Here’s Why Markets Turned Confident

Stocks amassed more gains on Tuesday after two more economic reports were in the “Goldilocks” range.

Tuesday’s economic reports were closely scrutinized as the FOMC began its two-day monetary policy meeting, when it will decide on the fate of quantitative easing. Both the Consumer Price Index and the report on housing starts for May were strong enough to demonstrate that the economic recovery is continuing, yet they were not so strong as to convince the Federal Reserve that quantitative easing is no longer necessary. The reports were in the “Goldilocks” range, causing stocks to make another significant advance.

On the housing front, the U.S. Department of Commerce’s Census Bureau reported that May housing starts increased to a seasonally-adjusted annual rate of 914,000 compared with April’s revised rate of 856,000. Economists had been expecting an increase to 950,000 from April’s initial estimate of 853,000. The shortfall from the forecast could be used as a reason for the Fed to continue with its bond-buying program.

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The U.S. Department of Labor’s Bureau of Labor Statistics reported that the Consumer Price index increased by only 0.1 percent in May, despite economists’ expectations for a 0.2 percent rise. The reading for “core” CPI (excluding food and energy costs) indicated a 0.2 percent increase, consistent with economists’ expectations. The reduced inflationary pressure allows the Federal Reserve more room to extend its monetary easing efforts, without inflationary consequences (in the near future).

As was the case on Monday, the economic reports released on Tuesday had something for everyone, causing the major stock indices soar.

The Dow Jones Industrial Average (NYSEARCA:DIA) jumped 138 points to finish Tuesday’s trading session at 15,318 for a 0.91 percent advance. The S&P 500 (NYSEARCA:SPY) climbed 0.78 percent to close at 1,651. The Nasdaq 100 (NASDAQ:QQQ) surged 0.84 percent to close at 2,996. The Russell 2000 (NYSEARCA:IWM) soared 1.23 percent to a record-high close of 999.99.

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In other major markets, oil (NYSEARCA:USO) advanced 0.58 percent to close at $34.96. On London’s ICE Futures Europe Exchange, July futures for Brent crude oil advanced by 54 cents (0.51 percent) to $106.01/bbl. (NYSEARCA:BNO). August gold futures declined by $15.90 (1.15 percent) to $1,367.20 per ounce (NYSEARCA:GLD). Transports were turbocharged on Tuesday, with the Dow Jones Transportation Average (NYSEARCA:IYT) accelerating 0.95 percent.

Japanese stocks declined slightly on Tuesday after the yen failed to weaken below Monday’s exchange rate of approximately 94.8 per dollar. A weaker yen causes Japanese exports to be more competitively priced in foreign markets (NYSEARCA:FXY). The yen maintained its strength after the government reported that Japan’s industrial production increased by only 0.9 percent in May, compared with a 1.7 percent increase in April. Economists had been anticipating another 1.7 percent rise. The Nikkei 225 Stock Average declined 0.20 percent to 13,007 (NYSEARCA:EWJ).

European stocks were mixed on Tuesday despite the fact that the ZEW Indicator of Economic Sentiment for Germany rose 2.1 points during June to 38.5. The reading exceeded economists’ expectations for a less-significant increase to 38.1 (NYSEARCA:EWG). The Euro STOXX 50 Index finished Tuesday’s session with a 0.07 percent dip to 2,700 — remaining below its 50-day moving average of 2,722. Its Relative Strength Index is 45.53 (NYSEARCA:FEZ).

In China, stocks made a modest advance following reports that the People’s Bank of China may reduce interest rates and that there might be a reduction in the reserve requirement ratios for the nation’s banks. The Shanghai Composite Index advanced 0.41 percent to 2,159 (NYSEARCA:FXI). Hong Kong’s Hang Seng Index was unchanged at 21,225 (NYSEARCA:EWH).

Technical indicators reveal that the S&P 500 remained above its 50-day moving average of 1,617 after closing at 1,651. The index is advancing from a double-bottom, which appears along the 50-day moving average on June 6 and 13. Its Relative Strength Index climbed from 52.78 to 56.36. Although the MACD remains below the signal line, it is now on an upward trajectory and is poised to cross above the signal line. If that happens, it would suggest the likelihood of a continued advance.

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For the day, all sectors were solidly in positive territory, as the industrial and consumer discretionary sectors took the lead, with gains of 1.18 percent and 1.02 percent, respectively. The consumer staples sector was the laggard, advancing by 0.37 percent.

Consumer Discretionary (NYSEARCA:XLY): +1.02 percent

Technology (NYSEARCA:XLK): +0.79 percent

Industrials (NYSEARCA:XLI): +1.18 percent

Materials (NYSEARCA:XLB): +0.45 percent

Energy (NYSEARCA:XLE): +0.57 percent

Financials (NYSEARCA:XLF): +0.63 percent

Utilities (NYSEARCA:XLU): +0.68 percent

Health Care (NYSEARCA:XLV): +0.84 percent

Consumer Staples (NYSEARCA:XLP): +0.37 percent

Bottom line: Tuesday brought two more economic reports with results in the “sweet spot” to justify continued quantitative easing, while the FOMC deliberates the fate of the program, which will be announced on Wednesday. The results made investors feel confident enough about the situation to remain in a “risk-on” mode throughout Tuesday’s trading session.

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

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