Good Economic News Is Still Bad News

Tuesday’s stock market activity proved that good economic news is still bad news for investors who have nightmares about the dreaded taper of the Federal Reserve’s bond-buying program. The Commerce Department reported that the nation’s trade deficit contracted by 22 percent during June. The result was so good that many economists now expect that second-quarter GDP will be revised upward from the initial estimate of 1.7 percent to a figure well above two percent. The good news reinforced what has become a nightmare scenario for many investors: a September taper of the quantitative easing program. As a result, stock prices sank.

The retail sector was particularly hard-hit on Tuesday, with the SPDR S&P Retail ETF sinking 1.23 percent (XRT). A disappointing second quarter sent American Eagle Outfitters falling 12 percent (AEO).

The Dow Jones Industrial Average (DIA) lost 93 points to finish Tuesday’s trading session at 15,518 for a 0.60 percent decline. The S&P 500 (SPY) dropped 0.57 percent to close at 1,697.

The Nasdaq 100 (QQQ) fell 0.67 percent to finish at 3,122. The Russell 2000 (IWM) sank 1.02 percent to end the day at 1,052.

In other major markets, oil (USO) fell 0.98 percent to close at $37.46.

On London’s ICE Futures Europe Exchange, September futures for Brent crude oil declined by 64 cents (0.59 percent) to $107.13/bbl. (BNO).

December gold futures declined by $20.40 (1.57 percent) to $1,282.00 per ounce (GLD).
Transports capsized during Tuesday’s session, with the Dow Jones Transportation Average (IYT) sinking 1.28 percent.

In Japan, stocks surged on the news that the country’s civil service pension fund will rotate out of bonds and into stocks. The Nikkei 225 Stock Average jumped by exactly one percent to 14,401 (EWJ).

In China, stocks managed to advance despite widespread fear of a downbeat trade balance report due on Thursday, which is expected to show that the nation’s exports increased less than expected. The Shanghai Composite Index advanced 0.49 percent to close at 2,060 (FXI). Hong Kong’s Hang Seng Index sank 1.34 percent to finish the session at 21,923 after a batch of disappointing earnings reports. HSBC and other financial sector stocks led the decline (EWH).

European Stocks struggled on Tuesday after a number of bleak earnings forecasts and disappointing earnings reports stole the spotlight (VGK). Germany’s second-largest steel company, Salzgitter, sank 12 percent after citing weak demand resulting from the ongoing Eurozone recession as the reason for an anticipated pretax loss of approximately €400 million during 2013. Also in Germany, the world’s largest reinsurance company, Munich Re, saw its share price drop 4.9 percent after reporting a 35 percent decline in quarterly profits as a result of claims arising from natural disasters (EWG).

The Euro STOXX 50 Index finished Tuesday’s session with a 0.65 percent decline to 2,790 – remaining above its 50-day moving average of 2,689. Its Relative Strength Index is 63.80 (FEZ).

Technical indicators reveal that the S&P 500 remained above its 50-day moving average of 1,650 after finishing Tuesday’s session with a 0.57 percent drop to 1,697 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 68.28 to 61.54. After edging above the signal line, the MACD has dropped back down to meet it. If the MACD crosses below the signal line, it would suggest a likely decline.

For Tuesday, all sectors were in negative territory. The materials sector took the hardest hit, falling 0.92 percent.

Consumer Discretionary (XLY): -0.41%

Technology: (XLK): -0.53%

Industrials (XLI): -0.75%

Materials: (XLB): -0.92%

Energy (XLE): -0.61%

Financials: (XLF): -0.89%

Utilities (XLU): -0.51%

Health Care: (XLV): -0.47%

Consumer Staples (XLP): -0.12%

Bottom line: Taper fear once again spooked investors after the Commerce Department reported that the trade deficit contracted by 22 percent in June, raising the likelihood that second quarter GDP will be revised to a figure well above 2 percent.

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