Stocks Fall As Investors See Threats To Quantitative Easing

Investor fear that Tuesday’s upbeat economic data may threaten the future of quantitative easing became apparent on Wednesday. Stocks fell despite a reasonable assumption that the Conference Board’s Consumer Confidence Index for May and the better-than-expected Case-Shiller Home Price Index would have continued to exert a positive impact on the equities markets.

Nevertheless, the Chicago Board Options Exchange Volatility Index (VIX) – also known as the “fear index” – rose by more than 2 percent on Wednesday, signaling enhanced investor anxiety. Ben Bernanke’s testimony last Wednesday, to the effect that the FOMC would consider “recalibration of the pace” of its bond purchases if the economic data should warrant it obviously weighed heavily on the minds of investors. If Dr. Bernanke readjusts the Fed’s liquidity pump, it could play havoc with stock prices.

The Dow Jones Industrial Average (DIA) sank by 106 points to finish Wednesday’s trading session at 15,302 for a 0.69 percent decline. The S&P 500 (SPY) finished Wednesday’s session with a 0.70 percent drop to close at 1,648.

The Nasdaq 100 (QQQ) fell 0.57 percent to 2,994. The Russell 2000 (IWM) sank 1.04 percent to 986.

In other major markets, oil (USO) took a 2.04 percent nosedive to close at $33.10.

On London’s ICE Futures Europe Exchange, July futures for Brent crude oil declined by $2.05 (1.97 percent) to $102.18/bbl. (NYSEARCA:BNO).

June gold futures advanced by 20 cents (0.01 percent) to $1,391.50 per ounce (GLD).

Transports backed over the cat on Wednesday, with the Dow Jones Transportation Index (IYT) falling by exactly one percent.

The major European stock indices made steep declines on Wednesday following disappointing economic reports on Eurozone GDP (0.6 percent contraction in 2013), German unemployment (jumping by four times the amount expected) and shrinking British retail sales (VGK). The Euro STOXX 50 Index finished Wednesday’s trading session with a 1.74 percent drop to 2,786 – remaining above its 50-day moving average of 2,702. Its Relative Strength Index is 53.79 (FEZ).

Japan’s stock market made a slight advance on Wednesday as bargain hunters cautiously moved in to “buy the dip”. The Nikkei 225 Stock Average advanced 0.10 percent to 14,326 (EWJ).

In China, stocks made a modest advance following another report that the government will allow initial public offerings to resume in mid-August. The Shanghai Composite Index advanced 0.13 percent to 2,324 (FXI). In Hong Kong, a bad day for real estate developers and REITs sent Hong Kong’s Hang Seng Index falling 1.61 percent to 22,554 (NEWH).

Technical indicators reveal that the S&P 500 remains above its 50-day moving average of 1,596 after closing at 1,648 – as bears hope that we could be watching the formation of a head-and-shoulders pattern, which would signal a decline. Its Relative Strength Index dropped from 65.03 to 58.73. Although both the MACD and the signal line remain well above the zero line (suggesting the likelihood of a further advance) both have assumed a downward trajectory and the MACD has crossed below the signal line, suggesting the likelihood of a decline.

For the day, all sectors were negative, with the consumer staples, healthcare and utilities sectors taking the hardest hits.

Consumer Discretionary (XLY): -1.03%

Technology: (XLK): -0.25%

Industrials (XLI): -0.57%

Materials: (XLB): -0.32%

Energy (XLE): -0.22%

Financials: (XLF): -0.01%

Utilities (XLU): -1.49%

Health Care: (XLV): -1.57%

Consumer Staples (XLP): -1.92%

Bottom line: Tuesday’s good news about the economy is now being viewed by investors as bad news, since Ben Bernanke’s testimony that the FOMC will recalibrate its bond purchases if the economic situation warrants it, has underscored the idea that quantitative easing is threatened by upbeat economic data.

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