Are Markets Subject to the Fedspeak of the Day?

A “good enough” retail sales report gave stocks enough energy to stay out of the red on Tuesday.

Stocks achieved moderate gains on Tuesday after a “good enough” report on July retail sales from the Commerce Department. Although economists were expecting an increase of 0.3 percent, the report indicated a 0.2 percent increase. Nevertheless, after excluding sales of automobiles, gasoline and building materials, so-called “core” retail sales increased by 0.4 percent, as expected by economists.

Atlanta Federal Reserve President Dennis Lockhart was the latest Fed official to discuss the dreaded taper of the Fed’s bond-buying program. As has been the case with so many other Fed officials who have been discussing the subject, Lockhart is not an FOMC member.

Although Lockhart noted that he is not ruling out the possibility of a decision to begin the taper at the September FOMC meeting, he pointed out that the economic data does not provide a clear picture of the nation’s economic strength. Lockhart explained that “GDP growth has remained lackluster” and that any decision to begin tapering “whether it is in September, October or December, ought to be thought of as a cautious first step.”

The Chicago Board Options Exchange Volatility Index, also known as the “fear index”, took a 3.90 percent fall on Tuesday. The result further reinforced the notion that the VIX has assumed a newfound role as the “Taperometer”, since it has been measuring taper fears. Lockhart’s remarks obviously lowered the Taperometer reading.

The Dow Jones Industrial Average (NYSEARCA:DIA) gained 31 points to finish Tuesday’s trading session at 15,451 for a 0.20 percent advance. The S&P 500 (NYSEARCA:SPY) advanced 0.28 percent to close at 1,694. The Nasdaq 100 (NASDAQ:QQQ) climbed 0.48 percent to finish at 3,141. The Russell 2000 (NYSEARCA:IWM) declined 0.16 percent to end the day at 1,051.

In other major markets, oil (NYSEARCA:USO) rose 0.37 percent to close at $37.90. On London’s ICE Futures Europe Exchange, October futures for Brent crude oil advanced by 48 cents (0.45 percent) to $108.22/bbl. (NYSEARCA:BNO). December gold futures declined by $13.40 (1.00 percent) to $1,320.80 per ounce (NYSEARCA:GLD). Transports hit the guardrail during Tuesday’s session, with the Dow Jones Transportation Average (NYSEARCA:IYT) dropping 0.67 percent.

Stocks skyrocketed in Japan on Tuesday, as a number of events fueled investor bullishness. The nation’s Cabinet Office reported that machinery orders declined by a less-than-expected 2.7 percent in June after falling 10.5 percent in May. Economists had been anticipating a 7 percent drop in June.

Investors were particularly excited by a news report which indicated that Prime Minister Shinzo Abe is considering a corporate tax cut to offset any adverse economic consequences which could result from the planned “consumption tax” which is basically a value-added tax. The yen weakened to 97.54 per dollar before the closing bell in Tokyo. A weaker yen causes Japanese exports to be more competitively priced in foreign markets (NYSEARCA:FXY). The Nikkei 225 Stock Average skyrocketed 2.57 percent to 13,867 (NYSEARCA:EWJ).

In China, stocks continued to advance on the Shanghai Stock Exchange with momentum from Friday’s industrial production report as well as news that the government will be relaxing its stance against real estate development.

Shares in Hong Kong made a stronger move following the good news from Japan concerning a corporate tax rate cut. The Shanghai Composite Index advanced 0.23 percent to close at 2,106 (NYSEARCA:FXI). Hong Kong’s Hang Seng Index jumped 1.21 percent to finish the session at 22,541 (NYSEARCA:EWH).

In Europe, the ZEW Centre for European Economic Research reported that the ZEW Indicator of Economic Sentiment for Germany rose by 5.7 points in August to 42.0 — its highest reading since March. Economists were expecting a less-significant increase to 39.9. The respective indicator for the Eurozone rose by 11.2 points to 44.0 (NYSEARCA:VGK).

The Euro STOXX 50 Index finished Tuesday’s session with a 0.51 percent advance to 2,841 –rising further above its 50-day moving average of 2,694. Its Relative Strength Index is 71.29. Most investors consider an RSI above 70 as an “overbought” signal (NYSEARCA:FEZ).

Technical indicators revealed that the S&P 500 continued to climb above its 50-day moving average of 1,653 after finishing Tuesday’s session with a 0.28 percent advance to 1,694. At this point, bears are hoping to see the formation of a head-and-shoulders pattern on the S&P chart. Its Relative Strength Index rose from 55.39 to 57.71. The MACD is below the signal line and both are on a downward trajectory, suggesting a decline.

For Tuesday, all sectors were in positive territory except for the utilities sector, which fell 0.54 percent. The consumer discretionary sector was flat on the day.

Consumer Discretionary (NYSEARCA:XLY): unchanged
Technology: (NYSEARCA:XLK): +0.68 percent
Industrials (NYSEARCA:XLI): +0.44 percent
Materials: (NYSEARCA:XLB): +0.36 percent
Energy (NYSEARCA:XLE): +0.18 percent
Financials: (NYSEARCA:XLF): +0.49 percent
Utilities (NYSEARCA:XLU): -0.54 percent
Health Care: (NYSEARCA:XLV): +0.37 percent
Consumer Staples (NYSEARCA:XLP): +0.07 percent

Bottom line: A “good enough” report on July retail sales combined with some comforting words about the dreaded taper from Atlanta Fed President Dennis Lockhart to push stocks moderately into positive territory on Tuesday. We’re well into the “dog days of summer” and the big economic news for the week will come on Thursday. Markets remain overbought and overvalued and subject to the “Fedspeak” of the day.

John Nyaradi is the author of The ETF Investing Premium Newsletter.

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