Risk-On Mode Puts Markets Back on Top

Thursday’s economic reports were in a “Goldilocks” range — sending investors into a “risk-on” mode and pushing stocks skyward.

Thursday’s economic data allowed stocks to make a significant rebound from Wednesday’s bloodbath. All three economic reports were in a “Goldilocks” range: Positive enough to boost investor enthusiasm about the economic recovery, without being so strong that the U.S. Federal Reserve would reduce its quantitative easing program. As a result, investors embraced risk and sent the major stock indices soaring in excess of one percent.

The U.S. Department of Labor reported that initial unemployment claims for the week ending June 8 decreased by 12,000 to 334,000. Economists had been expecting an increase to 350,000 initial claims. Nevertheless, 334,000 new unemployment claims in one week is never going to bring us to the Fed’s threshold unemployment rate of 6.5 percent for ending quantitative easing.

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Although retail sales increased 0.6 percent in May, beating economists’ expectations for a 0.5 percent increase, the forecast for sales ex autos was 0.4 percent compared with the reported figure of 0.3 percent. As a result, the “glass half empty” crowd got some evidence to convince the Fed that it is too early to cut back on the bond-buying.

The business inventories report from the U.S. Department of Commerce’s Census Bureau was in line with economists expectations. Without an upside surprise, why would the Fed see the report as justification to cut back on quantitative easing? It was a win-win for fans of the liquidity pump.

The final burst of bullishness during the last hour of trading resulted from a remark by Ben Bernanke’s de facto press secretary, Jon Hilsenrath of The Wall Street Journal, that the FOMC meeting on June 18-19 will be a dovefest.

The Dow Jones Industrial Average (NYSEARCA:DIA) jumped 180 points to finish Thursday’s trading session at 15,176 for a 1.21 percent surge. The S&P 500 (NYSEARCA:SPY) vaulted 1.48 percent to close at 1,636. The Nasdaq 100 (NASDAQ:QQQ) soared 1.26 percent to close at 2,962. The Russell 2000 (NYSEARCA:IWM) skyrocketed 1.79 percent to 989.

In other major markets, oil (NYSEARCA:USO) advanced 0.88 percent to close at $34.33. On London’s ICE Futures Europe Exchange, July futures for Brent crude oil advanced by $1.37, or 1.32 percent, to $104.93/bbl (NYSEARCA:BNO). August gold futures declined by $7.90, or 0.57 percent, to $1,384.10 per ounce (NYSEARCA:GLD). Transports were in hyperdrive on Thursday, with the Dow Jones Transportation Average (NYSEARCA:IYT) accelerating 1.91 percent.

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The Japanese stock market crashed on Thursday after investors finally lost faith in the government’s ability to achieve its 2 percent inflation target. Japan is now officially in a bear market after the Nikkei 225 Stock Average sank 20 percent in only three weeks.

The events leading to the crash began with remarks made by Finance Minister Taro Aso who pointed out that several Bank of Japan board members were afraid that the nation’s monetary easing efforts would cause Japanese Government Bond yields to spike. The remarks were similar to a number of reports which had been published on May 27, concerning a rift among BOJ board members after some members complained that the aggressive monetary easing program was causing volatility in the market for Japanese Government Bonds.

After the Tokyo Stock Exchange closed on Wednesday, the exchange rate for yen escalated. Just before Thursday’s closing bell in Tokyo, the yen rose to approximately 94 per dollar. The Nikkei 225 Stock Average finished Thursday’s historic session with a 6.35 percent nosedive to 12,445 (NYSEARCA:EWJ).

The major European stock indices made a steady climb from their initial slump on Thursday, to finish the session only slightly in the red. Although many commentators claimed that the losses were pared by America’s upbeat economic reports, the stock advances began long before the release of America’s reports at 8:30 EDT (NYSEARCA:VGK).

The Euro STOXX 50 Index finished Thursday’s session with a 0.18 percent decline to 2,661 — remaining below its 50-day moving average of 2,716. Its Relative Strength Index is 37.89 (NYSEARCA:FEZ).

In China, stocks sank after the Shanghai Stock Exchange opened for the first day since the weekend’s release of a batch of dismal economic reports, due to the 3-day celebration of Dragon Boat holiday. As we discussed on Sunday, the data included a report from China’s National Bureau of Statistics that the nation’s industrial production increased by 9.2 percent during May. The result fell short of economists’ expectations for a 9.4 percent increase. It also represented a decline from April’s reading of 9.3 percent. The Shanghai Composite Index sank 2.74 percent to 2,178 (NYSEARCA:FXI). Hong Kong’s Hang Seng Index dropped 2.19 percent to 20,887 (NYSEARCA:EWH).

Technical indicators reveal that the S&P 500 remained above its 50-day moving average of 1,612 after closing at 1,636 – after narrowly finishing above the 50-day MA on Wednesday.

Some bears might insist that a head-and-shoulders pattern has now formed on the chart, which would signal a decline. Others may point out that the right shoulder appears to have broken above the neckline, although if the S&P 500 should close below its 50-day moving average, that will not matter. A selloff would likely ensue. Its Relative Strength Index jumped from 44.20 to 52.03. The MACD remains below the signal line and both have been on descending trajectories, suggesting the likelihood of a further decline. However, the MACD histogram is on an ascending trajectory, back toward the zero line.

For the day, all sectors were solidly in positive territory, with gains in excess of one percent. The financial and consumer discretionary sectors led the group, with gains of 1.88 percent and 1.87 percent, respectively. The consumer staples sector was the laggard, with a 1.04 percent gain.

Consumer Discretionary (NYSEARCA:XLY): +1.87 percent

Technology (NYSEARCA:XLK): +1.14 percent

Industrials (NYSEARCA:XLI): +1.47 percent

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Materials (NYSEARCA:XLB): +1.84 percent

Energy (NYSEARCA:XLE): +1.68 percent

Financials (NYSEARCA:XLF): +1.88 percent

Utilities (NYSEARCA:XLU): +1.62 percent

Health Care (NYSEARCA:XLV): +1.55 percent

Consumer Staples (NYSEARCA:XLP): +1.04 percent

Bottom line: Thursday became a “risk on” day after all three of the economic reports scheduled for release fell within a “Goldilocks” range: They were upbeat without being so strong as to encourage the Federal Reserve to cut back on its bond-buying.

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

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