Did Talk of Taper Lite Send Stocks Tumbling?

Stocks made a slight retreat on Thursday on speculation that the Fed will taper its bond-buying, although by a less-significant $10 billion.

The major stock indices bounced around on Thursday, as the recent phase of bullishness was tempered by speculation that the U.S. Federal Reserve will proceed to taper its bond-buying by $10 billion, rather than $15 billion, as previously expected. The dreaded taper — once it goes into effect — is expected to send stocks lower. In fact, mere speculation on the subject by commentators sent the S&P 500 falling 3.1 percent during August.

Since PIMCO’s Bill Gross first mentioned the possibility of what he called a “Taper Lite”, the theme has been adopted by many commentators who expect the FOMC to vote in favor of a cutback at its September 17-18 monetary policy meeting. The Fed has been purchasing $40 billion in mortgage-backed securities and $45 billion in Treasury securities (bonds, bills, notes, coupons, etc.) every month during the third phase of quantitative easing.

The Dow Jones Industrial Average (NYSEARCA:DIA) lost 25 points to finish Thursday’s trading session at 15,300 for a 0.17-percent decline. The S&P 500 (NYSEARCA:SPY) fell 0.34 percent to close at 1,683. The Nasdaq 100 (NASDAQ:QQQ) declined 0.14 percent to finish at 3,175. The Russell 2000 (NYSEARCA:IWM) dropped 0.65 percent to end the day at 1,048.

In other major markets, oil (NYSEARCA:USO) climbed by exactly one percent to close at $38.87. On London’s ICE Futures Europe Exchange, November futures for Brent crude oil rose $1.54 (1.40 percent) to $111.73/bbl. (NYSEARCA:BNO). December gold futures sank $40.90 (3.00 percent) to $1,322.90 per ounce (NYSEARCA:GLD). Transports backed over the neighbor’s cat on Thursday, as the Dow Jones Transportation Average (NYSEARCA:IYT) fell 1.16 percent.

In Japan, stocks declined after the nation’s Cabinet Office reported that “core” machinery orders — a crucial component of the nation’s core capital expenditures, which can signal future economic expansion or contraction — remained unchanged in July. Economists were expecting a 2.4 percent increase. “Core” machinery excludes equipment ordered by utility companies and shipping firms. The yen strengthened to 99.44 per dollar during Thursday’s trading session in Tokyo. A stronger yen causes Japanese exports to be less competitively priced in foreign markets (NYSEARCA:FXY). The Nikkei 225 Stock Average declined 0.26 percent advance to 14,387 (NYSEARCA:EWJ).

China’s Shanghai Composite Index rose to its highest level since June 5, as the financial sector soared following remarks by Premier Li Keqiang, who promised to make exchange rate reforms for the yuan. The Shanghai Composite Index advanced 0.64 percent to 2,255 (NYSEARCA:FXI). Hong Kong’s Hang Seng Index rose 0.07 percent to end the session at 22,953 (NYSEARCA:EWH).

In Europe, stocks retreated after Eurostat reported that industrial production fell by 1.5 percent in the Eurozone during July and by 1.0 percent in the greater, 28-nation European Union (NYSEARVA:VGK). On a year-over-year basis, industrial production fell by 2.1 percent in the Eurozone and by 1.7 percent in the EU28. The Euro STOXX 50 Index finished Thursday’s session with a 0.05 percent decline to 2,862 — remaining above its 50-day moving average of 2,765. Its Relative Strength Index is 62.68 (NYSEARCA:FEZ).

Technical indicators revealed that the S&P 500 remained above its 50-day moving average of 1,671 despite finishing Thursday’s session with a 0.34 percent decline to 1,683. Although a head-and-shoulders pattern appeared on the S&P chart from the period beginning in early May through September 6, the S&P recently broke the neckline of the pattern. (There had been a pinhead-and-shoulders pattern running from the period beginning on July 10 through August 16 and the S&P would have to rise above 1,695 to break the neckline of that pattern.) Its Relative Strength Index fell from 62.23 to 59.09. The MACD crossed above the zero line after crossing above the signal line on Monday. This move suggests the likelihood of a further advance.

For Thursday, all sectors were in negative territory except for the technology and consumer staples sectors, which advanced by 0.08 percent and 0.04 percent, respectively. The materials sector took the hardest hit, falling 1.04 percent.

Consumer Discretionary (NYSEARCA:XLY): -0.23 percent
Technology: (NYSEARCA:XLK): +0.08 percent
Industrials (NYSEARCA:XLI): -0.41 percent
Materials: (NYSEARCA:XLB): -1.04 percent
Energy (NYSEARCA:XLE): -0.59 percent
Financials: (NYSEARCA:XLF): -0.71 percent
Utilities (NYSEARCA:XLU): -0.28 percent
Health Care: (NYSEARCA:XLV): -0.17 percent
Consumer Staples (NYSEARCA:XLP): +0.04 percent

Bottom line: As investor concerns about the situation in Syria fade, anxiety is now being re-focused on the anticipated September taper of the Fed’s bond-buying, with a decision to be announced by the FOMC next Thursday.

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