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Stocks’ Volatility Surges as Traders Fear the Worst

InvestorPlace logo InvestorPlace 6/15/2015 Anthony Mirhaydari

An ominous feeling descended on Wall Street Monday as the situation surrounding the Greek bailout negotiations made no progress over the weekend. In fact, there were reports that eurozone countries are preparing for a possible debt default by Greece — with a $1.8 billion bundle of payments due to the International Monetary Fund at the end of the month — by readying capital control measures.

Along with a poor industrial production report featuring the first back-to-back decline in activity since 2009, sentiment soured heading into this week’s big catalyst: Wednesday’s Federal Reserve policy announcement, the first that could feature an interest rate hike since 2006.

In the end, the Dow Jones Industrial Average lost 0.6%, the S&P 500 lost 0.5%, the Nasdaq Composite lost 0.4% and the Russell 2000 lost 0.3%.

That boosted the CBOE Volatility Index, or VIX, in a big way as large caps fell to test the lows from last week. That lifted the VelocityShares 2x VIX (TVIX) position recommended to Edge subscribers to a gain of 7.1%.

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There was some merger and acquisition activity with homebuilders Standard Pacific (SPF) and Ryland (RYL) agreeing to a $5.2 billion merger, Dealertrack (TRAK) agreeing to be acquired by Cox Automotive for $4 billion, and Target (TGT) selling its pharmacy and clinics business to CVS (CVS) for $1.9 billion.

Merger activity is also hot in the managed care arena with Cigna (CI) reportedly turning down a $175 per share offer from Anthem (ANTM).

On the economic front, industrial production dropped 0.2% in May versus April following a 0.5% drop the previous month. The manufacturing component fell 0.2% for the third negative reading in the last five months. Weakness was concentrated in the consumer goods and construction supplies segments, the latter of which is a poor indicator for the health of the housing sector.

Vehicle production was a bright spot, rising 1.7% versus 2% and 4% gains in the prior two months.

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Paul Ashworth at Capital Economics noted the decline is a result of the ongoing contraction in the mining sector on commodity price weakness and the impact of the stronger dollar on manufacturers.

Separately, homebuilder sentiment increased to its best level since September.

Technically, stocks remain in a holding pattern going back to December as investors await resolution on big, mammoth issues: The specter of policy tightening at the Fed, the rising chance the euro proves revocable, and the growing realization that a tightening job market will weigh on corporate profitability when second-quarter earnings season kicks off in early July.

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But this masks an ongoing deterioration in market breadth as investors move away from a growing percentage of stocks and the Dow Theory warning coming from the big underperformance of utility and transportation stocks relative to the Dow Jones Industrial Average.

In fact, the divergence between utes, trannies and industrials has swelled to an extreme not seen since 2000 according to Jason Goepfert at SentimenTrader.

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.

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