Here’s What Dampened the Midweek Markets

Punchbowl separation anxiety overshadows upbeat earnings and economic reports, sending stocks lower.

Widespread investor concern about the dreaded taper of the Federal Reserve’s bond-buying program overshadowed Wednesday’s good news, sending stocks lower. Anxiety about rising interest rates sent the S&P Homebuilders Index (NYSEARCA:SPHOME, NYSEARCA:XHB) falling2.09 percent on the very day when the Census Bureau’s report on New Home Sales for June beat expectations. Although economists were expecting the Seasonally-Adjusted Annual Rate (SAAR) of new home sales to hit 481,000 in June, the Census Bureau reported a SAAR of 497,000.

On the other hand, the impact of rising interest rates on home sales was confirmed by Wednesday’s release of the weekly Mortgage Purchase Applications Indexby the Mortgage Bankers Association. The report disclosed that the seasonally-adjusted Purchase Index sank 2 percent from the week ending July 12.

Taper-phobia also caused investors to pay slight attention to the better-than expected Flash July U.S. Manufacturing PMI from Markit Economics. The flash reading rose to 53.2 from June’s 51.9, beating expectations of an increase to 52.8.

The better-than-expected earnings report from Apple (NASDAQ:AAPL) helped keep the Nasdaq out of the red on Wednesday. Other earnings beats came from Ford (NYSE:F), Boeing (NYSE:BA) and Eli Lilly (NYSE:LLY).

Of particular concern to investors was the earnings miss by Caterpillar (NYSEARCA:CAT). The slowdown in Caterpillar’s sales was interpreted as troubling signal about the state of the global economy – especially China’s economy. Caterpillar products are used for the mining industry, infrastructure expansion, construction projects and for burying one’s enemies in landfills.

The Dow Jones Industrial Average (NYSEARCA:DIA) lost 25 points to finish Wednesday’s trading session at 15,542 for a 0.16 percent decline. The S&P 500 (NYSEARCA:SPY) fell 0.38 percent to close at 1,685.

The Nasdaq 100 (NASDAQ:QQQ) advanced 0.32 percent to finish at 3,041. The Russell 2000 (NYSEARCA:IWM) dropped 0.80 percent to end the day at 1,043.

In other major markets, oil (NYSEARCA:USO) sank 1.81 percent to close at $37.40. On London’s ICE Futures Europe Exchange, September futures for Brent crude oil declined by $1.37 (1.26 percent) to $107.05/bbl. (NYSEARCA:BNO). August Gold Futures declined by $14.00 (1.05 percent) to $1,320.70 per ounce (NYSEARCA:GLD). Transports jackknifed on Wednesday, with the Dow Jones Transportation Average (NYSEARCA:IYT) falling 1.15 percent.

In Japan, stocks retreated after the nation’s Finance Ministry reported that exports increased by 7.4 percent, falling short of expectations of a ten-percent increase. Share prices for shipping companies sank, leading the stock market decline. The Nikkei 225 Stock Average declined 0.32 percent to 14,731 (NYSEARCA:EWJ).

China received a double-dose of bad news on Wednesday after the HSBC Flash China Manufacturing PMI for July fell further into the range of contraction to an eleven-month low of 47.7 from June’s final reading of 48.2 (NYSEARCA:FXI). The Flash China Manufacturing Output Index fell to a nine-month low of 48.2 from June’s 48.6. Adding insult to injury, Caterpillar (NYSEARCA:CAT) blamed its disappointing quarterly earnings of only $1.45 per share (compared with expectations of $1.70) on the economic slowdown in China, validating the strategy discussed by short-seller Jim Chanos at CNBC’s “Delivering Alpha” conference in New York last week. Chanos explained that he was short-selling Caterpillar because China’s economic slowdown would impact the company’s profits.

The Shanghai Composite Index declined 0.52 percent to close at 2,033 (NYSEARCA:FXI). Nevertheless, Hong Kong’s Hang Seng Index advanced 0.24 percent to finish the session at 21,968 (NYSEARCA:EWH).

European stocks rallied on Wednesday, as the Flash Eurozone Composite PMI for July broke into the range of expansion to hit its highest level in eighteen months (NYSEARCA:VGK). The Flash Eurozone Composite Output Index rose to 50.4 from June’s 48.7.

The Euro STOXX 50 Index finished Wednesday’s session with a 1.08 percent jump to 2,752 — climbing further above its 50-day moving average of 2,695. Its Relative Strength Index is 62.28 (NYSEARCA:FEZ).

Technical indicators reveal that the S&P 500 remained above its 50-day moving average of 1,643 after finishing Wednesday’s session with a 0.38 percent decline to 1,685. At this point, bears are hoping to see the formation of a head-and-shoulders pattern on the S&P chart. Its Relative Strength Index fell from 67.29 to 63.57. The MACD has now assumed a downward trajectory, suggesting a further decline.

For Wednesday, all sectors were in negative territory, except for the technology sector, which enjoyed a 0.67 advance. The utilities sector trailed the group, falling 1.52 percent.

Consumer Discretionary (NYSEARCA:XLY): -0.34 percent
Technology: (NYSEARCA:XLK): +0.67 percent
Industrials (NYSEARCA:XLI): -0.77 percent
Materials: (NYSEARCA:XLB): -0.94 percent
Energy (NYSEARCA:XLE): -1.11 percent
Financials: (NYSEARCA:XLF): -0.72 percent
Utilities (NYSEARCA:XLU): -1.52 percent
Health Care: (NYSEARCA:XLV): -0.16 percent
Consumer Staples (NYSEARCA:XLP): -0.65 percent

Bottom line: Widespread concern about rising interest rates put a damper on Wednesday’s stock market activity, as demonstrated by the fact that the S&P Homebuilders Index fell more than two percent on the very day when the Census Bureau’s report on New Home Sales for June beat expectations.

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

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