How Taper Talk Has Cooled the Stock Market

After closing in positive territory for 20 consecutive Tuesdays, the Dow Jones Industrial Average fails to reach number 21.

Taper Talk has cooled the stock market, preventing the Dow Jones Industrial Average (NYSEARCA:DIA) from reaching its 21st consecutive Tuesday with a close in positive territory. Kansas City Federal Reserve President Esther George — a consistent opponent of quantitative easing — spoke out again on Tuesday in favor of decreased bond-buying. San Francisco Fed President John Williams (not an FOMC member) put the scare into people by suggesting that the Fed might make a modest downward adjustment of its bond purchases during the summer. Meanwhile, a number of economists have speculated that the Fed will readjust its quantitative easing program in September.

The ongoing scuttlebutt — and its impact on the stock market — places more pressure on Ben Bernanke to address the issue in a post-FOMC meeting press conference on June 19. Bernanke’s de facto “press secretary”, Jon Hilsenrath of The Wall Street Journal, has previously explained that Dr. Bernanke objects to the use of the term “taper” to describe what the Fed has planned for QE.

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According to Hilsenrath, the “exit strategy” from quantitative easing will not necessarily follow a steady, gradual attenuation process. Unless and until Chairman Bernanke addresses this matter, the stock market will continue to take a dip every time a television commentator says the word taper.

The Dow lost 76 points to finish Tuesday’s trading session at 15,177 for a 0.50 percent decline. The S&P 500 (NYSEARCA:SPY) finished with a 0.55-percent fall to close at 1,631. The Nasdaq 100 (NASDAQ:QQQ) declined by 0.57 percent to close at 2,973. The Russell 2000 (NYSEARCA:IWM) sank 0.86 percent to 981.

In other major markets, oil (NYSEARCA:USO) advanced 0.12 percent to close at $33.20. On London’s ICE Futures Europe Exchange, July futures for Brent crude oil advanced by $1.37, or 1.34 percent, to $103.43/bbl. (NYSEARCA:BNO). June gold futures declined by $13.10, or 0.93 percent, to $1,398.60 per ounce (NYSEARCA:GLD). Transports were stuck in a rut on Tuesday, with the Dow Jones Transportation Index (NYSEARCA:IYT) declining by 0.50 percent.

European stocks advanced on Tuesday after Spain’s Labor Ministry reported that the number of unemployed people in the nation dropped by 1.97 percent in May to 4.89 million (NYSEARCA:VGK). The Euro STOXX 50 Index finished Tuesday’s trading session with a 0.29 percent advance to 2,755 — remaining above its 50-day moving average of 2,707. Its Relative Strength Index is 46.97 (NYSEARCA:FEZ).

 

The Japanese stock market rallied on Tuesday as the yen gradually weakened during the course of the trading session. A weaker yen causes Japanese exports to be more competitively priced in foreign markets (NYSEARCA:FXY). A report from the nation’s Labor Ministry disclosed that monthly wages increased by 0.3 percent on a year-over-year basis. The result was seen as proof that Abenomics is succeeding in its objective to increase inflation to 2 percent. The Nikkei 225 Stock Average rebounded 2.05 percent to 13,533 (NYSEARCA:EWJ).

In China, stocks continued to decline in the wake of disappointing PMI reports from the government and HSBC. The HSBC China Manufacturing PMI for May declined into contractionary territory, hitting 49.2 from April’s 50.4. The Shanghai Composite Index sank 1.15 percent to 2,272 (NYSEARCA:FXI). Hong Kong’s Hang Seng Index crept upward by 0.01 percent to 22,285 (NYSEARCA:EWH).

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Technical indicators reveal that the S&P 500 remains above its 50-day moving average of 1,603 after closing at 1,631 – as bears hope that we could be watching the formation of a head-and-shoulders pattern, which would signal a decline. Its Relative Strength Index dropped from 53.67 to 50.02. MACD has generated a “sell” signal, suggesting the likelihood of a decline.

For the day, all sectors were solidly negative, except for the consumer staples sector, which barely squeaked out of the red. The financial and energy sectors took the hardest hits.

Consumer Discretionary (NYSEARCA:XLY): -0.35 percent

Technology (NYSEARCA:XLK): -0.44 percent

Industrials (NYSEARCA:XLI): -0.55 percent

Materials (NYSEARCA:XLB): -0.12 percent

Energy (NYSEARCA:XLE): -0.79 percent

Financials (NYSEARCA:XLF): -0.91 percent

Utilities (NYSEARCA:XLU): -0.34 percent

Health Care (NYSEARCA:XLV): -0.62 percent

Consumer Staples (NYSEARCA:XLP): +0.02 percent

Bottom line: The stock market again demonstrated how important the quantitative easing program has been to its smooth functioning (and unrelenting advances). After two Federal Reserve officials discussed ending the program this summer, the major stock indices headed into the red.

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

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