Market Action: Taper Concern Still Hovers

Stocks again retreated on good news during Thursday’s session, proving that taper fear is not gone — it has just been reduced to taper “concern”.

Just when you thought it was gone – it’s back. After stocks managed to advance last Wednesday following three positive economic reports, financial commentators had reached the conclusion that the Federal Reserve’s new mantra, “tapering is not tightening” had finally sunk in, and that investors no longer had the same fears concerning cutbacks to the Fed’s bond purchases.

Thursday’s trading action demonstrated that the only difference is that the fear has been reduced to concern. Instead of a huge stock selloff in the wake of positive economic data, we saw a more restrained, 0.43 percent decline in both the Dow and the S&P 500. The yield on the ten-year Treasury note rose slightly to 2.87 percent.

On Thursday, the Bureau of Economic Analysis released its second estimate of third quarter GDP, which jumped to a 3.6 percent rate of annual expansion from the initial estimate of 2.8 percent growth. The Department of Labor reported that for the week ending November 30, the advance figure for initial unemployment claims was down to 298,000.

The number represented a 23,000-claim reduction from the previous week’s 321,000 claims. Economists had been expecting an increase to 322,000 claims. This report, following on the heels of Wednesday’s better-than-expected ADP National Employment Report, has raised expectations that Friday’s release of the November non-farm payrolls report from the Bureau of Labor Statistics will bring another upside surprise.

The string of improving economic data has raised concern that the FOMC will announce the beginning of the dreaded taper of its bond purchases on December 18. Nevertheless, in a speech before business leaders on Thursday, Atlanta Federal Reserve President Dennis Lockhart (who is not a voting FOMC member) anticipated that the taper would be “on the table” at the December FOMC meeting, although the thrust of his message suggested that a “Dectaper” would be unlikely. Lockhart discussed the idea that the FOMC should disclose a “taper timetable”.

The Dow Jones Industrial Average (NYSEARCA:DIA) lost 68 points to finish Thursday’s trading session at 15,821 for a 0.43 percent decline. The S&P 500 (NYSEARCA:SPY) also fell 0.43 percent to close at 1,785. The Nasdaq 100 (NASDAQ:QQQ) retreated 0.15 percent to finish at 3,477. The Russell 2000 (NYSEARCA:IWM) advanced 0.10 percent to end the day at 1,122.

In other major markets, oil (NYSEARCA:USO) advanced 0.14 percent to close at $34.93. On London’s ICE Futures Europe Exchange, January futures for Brent crude oil declined $0.74 (0.66 percent) to $110.69/bbl. (NYSEARCA:BNO). February gold futures declined $22.80 (1.83 percent) to $1,224.40 per ounce (NYSEARCA:GLD). Transports managed to avoid the snowstorm in Colorado on Thursday, with the Dow Jones Transportation Average (NYSEARCA:IYT) advancing 0.02 percent.

In Japan, the exchange rate for the yen continued to be the dominant factor in stock market activity. Japanese stocks were crushed for the second consecutive day, as the yen strengthened to 102.04 per dollar before Thursday’s 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 1.50 percent to 15,177 (NYSEARCA:EWJ).

Stocks retreated China as a round of profit-taking followed Wednesday’s 1.31 percent surge in Shanghai. Telecom investors “sold the news” after the government awarded 4G licenses to wireless carriers. The Shanghai Composite Index declined 0.21 percent to 2,247 (NYSEARCA:FXI). Hong Kong’s Hang Seng Index dipped 0.07 percent to end the day at 23,712 (NYSEARCA:EWH).

Stocks sank in Europe after European Central Bank President Mario Draghi presented a depressing explanation as to why the ECB was leaving the benchmark interest rate at a record-low 0.25 percent. Draghi explained that higher commodity prices and slumping demand combined with weak export growth to support a grim forecast for the region’s economy.

The Euro STOXX 50 Index took a 1.29 percent nosedive to 2,953 – sinking further below its 50-day moving average of 3,015. Its Relative Strength Index is 33.93 (NYSEARCA:FEZ). More Reasons to Buy Europe

Technical indicators revealed that the S&P 500 remained above its 50-day moving average of 1,749 despite declining 0.43 percent to finish Thursday’s session at 1,785. Its Relative Strength Index declined from 57.56 to 52.87. The MACD is falling below the signal line, which would suggest that the S&P will continue to retreat during the immediate future.

On Thursday, only two sectors finished in positive territory and seven sectors finished in the red. The financial sector took the hardest hit, falling 0.94 percent.

Consumer Discretionary (NYSEARCA:XLY): +0.11 percent
Technology: (NYSEARCA:XLK): -0.32 percent
Industrials (NYSEARCA:XLI): +0.04 percent
Materials: (NYSEARCA:XLB): -0.57 percent
Energy (NYSEARCA:XLE): -0.34 percent
Financials: (NYSEARCA:XLF): -0.94 percent
Utilities (NYSEARCA:XLU): -0.81 percent
Health Care: (NYSEARCA:XLV): -0.18 percent
Consumer Staples (NYSEARCA:XLP): -0.91 percent

Bottom line: Thursday’s better-than-expected economic reports raised concern that the Federal Reserve might begin tapering its bond purchases in December, resulting in a 0.43 percent decline for both the Dow and the S&P 500.

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

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