U.S. shares extended a selloff today, with the Nasdaq Composite Index sliding the most in two months, as Raymond James & Associates said equities are vulnerable to losses and Citigroup Inc. cited investor concerns for a “severe” pullback.
Twitter Inc. and Pandora Media Inc., which trade at more than 150 times earnings, plunged at least 7 percent to pace a Dow Jones gauge of Internet shares to the biggest drop since May. The Nasdaq Biotechnology Index headed for its steepest two-day slide since April. Goldman Sachs Group Inc. and JPMorgan Chase & Co. sank more than 1.6 percent to lead bank shares lower. Alcoa Inc., the largest American aluminum producer, rose 1.3 percent in late trading after reporting earnings that topped estimates.
The Standard & Poor’s 500 Index lost 0.7 percent to 1,963.71 at 4 p.m. in New York. The Dow Jones Industrial Average (INDU) fell 117.59 points, or 0.7 percent, to 16,906.62. The Russell 2000 (RTY) Index sank 1.2 percent, while the Nasdaq Composite slid 1.4 percent, the most since May 6. About 6.4 billion shares changed hands on U.S. exchanges today, 7.3 percent above the three-month average.
“Many investors wonder if the ride is over,” Tobias Levkovich, chief U.S. equity strategist at Citigroup Inc., said in a report today. “As stock indices hit new highs, there are those that fear further gains, given defensive positioning, but more worry about buying in now just in time for a severe pullback.”
The Chicago Board Options Exchange Volatility Index, the measure known as VIX (VIX) that tracks investors’ volatility expectations for the S&P 500, jumped 9.8 percent yesterday from a seven-year low. The index added 5.7 percent to 11.98 today, giving it the biggest two-day rally since April 11.
U.S. benchmark indexes ended last week at all-time highs, with the Dow topping 17,000 for the first time. The S&P 500 has not had a drop of 10 percent in more than two years. The gauge trades at a valuation of 18 times reported earnings, the highest since 2011 when it was in the middle of a 19 percent slide, its biggest during the current five-year bull market.
“I do think we are vulnerable to a 10 percent to 12 percent decline in the weeks ahead, albeit within the construct of a secular bull market that has years left to run,” Jeffrey Saut, chief investment strategist at Raymond James wrote in a post on the firm’s website.
The Russell 2000 tumbled 1.8 percent yesterday, the most since April 25. The index last week recovered nearly all its losses from a two-month selloff of Internet and small-cap shares, coming within a point of an all-time high. Gauges of Internet and biotechnology companies also had climbed back from their lows for the year, retracing more than half of their earlier losses.
Small-caps and Internet shares were the biggest victims of the market retreat earlier this year as investors dumped the biggest winners of the bull market amid concern valuations advanced too far. Investors resumed selling those industries this week after a rally drove valuations on the Nasdaq Composite (CCMP) to 35 times reported earnings, about double that of the S&P 500.
The Dow Jones Internet Composite Index sank 3 percent today, the most since May 6. The gauge had rallied 15 percent from a low on May 8 to erase its losses for the year before falling 4.3 percent in the past two days. The barometer surged 54 percent in 2013.
Twitter sank 7 percent to $37.41, while Pandora dropped 7.3 percent to $25.79. Both stocks had the biggest declines since May 6. Facebook Inc. and TripAdvisor Inc., which rallied more than 98 percent in 2013, lost at least 3.9 percent.
The Nasdaq Biotechnology index has fallen 4.6 percent in the past two days, the most since April 11. It had surged 23 percent since a low that month.
“There’s clearly some profit-taking in names that have done extremely well,” Peter Tuz, who helps manage more than $450 million as president of Chase Investment Counsel Corp. in Charlottesville, Virginia, said in a phone interview. “Some of the stocks have pretty lofty P/E ratios, so if anything does go awry with earnings or guidance, they could have bigger declines. It’s just a little bit of rebalancing, which isn’t atypical for the start of a new quarter.”
While data from employment to housing is indicating the world’s largest economy is recovering after the worst contraction in gross domestic product since 2009, International Monetary Fund Managing Director Christine Lagarde this week signaled a cut in the institution’s global expansion forecasts, saying investment is still weak and risks remain in the U.S.
The Federal Reserve will release minutes from its June meeting tomorrow. Policy makers trimmed bond purchases last month by $10 billion for the fifth consecutive time, saying economic growth is rebounding and the job market is improving.
Officials are debating the timing for the first increase in the main interest rate since 2006. Policy makers have kept their target for overnight lending between banks in a range of zero to 0.25 percent since December 2008.
Goldman Sachs yesterday joined banks including JPMorgan Chase & Co. and Bank of Tokyo-Mitsubishi UFJ Ltd. in bringing forward it estimates for Fed rate increases after data last week showed the economy added more workers than estimated in June.
In Europe, signs the economic recovery is losing momentum sent stocks lower for a third day. U.K. manufacturing unexpectedly slumped the most in 16 months in May and German exports contracted more than estimated, data showed today.
Alcoa rose 1.3 percent to $15.05 in late trading after unofficially kicking off earnings season. The company reported second-quarter earnings and sales that beat analysts’ expectations after an increase in the price of aluminum including regional delivery premiums.The stock finished the regular session 0.8 percent higher at $14.85.
Citigroup Inc., JPMorgan Chase, Goldman Sachs, Yahoo! Inc. and Johnson & Johnson are among companies reporting financial results in the next week.
Bank shares dropped 1.2 percent for the fourth-worst performance among 24 S&P 500 groups. Goldman Sachs retreated 1.7 percent to $164.91 and JPMorgan Chase lost 1.6 percent to $55.76. Both fell to one-month lows.
Profit for S&P 500 members probably climbed 5 percent in the three months through June, while sales rose 3 percent, according to analyst estimates compiled by Bloomberg. The forecasts are lower than they were at the beginning of April, when analysts projected earnings to rise 7.3 percent and sales to increase 3.7 percent.
Three rounds of monetary stimulus from the Fed and better-than-forecast corporate earnings have driven the S&P 500 up more than 190 percent from a low reached in March 2009.
“Equities are near all-time highs and the air will only get thinner,” said Heinz-Gerd Sonnenschein, a strategist at Deutsche Postbank AG in Bonn, Germany. “We need a strong results season now to support equities because investors will keep wondering when the Fed will hike rates and this can bring some nervousness to the market.”
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