Thursday was a rough day for the U.S. markets because good news was bad news and bad news was bad news.
Stocks sank on Thursday while caught in a double-bind resulting from the current “pre-taper of quantitative easing” era. The rule that “good news is bad news” applied to the better-than-expected report on initial unemployment claims, which reinforced expectations that the Federal Reserve would begin to taper its bond-buying in September because the unemployment situation is improving.
On the other hand, the bad news that the Philly Fed Manufacturing Index and the Empire State Manufacturing Survey both sank, was just plain-old bad news — doing nothing to abate the taper and serving only to hurt stock prices. The bearish call from Cisco (NASDAQ:CSCO) CEO John Chambers during his Wednesday afternoon conference call really spooked investors. His planned layoff of 4,000 employees apparently did nothing to inspire the pro-quantitative easing crowd. The explanation by Chambers that emerging market growth has stalled, helped fuel the already-rising sentiment of risk-aversion among investors.
The Dow Jones Industrial Average (NYSEARCA:DIA) lost 225 points to finish Thursday’s trading session at 15,112 for a 1.47 percent drop. The S&P 500 (NYSEARCA:SPY) sank 1.43 percent to close at 1,661. The Nasdaq 100 (NASDAQ:QQQ) dropped 1.70 percent to finish at 3,076. The Russell 2000 (NYSEARCA:IWM) fell 1.93 percent to end the day at 1,027. In other major markets, oil (NYSEARCA:USO) advanced 0.39 percent to close at $38.24.
On London’s ICE Futures Europe Exchange, October futures for Brent crude oil advanced by 57 cents (0.52 percent) to $109.39/bbl. (NYSEARCA:BNO). December gold futures advanced by $31.80 (2.38 percent) to $1,365.20 per ounce (NYSEARCA:GLD). Transports ran aground during Thursday’s session, with the Dow Jones Transportation Average (NYSEARCA:IYT) dropping 0.91 percent.
The Japanese stock market reversed course on Thursday as the exchange rate for the yen rose, hurting exporters. The yen strengthened to 97.63 per dollar before the closing bell in Tokyo. A stronger yen causes Japanese exports to be less competitively priced in foreign markets (NYSEARCA:FXY). The Nikkei 225 Stock Average sank 2.12 percent to 13,752 (NYSEARCA:EWJ).
In China, stocks dropped on Thursday with the pharmaceutical sector leading the decline, as the result of an investigation into bribery and corruption in the business. The Shanghai Composite Index fell 0.87 percent to close at 2,081 (NYSEARCA:FXI). Hong Kong’s Hang Seng Index dipped 0.01 percent to end the day at 22,539 (NYSEARCA:EWH). European stocks had a horrible day, as concerns about the potential consequences from the violence in Egypt took center stage while corporate earnings season drew to a close (NYSEARCA:VGK). Trading volume was thin, as most Europeans are “on holiday” during August.
Earnings disappointments were led by Zurich Insurance, which sank 3.6 percent as a result of payouts on flood claims, causing the company to miss earnings expectations. BG Group, which relies on Egypt – of all places – as a source for nearly one-quarter of its oil and gas production, fell 2.4 percent as the chaos in that nation continues to escalate. Apparel giant Hennes & Mauritz saw its share price after coming up short at the top line, with sales failing to reach expectations.
The Euro STOXX 50 Index finished Thursday’s session with a 0.57 percent drop to 2,835 — remaining above its 50-day moving average of 2,700. Its Relative Strength Index is 67.11 (NYSEARCA:FEZ).
Technical indicators revealed that the S&P 500 continued to remain above its 50-day moving average of 1,656 despite finishing Thursday’s session with a 1.43 percent drop to 1,661. At this point, bears are hoping to see the formation of a head-and-shoulders pattern on the S&P chart. (There already is a pinhead-and-shoulders pattern running from the period beginning on July 10 through the present.) Its Relative Strength Index fell from 52.24 to 40.82. The MACD is below the signal line and both are on a downward trajectory, suggesting a continued decline.
For Thursday, all sectors were solidly in negative territory. The consumer discretionary sector took the hardest hit, sinking 1.75 percent.
Consumer Discretionary (NYSEARCA:XLY): -1.75 percent
Technology: (NYSEARCA:XLK): -1.61 percent
Industrials (NYSEARCA:XLI): -1.12 percent
Materials: (NYSEARCA:XLB): -0.72 percent
Energy (NYSEARCA:XLE): -0.55 percent
Financials: (NYSEARCA:XLF): -1.47 percent
Utilities (NYSEARCA:XLU): -1.27 percent
Health Care: (NYSEARCA:XLV): -1.68 percent
Consumer Staples (NYSEARCA:XLP): -1.60 percent
Bottom line: Thursday’s good news was bad news and the bad news was worse, causing stocks to take a hard fall, with increasing fears that the Federal Reserve will taper its bond-buying program in September.
John Nyaradi is the author of The ETF Investing Premium Newsletter.