The maker of security systems is almost 9 percent lower since April 2. H&R Block Inc., the tax software provider, is down 11 percent and is about 27 percent owned by hedge funds.
The selloff that began last week was sparked by growing concern that valuations may be too high as earnings season begins. The Nasdaq Composite trades at 35 times reported earnings of the companies in the index. That’s double the ratio for the S&P 500, which trades at about 17 times earnings.
Profit for members of the S&P 500 probably fell 0.9 percent in the first quarter, analysts now forecast, after anticipating a 6.6 percent rise in January. Sales increased 2.6 percent, according to projections.
Analysts have reduced earnings estimates more than they usually do over the last three months, according to Goldman Sachs Group Inc. strategists led by David Kostin. Average profit forecasts for S&P 500 companies fell about 4 percent in the first quarter, a percentage point more than normal, they wrote.
Earnings Season
Alcoa Inc. unofficially started the earnings season on April 8 with profit that beat forecasts. About 54 companies in the S&P 500 are scheduled to report results next week, including Coca-Cola Co., Goldman Sachs Group Inc., Yahoo! Inc., Google Inc. and General Electric Co.
“We can still get decent earnings, but all in all, the total level of earnings will probably not grow as much as expected,” Nicola Marinelli, who helps oversee $200 million at Sturgeon Capital Ltd. in London, said by telephone. “Earnings will have subdued growth. Equity market can remain strong but that doesn’t mean much stronger.”
Economic Data
The Thomson Reuters/University of Michigan preliminary April index of sentiment rose to 82.6 from 80 a month earlier. The median estimate in a Bloomberg survey of 66 economists called for the measure to increase to 81. Estimates ranged from 79 to 89.8. The index averaged 89 in the five years before December 2007, when the last recession began, and 64.2 in the 18-month contraction that followed.
Separate data showed producer prices in the U.S. rose more than forecast in March, led by the biggest gain in the cost of services in four years.
Investors have added $5.4 billion to U.S. equity exchange- traded funds in the past five days and added $732.3 million to American bond ETFs, data compiled by Bloomberg show. Health-care stocks absorbed the most money among industry ETFs, taking in $511 million during the past week. Technology ETFs lost $1.1 billion in the past five days, the most of any sector in that period.
Traders exchanged more than 1.2 million contracts today on the PowerShares QQQ ETF, which tracks shares of the Nasdaq 100, according to data compiled by Bloomberg. That’s almost twice the 20-day average volume for the fund. Bearish contracts expiring this month with strike prices of $84 and $85 were the most traded at this time of day, Bloomberg data show.
The selloff that is sending shares in the Nasdaq 100 Index to the wildest swings since Europe’s debt crisis is failing to stir equal panic in option prices. During April, the Nasdaq 100 has moved 1.5 percent a day on average, the most since November 2011. At the same time, prices for options are below levels from February and October.
“They’ll have to show a lot of pessimism before this decline is over,” said Bruce Bittles, chief investment strategist at Milwaukee-based RW Baird & Co., which oversees $110 billion. “It certainly looks like this correction could carry on.”
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