Investors Bullish on Belief that QE Has Nine Lives

Investors were delighted by the industrial production decline as hopes for prolonged quantitative easing sent the Dow and S&P 500 to new records.

The worse-than-expected drop in April industrial production was enthusiastically received by investors, who saw the bad news as justification for the Fed to reverse any earlier plans to taper back its quantitative easing program. The 0.5-percent decline in industrial production during April portrayed a situation worse than that seen by economists, who anticipated a less significant decline of 0.2 percent.

The Dow Jones Industrial Average (NYSEARCA:DIA) jumped 60 points to finish Wednesday’s trading session at a new record-high closing level of 15,275 for a 0.40-percent advance. The Dow also reached a new record intraday high of 15,301.34. The S&P 500 (NYSEARCA:SPY) advanced 0.51 percent to set a new record-high close at 1,658.78. The S&P also reached a new intraday record high of 1,661.49.

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The Nasdaq 100 (NASDAQ:QQQ) rose 0.22 percent to 3,002. The Russell 2000 (NYSEARCA:IWM) advanced 0.26 percent to a new record-high close at 988.54. In other major markets, oil (NYSEARCA:USO) advanced 0.15 percent to close at $33.61.

On London’s ICE Futures Europe Exchange, June futures for Brent crude oil  advanced by $1.08, or 1.05 percent, to $103.59/bbl. (NYSEARCA:BNO). June gold futures declined by $33.40, or 2.34 percent, to $1,391.20 per ounce (NYSEARCA:GLD).

Transports sped along on Wednesday, with the Dow Jones Transportation Index (NYSEARCA:IYT) surging 0.75 percent.

European investors reacted with a wave of bullishness after Eurostat reported that the 27-nation European Union joined the euro zone in a recession that has been dragging on for six consecutive quarters. Euro zone GDP contracted by 0.2 percent during the first quarter, and GDP for the 27-nation European Union contracted by 0.1 percent (NYSEARCA:VGK).

The Euro STOXX 50 Index finished with a 0.50-percent advance to 2,809 — remaining above its 50-day moving average of 2,676 (NYSEARCA:FEZ).

In China, stocks advanced after the People’s Bank of China lowered its reference rate, keeping the yuan within its permitted trading range. So far this year, the exchange rate for the yuan has increased 1.4 percent. At the close of trading in Shanghai, the yuan fell 0.05 percent to 6.1459 per dollar. The Shanghai Composite Index advanced 0.36 percent to 2,224 (NYSEARCA:FXI). Hong Kong’s Hang Seng Index climbed 0.50 percent to 23,044 (NYSEARCA:EWH).

In Japan, yen weakness was again the big story as stocks soared after the yen dropped lower than a penny to less than 102 yen per dollar. A weaker yen results in more-competitive prices for Japanese exports in foreign markets (NYSEARCA:FXY). The Nikkei 225 Stock Average skyrocketed 2.29 percent to 15,096 (NYSEARCA:EWJ).

Technical indicators reveal that the S&P 500 remains far above its 50-day moving average of 1,577 after closing at 1,658.78 — motivating bears to hope that we are watching the formation of a head-and-shoulders pattern, which would signal a decline. Its Relative Strength Index rose from 71.49 to 73.34 — further above the threshold level of 70, which most investors consider an “overbought” signal. Both the MACD and the signal line continue soaring above the zero line, suggesting the likelihood of a further advance.

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For the day, all sectors finished in solidly positive territory except for the energy sector, which fell 0.28 percent. The big winners were consumer staples, utilities, and financial.

Consumer Discretionary (NYSEARCA:XLY):  +0.54 percent

Technology (NYSEARCA:XLK):  +0.32 percent

Industrials (NYSEARCA:XLI):  +0.41 percent

Materials (NYSEARCA:XLB):  +0.55 percent

Energy (NYSEARCA:XLE):  -0.28 percent

Financials (NYSEARCA:XLF):  +0.92 percent

Utilities (NYSEARCA:XLU):  +0.95 percent

Health Care (NYSEARCA:XLV):  +0.53 percent

Consumer Staples (NYSEARCA:XLP):  +0.99 percent

Bottom line: Bad news was good news for American investors (as well as European investors) on Wednesday as the worse-than-expected decline in industrial production during April sent both the Dow and the S&P 500 to new record high intraday and closing levels. 

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

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