Stocks Build A Cushion For Taper Selloff

Stocks made strong advances on Tuesday, building a nice cushion in case a decision by the FOMC to begin the taper on Wednesday sparks a swoon.

Stocks made solid advances on the eve of the announcement by the FOMC as to whether it will begin to taper back the Federal Reserve’s bond purchases. The major stock indices have built large cushions, which could soften any significant fall in the event of panic selling, following the release of the Fed’s decision. The FOMC Statement will be released at 2:00 on Wednesday and Ben Bernanke will hold a press conference at 2:30.

It is widely anticipated that the Fed will cut back its monthly bond purchases by $10 billion to $75 billion.

The Bureau of Labor Statistics reported that the Consumer Price Index rose by 0.1 percent during August, as did “core” CPI (which excludes food and energy expenses). Both fell short of the anticipated 0.2 percent increase for each reading. On a year-over-year basis, the 1.5 percent increase fell short of the expected 1.6 percent rise, although year-over-year “core” CPI met the expected 1.8 percent increase. The FOMC has indicated that its target for inflation is 2.0 percent.

The Dow Jones Industrial Average (DIA) gained 34 points to finish Tuesday’s trading session at 15,529 for a 0.23 percent advance. The S&P 500 (SPY) climbed 0.42 percent to close at 1,704.

The Nasdaq 100 (QQQ) surged 0.70 percent to finish at 3,190. The Russell 2000 (IWM) jumped 0.96 percent to end the day at 1,066.

In other major markets, oil (USO) sank 0.97 percent to close at $37.74.

On London’s ICE Futures Europe Exchange, November futures for Brent crude oil fell $2.29 (2.08 percent) to $107.78/bbl. (BNO).

December gold futures declined by $7.80 (0.59 percent) to $1,310.00 per ounce (GLD).

Transports were dragging through slow traffic on Tuesday, as the Dow Jones Transportation Average (IYT) advanced 0.14 percent.

In Japan, stocks retreated as the yen strengthened to 99.12 per dollar just before Tuesday’s closing bell in Tokyo. The yen was trading at 99.38 per dollar earlier in the session. A stronger yen causes Japanese exports to be less competitively priced in foreign markets (FXY). The Nikkei 225 Stock Average declined 0.65 percent to 14,311 (EWJ).

In China, stocks fell after the nation’s Ministry of Commerce reported that foreign direct investment in China rose by only 0.6 percent in August, falling far short of economists’ expectations for a 12.5 percent surge. The Shanghai Composite Index sank 2.05 percent to 2,185 (FXI). Hong Kong’s Hang Seng Index declined 0.31 percent to end the session at 23,180 (EWH). The Shanghai Stock Exchange will be closed on Thursday and Friday for the Mid-Autumn Festival and the Hong Kong Stock Exchange will be closed on Friday.

In Europe, stocks retreated after the European Automobile Manufacturers’ Association (ACEA) reported that new car sales decreased by 5.0 percent in August (VGK). The bad news overshadowed a report from the ZEW Centre for European Economic Research, indicating that its Indicator of Economic Sentiment for Germany rose 7.6 points in September to 49.6 (EWG). The economic expectations indicator for the Eurozone rose by 14.6 points to 58.6 while the current economic situation indicator for the Eurozone rose 14.4 points to negative 59.7.

The Euro STOXX 50 Index finished Tuesday’s session with a 0.13 percent decline to 2,890 – remaining well above its 50-day moving average of 2,780. Its Relative Strength Index is 65.99 (FEZ).

Technical indicators revealed that the S&P 500 rose further above its 50-day moving average of 1,675 after finishing Tuesday’s session with a 0.42 percent advance to 1,704. At this point, bears are hoping to see the formation of a “double top”. Its Relative Strength Index rose from 64.18 to 66.50. The MACD continues to rise above the zero line and the signal line has now crossed above the zero line, suggesting the likelihood of a further advance.

For Tuesday, all sectors were in positive territory except for the materials sector, which declined 0.28 percent. The utilities sector led the group, with a gain of 0.59 percent.

Consumer Discretionary (XLY): +0.58%

Technology: (XLK): +0.50%

Industrials (XLI): +0.43%

Materials: (XLB): -0.28%

Energy (XLE): +0.45%

Financials: (XLF): +0.49%

Utilities (XLU): +0.59%

Health Care: (XLV): +0.06%

Consumer Staples (XLP): +0.34%

Bottom line: Stocks finished building a nice cushion on Tuesday, in the event of a significant selloff on Wednesday afternoon, following the announcement of the FOMC’s decision on whether to begin to taper the Fed’s bond purchases.

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