Day Traders Diary

5/12/21

The major averages took a sharp hit on Wednesday, led to the downside by technology shares as key inflation data showed higher-than-expected price pressures. The Dow Jones Industrial Average fell 681 points to its session low in the final minutes of trading, on pace to post its worst day of the year. The S&P 500 lost 2% or 89 points while the tech-heavy Nasdaq Composite slid 2.6% to 357 points.

The selling intensified after the S&P 500 fell below Tuesday's low, a level traders were watching closely because of the intraday rebound one day ago. Once the S&P fell below that low about an hour into the trading day, the benchmark dropped even further.

Inflation accelerated at its fastest pace since 2008 last month with the Consumer Price Index spiking 4.2% from a year ago, compared to the Dow Jones estimate for a 3.6% increase. The monthly gain was 0.8%, versus the expected 0.2%.

Excluding volatile food and energy prices, the core CPI increased 3% from the same period in 2020 and 0.9% on a monthly basis. The respective estimates were 2.3% and 0.3%.

Investors have been fearful of a pickup in inflation as it could squeeze margins and erode corporate profits. If price pressures run too hot for a sustained period of time, the Federal Reserve would be forced to tighten monetary policy.

Tech shares, which have been under pressure this week and this month, led the decline again Wednesday as bond yields jumped. Shares of Alphabet, Microsoft, Facebook, Amazon and Apple all fell more than 2%, while shares of chipmakers Nvidia and AMD were also lower. Tesla slid about 3%.

Strength in energy shares, which could do well in an inflationary environment, provided the broader market with some cushion. Occidental Petroleum climbed 2%. Chevron and Marathon Oil also traded higher.

The Cboe Volatility Index, also known as Wall Street's fear gauge, popped above 27 during Wednesday's stock rout. The VIX is a measure of fear or expected volatility in the markets computed from option prices on the S&P 500.

The technology sector pulled off a big intraday reversal in the previous session where the Nasdaq Composite erased a loss north of 2% and ended the day flat. The blue-chip Dow, however, lost more than 450 points. The S&P 500 slipped 0.9%, but avoided its second straight 1% loss.

The Technology Select Sector SPDR is off by more than 5% this week and 6% this month, as investors reassess the group's high valuations in the face of rising inflation.

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