Did Investors Lose Taste for Momentum Stocks?

It was an interesting day on Wednesday on Wall Street as major U.S. markets finish mixed after a strong start and a weak close. The big news was the announcement that Janet Yellen would be new Chairman of the Federal Reserve. Seen as ultra-dovish, markets started with celebratory gains but gave them up into the close as other news dampened animal spirits.

Gridlock goes on in Washington, but now it looks increasingly likely that the two sides will do what they always do, nothing, as the proposal gaining the most traction looks like budget ceiling relief for now with yet another deadline in December 2014. This unfortunate tactic has been called “kicking the can” or “extend and pretend.” I call it “delay and defer” and it seems like the only outcome we ever see these days out of Washington. I say unfortunate because, one day, like it or not, tough decisions are going to have to be made and the longer this goes on, the tougher they’re going to be.

Nevertheless, stocks managed to recover from Tuesday’s free-fall, although the Nasdaq and the Russell 2000 continued to sink as “momentum stocks” failed to shake off their momentum, which turned bearish during Tuesday’s session. Both the Nasdaq 100 and the Nasdaq Composite fell 0.46 percent.

The stock market advance was assumed to have been based on widespread hope that the folks on Capitol Hill would come to their senses. President Obama’s nomination of Janet Yellen as Fed Chair was also embraced by the market, as she was seen as not being in any particular hurry to end the Fed’s bond purchases.

The Dow Jones Industrial Average (NYSEARCA:DIA) regained 26 points to finish Wednesday’s trading session at 14,802 for a 0.18 percent advance. The S&P 500 (NYSEARCA:SPY) rose 0.06 percent to close at 1,656. The Nasdaq 100 (NASDAQ:QQQ) declined 0.36 percent to finish at 3,142. The Russell 2000 (NYSEARCA:IWM) also fell 0.36 percent to close at 1,043.

In other major markets, oil (NYSEARCA:USO) sank 2.04 percent to close at $36.55. On London’s ICE Futures Europe Exchange, OIL declined $1.22 (1.12 percent) to $108.19/bbl. (NYSEARCA:BNO). Gold fell $18.00 (1.36 percent) to $1,306.60 per ounce (NYSEARCA:GLD).

Transports were back in gear on Wednesday, with the Dow Jones Transportation Average (NYSEARCA:IYT) climbing 0.32 percent. Warning: There is a head-and-shoulders pattern on the IYT chart (seen as a signal for a decline). At Wednesday’s closing price of $115.54 per share, IYT remains below its 50-day moving average of $116.06, which it crossed with Tuesday’s stock market swoon.

In Japan, stocks managed to make a big advance, despite the fact that the exchange rate for the yen rose. The rally was attributed to reports that President Obama would announce at 3:00 p.m. that Janet Yellen would be his nominee as Fed Chair. The real reason for the rally was because the Bank of Japan minutes indicated that Abenomics was working. The yen strengthened slightly to 96.88 per dollar just before Wednesday’s closing bell in Tokyo. A stronger yen causes Japanese exports to be less competitively priced in foreign markets (NYSEARCA:FXY). Nevertheless, the Nikkei 225 Stock Average jumped 1.03 percent to 14,037 (NYSEARCA:EWJ).

As usual, events in the United States were reported as being the controlling influences in the European stock markets. According to the ethnocentric consensus, European stocks were in a holding pattern on Wednesday, as the world awaited resolution of the deadlock in Washington.

The Euro STOXX 50 Index finished Wednesday’s session with a 0.05 percent advance to 2,904 — remaining above its 50-day moving average of 2,845 (which rose more than the STOXX 50 itself on Wednesday, since it was 2,842 on Tuesday). Its Relative Strength Index is 54.80 (NYSEARCA:FEZ).

Technical indicators revealed that the S&P 500 remained below its 50-day moving average of 1,678 despite finishing Wednesday’s session with a 0.06 percent advance to 1,656. Its Relative Strength Index rose slightly from 39.19 to 39.63. The MACD continues to sink below the signal line and has now crossed below the zero line, suggesting the likelihood of a resumed decline.

For Wednesday, five sectors finished in positive territory four sectors finished in the red. The utilities sector led the group, with a 0.40 percent advance. The consumer discretionary sector took the hardest hit, falling 0.46 percent.

Consumer Discretionary (NYSEARCA:XLY): -0.46 percent
Technology: (NYSEARCA:XLK): +0.38 percent
Industrials (NYSEARCA:XLI): -0.04 percent
Materials: (NYSEARCA:XLB): +0.15 percent
Energy (NYSEARCA:XLE): -0.35 percent
Financials: (NYSEARCA:XLF): +0.33 percent
Utilities (NYSEARCA:XLU): +0.40 percent
Health Care: (NYSEARCA:XLV): -0.18 percent
Consumer Staples (NYSEARCA:XLP): +0.08 percent

Bottom line: Both the Dow and the S&P 500 managed to stay out of the red on Wednesday, although the Nasdaq and the Russell 2000 continued to slide as investors lost their taste for “momentum” stocks after Tuesday’s disastrous trading session.

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

Don’t Miss: John Cassidy Prescribes a Market Crash for America’s Political Constipation.

More from The Cheat Sheet